Finding New Profitability in Product SupportWritten By Pam Gruebnau
Article Date: 09-01-2004
Copyright (C) 2004 Associated Equipment Distributors. All Rights Reserved.
How can dealers increase gross margin on parts and service? Is flat rating catching on?
What do you need from manufacturers to support flat rating?
- About three years ago, we tried to increase our margins by using the special flat rate guide, but I kept running into service labor allowances, which is the loss and gain hours you don’t make on flat rates. I asked each of our service managers to use the flat rate guides, and our loss and gain hours fell sharply. By following the flat rate, we had a tremendous turn around.
- Customers were requesting a dollar figure up front and flat rating allowed us to do that. Sometimes we don’t charge the whole amount if we can finish quicker.
- You have to bill at flat rate even if the technician finishes early, and that’s the hardest thing to get the service manager to accept. He’s thinking about equipment he worked on in the 60s; it’s not the same today.
- Charging a flat rate is a way to get back something for the training you provide. If you just charge what it takes, where’s the payback on what you spend on training?
- Three years ago, 30 percent of our billing was flat rates; now it’s 95 percent.
- We don’t have staggered charge outs on flat rates, but we do have a staggered productivity expectation. We classify technicians as apprentice, technician 1-2-3 or masters. Apprentices are expected to reach 85 percent; masters have a lower expectation because they are called upon to help the apprentices.
- One customer told me we don’t charge enough for highly trained people and charge too much for untrained people. They would rather pay $175 an hour to have our best technicians do diagnostics but don’t want to pay $80 to have the worst technician replace bucket teeth.
- Better flat rates. One of our manufacturers assigns ½ hour to tighten a fitting, but not all fittings are created equal.
- Flat rates are driven by warranty so manufacturers don’t want to give you any extra time because they’re paying for it. It squeezes us pretty hard when we try to use the rates we get from our manufacturer.
- Our flat rates are real, but they don’t take into consideration a bolt the technician can’t loosen. Still, if you average it out, they will cover what we find in our market area.
- We have a flat rate system that’s electronic, and it’s 30 percent higher than our warranty reimbursement. We pay our distributors what the flat rate is just to get them using it.
- More dealers are selling product support; it provides higher margins than new equipment sales and links the customer to the dealer.
Who sells product support for your dealership?
- We try to tie product support in with the original machine sale. Our next choice is promoting flat rate scheduling. We’ll go out at 3:00 and still charge them the flat rate even when our mechanic is getting overtime.
- We developed a form for each piece of equipment. The technician fills it out when he’s doing service, then the sales manager makes a call and tries to up-sell.
- A dealer on the West Coast charges more for the best technicians – a 10 percent premium. That technician does the troubleshooting and then a lower level technician does the work.
- Our technicians have no selling skills. Customers believe a technician more than they believe the service manager. We need to teach technicians to be more effective with the customer.
- We’re finding a lot of contractors that want to bring all of their equipment to one shop, all brands.
- “All makes” is a great strategy because it’s incremental business.
Is your lube guy smart enough to do a machine audit? If he can fix a hose before it breaks that saves the contractor a lot of money.
- Our goal is to have our PSSRs fill our shop. Drive the service business and the parts will come. We don’t pay them on captive parts; we’re looking for incremental business.
- We have our PSSRs concentrate on labor sales and team selling on new equipment. We think that’s the future.
- Ours PSSRs also sell attachments.
- In mining, the PSSR is worth his weight in gold, because he has a daily relationship with the customer. No matter what your business size is, you need a PSSR.
- We added the first two PSSRs last fall and it’s made a big difference in our parts sales. Now we’re adding two more because it’s easy to see how they pay for themselves.
- We don’t have PSSRs. Instead, we do machine audits. The service manager goes out to do an audit of a machine and then tries to sell service.
- We run PM technicians through our service department.
- We send your best technicians out to look over machines and find needed repairs. If he just does the service, you’ve wasted the opportunity. We have service trucks with hose, waste oil disposal, those types of things.
How can dealers and manufacturers work together to participate in more of this profitable parts and service business?
- There are dealers that dispatch “super technicians” as soon as a call comes in. They go job to job as fast as possible and the customers love it. They are billed at double the normal labor rate. They find out what’s wrong, what parts are needed and what level of technician is required to handle the problem. Then another technician comes in to do the job. When the “super tech” leaves the job, the customer knows if he needs a rental machine. Right away the customer has the problem resolved. Customers want the speed.
- There are lots of things that contribute to downtime. Diagnostics, getting parts there, scheduling the right person to do that repair, getting the technician there, doing the work. There‘s a lot of opportunity if you start understanding everything that goes into it.
Who’s the biggest threat to taking away the dealer’s parts and service business?
- I have a large display area in both stores and we sell a lot of stuff there, safety supplies, toolboxes, etc. I have gondolas full of different things. It helps that guy that’s waiting have something to look at. We change the end caps every month or two and move things around. They’ll quit looking if you don’t move things.
- In the last year, every one of our counter people has had 40 to 65 hours of training, both soft skills and technical. We teach them how to up-sell and how to talk to customers.
- We’ve registered a couple of domain names and we’ve put the system in place to offer parts over the Internet. One of our manufacturers isn’t very happy with us.
- We’re doing b-to-b on the Internet and doing about 15 percent of our business electronically. That’s up from zero just two years ago. We’re only selling in our trade area.
- We’re being driven to offer parts on the Internet by some of our larger customers. They want to be able to order parts 24 hours a day and do it on the computer.
- It’s important that manufacturers brand package parts. Otherwise it just sends the message “Buy me somewhere else. I’m an off-the-shelf item.“
- We’re doing a little consignment inventory with our best customers and they love it.
- Ag dealers.
- I think it’s the used equipment repair people. The biggest threat in service is ex-technicians from dealerships.
- Our biggest threat is competitive dealers. They go out with lube trucks and service our customers’ machines.
- We have an aggressive plan to eliminate warranty claims and drive down our repair costs about 7 percent a year. Fifty percent of our machines have zero warranty claims during warranty period. That takes a lot of business away from our dealers. They’re going to need a new income stream. Our total warranty parts sales are just 8 percent of total parts sales.
Excerpted from September 2004 Construction Equipment Distribution.
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