November 2014

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38 | www.cedmag.com | Construction Equipment Distribution | November 2014 A Closer Look Absorption, in general terms, is defined as the percentage of the dealership's total expense burden that the parts and service departments offset, cover, or absorb. Whether you operate an auto, truck, agriculture or construction equipment dealership, absorption is the key to maintaining a successful and profitable business. Why is this so important? The answer is simple: If you do not have sufficient back-end repair business, then you will not have sufficient ability to weather the rainy days that do come along from time to time. Back in Time Let's look back in time, say 30 years or so. The year is 1980 and dealerships primarily were run in reverse of today. The dealership's main source of revenue was from the sale of new cars, trucks, tractors or equipment. Why, you ask? The gross profits on each sale were higher than they are today. There was little need, or even concern, to make money on the back-end business. At best, most dealership's goals were to have the parts and service departments carry their own weight and break even. There was little to no emphasis on increasing parts and service market share with the new sales market share. The philosophy was simple: You sell the product at a high gross margin and they will bring it back for repair when needed – that is, if they bring it back at all. Another fact that had a major impact on dealers was that the technology of the day was pretty simplistic by today's standards. Most cars and trucks could be repaired by untrained mechanics, therefore reducing the need for customers to return to the dealership for repairs. The same applied to the agriculture and equipment business. It was common for dealer-trained mechanics to leave the dealership and start their own "aftermarket" repair shops. Now, I am not knocking any mechanic who chose to pursue his or her dreams of owning a repair shop; as a matter of fact, some were quite successful. I am merely pointing out that these aftermarket repair shops were competing directly with dealerships, therefore reducing the dealership's ability to make money on parts and services sales from their own service facilities. With the recession of the early/mid '80s, and changes in how we as a country operate in terms of emissions and better fuel mileage, dealers began to notice a change that impacted the gross margin on new sales. The technology also increased on new products, there- fore increasing the need for dealerships to purchase new tooling, electronics and add training for their technicians. This is also about the time that the term "technician" began to replace the term "mechanic." Many dealerships found themselves struggling to maintain profitability as result of this shift in the market- place. With declining margins on new products, and rising expenses in their service departments, dealerships Let this definition be a reminder to evaluate the contributions of your parts and service depart- ments compared to the sales results – how's that percentage looking? BY TROY A. OTTMER Absorption Refresher 101: It's the Life Blood of Your Dealership

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