Dealership Newsmaker Q&A: Mike Nicholes

Jan. 1, 2020
Mike Nicholes is president of Mike Nicholes Capital Management, Inc.
Mike Nicholes is the president of Mike Nicholes Capital Management Inc.

Mike Nicholes has worked as a consultant and trainer for automotive, truck, agriculture and construction equipment dealerships and distributorships for 38 years, first as founder of Mike Nicholes Inc., and currently as the head of Mike Nicholes Capital Management. He is also a speaker, author, and workshop leader. For more information on his company, visit: www.partsconsulting.com.

What's the biggest challenge facing dealership parts departments today?

It's for the parts department and service department to start singing out of the same hymnbook. When parts and service were in one department, there was never the squabbling and hassling that there is now. When they became independently departmentalized, that led them to start battling each other for turf protection and pay plans and everything else.

The parts department's number one mandate is to feed the technicians. The concentration is now on how the dealership can get happier customers. They get happier customers by getting them in the door, getting their vehicles properly fixed on a timely basis, and getting them out the door.

Once you get the car in the store, the service advisor gets it in the stall, the mechanic has the skill and he has the tools, but the one chokepoint in the process is parts availability. The service department has the highest gross margins in the whole store; they just don't have the volume. If the general manager and the dealer are onboard with the parts manager and realize that, then things begin to change. The dealer starts absorbing more of his fixed operating overhead, and he starts making more money.

The path ahead of us is fairly clear. We have pillaged the marketplace, beginning in 2000 with zero-percent financing. That reached into the future and dragged people kicking and screaming out of the future to buy now and not wait until later. In 2004 came the factory pricing deals, and again we reached into the future. Now we see length-of-term financing. Dealerships are financing up to 84 months.

If you take all those things into consideration, it means that we, in my opinion, are in for another few years of this very tough market out front.

Parts and service don't have high volumes, but they have margins that nobody can compare to. The average margins in a parts department are about 28 to 35 percent gross profit. The average margins in a service department will run about 60 to 70 percent gross profit. You can do the math.

Fixed operations have become central to the whole operating scheme and culture of the dealership. They're absorbing all the cost of dealership out of parts, service and occasional body shop work.

In working with your clients, what are some of the top areas where you find they need the most improvement?

There are some individual operational things, but there is one thing that overrides them all: Parts managers, service managers, dealers, general managers and controllers need to understand the problem.

Of the 8,500 dealer principles I've interviewed over the past 38 years, only 3 percent have ever walked in the parts manager's shoes. Only about 4 percent have walked in the service manager's shoes and 10 percent come from outside. All the others come out of sales.

Human nature will tell you that if you have a whole bunch of problems to address, you'll take on those that you know best and handle them first; never having time for the others unless they are "panic" problems.

I train them together. I sit them down and teach them the basic operational principles. They are well known and well understood, but not all computer systems apply all the principles. And very few of the computer systems teach the users what they can do. They sell you a big overpriced DMS system, but they don't teach the parts manger, the service manger and the dealer how to use the darn thing. That's one of the problems they run into. They don't know how to use the tools they've got.

A parts manager has a real tricky job, because depending on what factory you're talking about, you could have up to a million and a half SKUs, of which the average parts department will stock between 5,000 to 12,000 of them.

I teach them the calculations you need to have, this is where they come from, and here's how you adjust them and amend them if they're too high or too low.

These techniques are not rocket science, and if they follow them and measure them, and know how to respond if the measurements are not what they should be, then things will go better. The technicians will get more of what they'll need, and everybody will be happy.

Some of the OEs are now taking a more active approach in dealership inventories — GM and Chrysler in particular.

Because there is a type of intellectual arrogance within the manufacturers that leads them to say, "We can do a better job than they can of controlling inventory." Well, that's up for a raging debate.

The real problem is that the factories are so frustrated that they figure if they control the inventory, they'll have a better inventory. All of that started with the Saturn project in 1988. Saturn was the first one to go to automatic stock replenishment, and they did very well. Saturn technicians are much more efficient in parts and service than anybody else.

General Motors decided to take this program and put it in the 7,000 GM dealerships. They had the right vision, but they've had some issues with the rollout.

Chrysler came along and said, "Aha! We're not going to do it that way." So the Chrysler ARO system was introduced a little bit better than RIM. Then along came Hyundai with Smart Parts, and Subaru with their program.

Every manufacturer is looking at automatic stock replenishment as a goal. Having said that, a good parts manager with a decent DMS and proper input of the right data into the system, can manage inventory at his required level for his/her specific parts department in his/her specific market better than the factory can.

That begs the question, what's a good parts manager? That would be a parts manager who has ear of the dealer and the cooperation of dealer, and who is observing all the basic rules of inventory management, and has the parts department running as smooth as clockwork.

Parts mangers are very unique people. There are an amazing number of things that a parts manager has to do. There are more facets of operations in a parts department than anywhere else. They're amazing people.

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