Greenwood On Management: “White Box” — real profit or smoke & mirrors?
"White box" parts promotion and discussion has hit the hot topic list again, only this time, we should be far more concerned than we were ten to fifteen years ago.Many Service Providers and Jobbers st...
“White box” parts promotion and discussion has hit the hot topic list again, only this time, we should be far more concerned than we were ten to fifteen years ago.
Many Service Providers and Jobbers state that white box parts have a place in the market. Part distributors are saying that “certain” white box parts are made better today than they were 10 years ago. Their analogy is that North American companies that have been investing millions of dollars into off shore companies, so now they feel that there is a good marriage of “reasonable quality” with “reasonable price”. These are the day-to-day examples given to shop owners to explain the product, however, there are many areas where that explanation needs a reality check.
Consider the following realities:
1. Worst-practices shops are frequently operating with an image of “very weak professionalism”, to be polite, in terms of the shop’s appearance. These shops have no “professional business structure”, or, future “business plan and vision”. These owners “live for today”. They also go to market with the lowest end labour rates in their market area.
2. Many of those shops promote white box parts, and go to market with the attitude ” “I” don’t care, whatsoever, what “I” sell as long as “I” am making money”.
3. Many used car lot owners instruct the garage owner to install white box parts on the used car, or the end of lease vehicle as it is being readied for the next sale.
4. Too many customers who own a $35,000 light truck or a $60,000 motor home insist on paying no more than “$20” for pads.
5. Consider that it was really the “jobber” that first made the decision that white box was OK to stock and sell in your marketplace.
6. Consider that it is very possible that the jobber, or the service provider, didn’t consider the entire final ramifications of their decisions.
Now re-evaluate these thoughts:
It is time for all Independent shops to step back, and really assess what has to be considered here to ensure a secure financial future.
We must clearly agree that there are three people who have to be “re-educated” today. It seems all three have not given thought to the long term ramifications of their decisions.
The first, and most important person is the consumer.
Unfortunately, the image, in much of the public’s eye, seems to be that of an industry repairing cars by “unprofessional, not so trustworthy, people”. As we all acknowledge, in the better shops, nothing could be further from the truth. The consumer today has not been properly educated, and does not currently understand, the technology and durability of today’s vehicles. This industry lacks good, up to date, educational material to be handed out at the counter, explaining the facts and realities today between quality parts and “white-box” parts, and what it means to the consumer.
The reasons for this extreme shortage of educational literature/material is clear. The manufacturers have been beaten up so much with pricing by the WD’s that there are no extra resources left. The WD’s have been beaten up on price by their jobbers, leaving them with no extra resources to allocate to address the education issue, and the jobber is constantly bombarded about the necessity of low pricing from the majority of their shop customers, leaving them with no financial resources to pump into their local marketplace. Each level doesn’t want to spend their money “educating the competitions customers for them”. As this is perhaps the real reason/problem, then where does the industry start? It is time for the individual Service Provider to get his/her house in order and budget money for educational material to their own customer/clients.
The additional facts contributing to this problem include that everyone, at every level, is in this “race to the bottom in pricing”. Consider that it may be a good time for an attitude/focus re-adjustment, and to start running profit oriented businesses, instead of just sales driven businesses, at every level of our industry. All of us, at every level of the industry, must take responsibility to ensure the consumer is educated professionally, if the aftermarket is to grow and sustain itself.
The second person to be re-educated is the “average” shop owner, and their lack of business know-how, business ethics, and professional business savvy.
The service provider must start to take some responsibility here. The blunt questions that every shop owner must raise, and discuss, with their peers are:
1. What are we doing today to truly educate the consumer about today’s vehicle realities and their need for quality parts?
2. Are we giving the consumer all the factual comparisons required, other than price, of a white box part compared to a brand name part so the consumer can make an informed/educated decision?
3. Are we buying white box and then turning around and selling at OE prices?
4. Are we guilty of selling white box so we can show a discount on the labour to look good in front of the customer?
5. When there is a warranty claim on the white box part, are we guilty of hiding the replaced part cost in other work being performed at the same time?
With all due respect, these points truly are business practices and “ethical” questions, yet, they play such an important role in forming societies opinions and perceptions of our industry. Pumping-out/marketing low labour rates with a white box part as the common practice of running a shop, perceiving that the part profit is all that one has to worry about in the success of the shop, proves that the shop management is totally uneducated to required business practices that ensures a shops profitability, growth, and prosperity.
Today’s shops must learn to become focused on labour productivity rather than just parts profitability to drive his/her bottom line. A simple example can be made by measuring the average labour hours produced per work-order at the right labour rate.
If a shop averages 1.3 labour hours per work-order (current Ontario average) and is charging a low $40 per hour labour, then there has been $52 worth of labour produced ($40 X 1.3). This shop would currently be averaging about an .80 to 1 ratio of labour to parts, therefore, it is safe to say that $62.40 worth of parts were sold also on that work-order. If the parts were white-box parts and even at a 60% gross profit on the parts, (a $24.96 cost) then $37.44 gross profit would be produced from the parts. The total labour and parts gross profit on the work-order would total $89.44. ($52 + $37.44 = $89.44)
Now, if management would learn about his/her business, and understand the business value of a long term quality relationship with their selected customer/client base by getting focused, delivering customer/client value, and manage their customer/clients vehicle properly for them, and using higher quality parts, then a much greater quality labour-rate could be invoked. If the shop moved to the necessary $78 labour rate required as is the minimum required today in Ontario, and still produced 1.3 labour hours on the work-order, but installed a higher quality part for their customer/client, then the numbers would line up like this: $78 X 1.3 hours = $101.40. The quality parts coming in at even a 50% higher cost price than white-box ($24.96 X 1.50 = $37.44), and sell them for the same producing only a 28% return, which we all know is low, or $14.56 gross profit ($52 – $37.44 = $14.56). Now the total gross profit on the work-order is $101.40 + $14.56 = $115.96.
The difference in gross profit made between the two work-orders is a very minimum of $115.96 – $89.44 = $26.52. If the shop was producing an average of 290 work-orders per month, then the additional gross profit made would be $7,690.80 per month, or $92,289 per year!
The higher labour rate certainly contributes towards paying the better technicians their true worth, and maintain high quality training throughout the shop. It allows the owner to hire the best technicians in his/her market area. It allows for the right equipment to be installed in the shop. It allows for management
to earn more for themselves to enjoy a career instead of buying themselves a job. As long as the sales do not go on the receivable list, the shop can pay its bills in full each month, and take advantage of discounts. Those are excellent benefits.
The better quality part gives the client a better return on their vehicle investment because the quality parts perform better and last longer than the white-box parts. With substantially fewer come-backs with quality parts, shop efficiency increases, the shop and client relationship is enhanced, providing the atmosphere to create a trust relationship. Trust leads to more/sustained business. These are excellent benefits. A shop that runs on white box mentality doesn’t enjoy these “perks”. Buying white-box and selling it at OE pricing may be perceived as creating a short term financial benefit but in reality it creates a long term disaster. Quite frankly, these shops are ripping people off and we all wish they would get out of the business. Credibility is lost with the consumer, relationships are not built with a quality client base, and the shop ends up with a price shopper customer base. With a price shopper customer base, including used car lots, the owner just works hard creating shop activity, just turning dollar over for dollar only………….and states we’re so busy. These shops can not pay their bills in full each month, has a low end, dirty, poorly equipped facility, and fails to enjoy the “finer” things in life. He/she bought a job. Hard goods in the service providers business does not build a professional bottom line. It must be clearly understood that the knowledge/labour side of the business does.
Every person within our industry has an opinion on white-box parts. There may be arguments on the other side of the question, but quite frankly, usually those arguments are made that are only self centered/benefit. Ultimately, all of us at every level of this industry answers to only one person. That one person is the final retail consumer paying for the maintenance or repair of their vehicle!
There are times, today, when the better, progressive, shops feel that dealing with white-box, unprofessional type shops and jobbers, is like wrestling a gorilla. To be declared the winner, you don’t quit when you’re tired, you quit when the gorilla is tired. Stay in shape, the gorilla is still standing, but the odds are strongly tipped in your favour.
Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has over 27 years of Business Management experience within the automotive industry, counseling individual shops in Ontario.
E. K. Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive industry, preparing analytical operating statements for Management purposes, personal and corporate tax return completion, Business Management consultation and Business Management and Employee Development Courses. Visit E. K. Williams & Co. on the Internet at www.ekw.ca and sign up for their FREE monthly management letter sent to you by E-mail.
Automotive Aftermarket E-Learning Centre Ltd. is a company devoted to developing Automotive Shop Business Management skills through the E-Learning environment over the inter-net. Students learn at their own speed, and at a time, and place, that best suits their needs; available 7 days a week 24 hours a day. Visit Automotive Aftermarket E-Learning Centre Ltd. on the Internet at www.aaec.ca
Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 or by E-mail; email@example.com or firstname.lastname@example.org