Next to payroll, parts is a major recurring expense for a repair shop. Managing that expense is the key to keeping a shop profitable. The day you order the part versus when you use the part is a factor in profitability.
In addition, there are other factors that play into parts control. In many cases, it’s not the part cost itself that is a deterrent to profitability but part return credits, repair credits and core charges that put a shop in the red.
Pre-ordering parts based on an insurer estimate for a vehicle scheduled for repair hampers profitability. Because the repair might not be completed before you pay for the part, you have incurred a dead expense.
Some shops I visit are complaining about parts storage concerns because they have pre-ordered parts waiting for the vehicle. At one shop I visited recently the vehicle arrival dates written on the parts list were up to two weeks away. One of the parts lists showed the parts were ordered on the 28th and the vehicle was not expected until the 12th of the following month.
You cannot collect for a part before you complete the repair and can bill for the part through a completed invoice. The payment for these parts would be due on the 10th under normal billing practices. In most cases, you are going to require additional parts once the vehicle arrives, you disassemble the vehicle and create your repair plan.
It’s a better practice to order all the parts needed for the repair at one time after the vehicle is at your shop. You will be waiting on parts either way so there is no reason to tie up your money for parts to sit in boxes. While this is contrary to some insurance company directives, showing them the statistics on your secondary parts orders usually brings some understanding.
I was at a shop recently and saw a bumper sitting by itself with a faded note on the invoice indicating the part should be returned. I asked the parts clerk how long the bumper had been there and she said a couple of weeks. She added, “The box is a little ragged so the delivery driver would not take it.”
I asked if she had talked to the person she ordered the part from or the parts manager about returning the part. She said she had not and was hoping a repair would come in that needed the part. I pulled the invoice off the box, looked at the part price and the date it was ordered. I asked the parts clerk if she felt comfortable asking the shop owner for $358.63. She quickly said “NO!”
I said that’s odd because you feel comfortable letting this bumper sit around for 20 days, essentially costing the owner $358.63. She admitted she had not looked at it that way. We went on to discuss how to talk to the selling parts department about the return, taking into consideration how much the shop spends with them and getting an agreement on parts returns.
As I was reviewing estimates at a customer’s shop I saw “2.0 repair on damaged door” in an estimate line note. I asked why that wasn’t added as an estimate line item rather than a note. The manager said, “The parts credit doesn’t get posted to the RO, the note is to change the labor cost when billing.” Let me start off with saying that every management system allows posting of parts credits for labor to the RO and allows you to convert it to paid labor time. While most labor credits are for repair of recycled parts they can also occur on new parts.
First make sure you ask for a parts credit invoice rather than a reduction in price. A price reduction is harder to convert to labor because you don’t get the paper trail a parts credit invoice provides. A price reduction changes your parts gross profit but does not help pay for the repair labor. It is important to post the parts credits for labor to a labor account. Then add the repair to an estimate line using the parts credit value as payment where it will also count towards cycle-time calculations.
Parts carrying a core charge are increasing almost daily. I remember when it was just on mechanical parts or wheels, now it is on a large variety of parts ranging from bumpers to headlights. It also seems that no matter how big a parts clerk writes “CORE’ on a part it still ends up in the trash. Core charges are often posted on the invoice when the part is sold so you incur the cost up front.
Referring back to pre-ordering parts you will see if you pre-order a headlamp and it spans over a billing period you have created a dead expense. This is another reason to not have parts delivered until you are going to use them. The best defense to excess core charge costs is to mirror-match parts and send the core back the same day you receive the part. This not only expedites your credit but ensures you have the packaging needed to return core for full credit.
I encourage you to discuss parts credits with your management system provider and set up a process to manage them effectively. A credit has a face value, you need to ensure it is processed properly so you can benefit from those dollars and cents as increased profitability.
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