A lot has changed in the world of parts procurement. Think back to the days when all that was required were three phone calls to trusted, known, local vendors. Think about how relatively small and uncompetitive the parts market was. It was full of manual labor, time and middle-man markups. Fast forward to the present and we are operating within a far different parts landscape. Technology is creating an abundance of information that is expanding markets, affecting pricing strategies and altering selling techniques. This is why it is necessary to identify and document your company’s parts procurement policies in order to deal with the challenges that arise from the ever-expanding world of parts. Development of effective parts purchasing policies for your business will help limit returns, maintain cash flow and help hold all stakeholders accountable.
The parts market has become a much more competitive, digital marketplace where merely signing up for a new parts search can allow a vendor to become the “recommended” vendor for one part in a collision repair. The parts searches available today generally focus only on price and availability. The searches give little consideration for ARA damage codes or differences between clean, undamaged pricing and as-is pricing models. It is becoming commonplace to see search results recommending different vendors for each major part in a repair. This is causing greater administrative burden on collision repair shops, higher return rates and lower overall gross profit dollars from parts sales. Parts searches are currently lacking in checks and balances. Metrics that need to be tracked such as average delivery time, parts grading accuracy and return rate are non-existent in today’s parts procurement platforms.
Developing effective purchasing policies is very similar to DRP tiers, in which vendors are placed into tiers based upon different criteria such as pricing, part grading accuracy, delivery time, return rate, location, etc. These tiers can be used to manage the vendors and set pricing standards to cover shop costs. The goal of developing purchasing policies is not to restrict purchases to certain vendors, but to place controls on procurement practices in order to minimize administrative labor, reduce parts returns, maximize vendor performance and preserve cash flow. Parts vendors can be broken up into one of three tiers. A sample outline is provided below.
- Contains a list of all primary OEM vendors, aftermarket and reconditioned supplier(s), and the recyclers you purchase 80 percent of your parts from. Include phone numbers, emails and contact person.
- Purchases will be made with open lines of credit.
- Orders will be placed electronically.
- Discounts and markups are pre-determined.
- Markups will match the market rate.
- Returns, cleanup, and warranty claims are easily processed.
- Specific performance criteria for return rates, average delivery time, etc.
- Contains list of backup OEM vendors, secondary aftermarket/reconditioned supplier(s) and recyclers from either an extended geographic range or niche recyclers that specialize in certain brands of vehicles.
- Purchases are less frequent and will be placed by credit card.
- Orders will be placed electronically or manually.
- Returns, cleanup, and warranty claims will require more labor/effort due to low volume/infrequent purchases.
- May require negotiating slightly higher markups to cover administrative efforts.
- Performance criteria should have upper and lower limits to identify tier two status.
- Consistent performance could lead to vendor being moved into tier one as volume increases.
- Shops can gain extra gross profit dollars or other reward perks from credit card purchases.
- Purchases will be made by COD only.
- Orders will generally be placed manually.
- Tier 3 vendors may have little to no history with repairer.
- Could be prior underperforming vendor from higher tier
- Generally, these vendors are “recommended” due to lowest parts price.
- Orders/cleanup/returns are most difficult to process as there is no relationship developed.
- Cleanup negotiations will probably involve three parties.
Tier 3 vendors require additional labor to manage and additional fees could include:
- COD check writing fee (covers check writing and tax exemption form)
- Restocking fee for returned parts (flat fee or percent of invoice).
- Higher than standard markup.
- Tier 3 vendor performance is monitored for higher tier consideration in the future.
Developing solid purchasing policies that clearly identify vendors, payment methods, administrative fees and performance criteria will aid in making sure that the proper part is selected and procured for the customer’s repair. Having set performance criteria to track and manage vendors by will incentivize vendors to perform and provide factual information to discuss with insurance partners when questions arise as a result of a parts search. The parts landscape has changed and so to should your purchasing policies.