When it comes to parts and service departments, there is no shortage of metrics to watch so it’s hard to narrow it down to only one.
To use a sports analogy, a successful baseball team must do many things well to win. When asked to narrow it down to the most important thing, some may say you must “keep your eye on the ball,” which is a self-explanatory truth. However, it’s not just the duty of the manager or a coach but every player on the team. A successful dealership is like a successful sports team – not only should the manager be keeping his/her eye on the ball but so should each team member.
Aftermarket Absorption
Helping your employees understand absorption is a great place to start to get your team to focus on the big picture. The parts and service departments are generally positive cash generators, meaning they generally bring in more cash monthly than they pay out or tie up in inventory.
Often, when a wholegoods deal is completed, it causes a negative cash situation. For example, you sell a new unit and take a trade. The manufacturer takes the cash proceeds, then floorplans the trade. Often the freight, pre-delivery, set-up, and delivery to the customer is covered by the dealership. Furthermore, any costs incurred in reconditioning the trade are tied up internally, resulting in a negative cash position.
Aftermarket contribution margin dollars are generically defined as: parts and service revenues, minus variable expenses (sales minus cost of sales). In basic terms, the contribution margin reveals how much of a company’s aftermarket revenues will be contributing to the company’s total fixed expenses.
The contribution margin is also a key component in calculating a company’s break-even needs.
Western Equipment Dealer Magazine Spring 2018 Issue
By Kelly Mathison
