Auto Service World
Feature   August 1, 2006   by Andrew Ross, Publisher and Editor

Newtonian Business

There are those who believe that the independent automotive aftermarket is in freefall.

While I disagree with this point emphatically, I am not blind to the seriousness of the issues that the industry faces. Many of the brightest minds in our industry are struggling to find solutions to the problem, while others are declaring that the end is nigh.

It reminds me of a time when there were those who believed that the earth was flat and you would sail off the edge if you went too far. That was an age when science as we know it was in its infancy. Galileo was dropping stuff off the Tower of Pisa, only to discover that it didn’t matter what he dropped or how much it weighed; it all fell at the same rate. In doing so, he described one of gravity’s constants.

We’ve learned a lot more about gravity since, courtesy of one Sir Isaac Newton and more recently Albert Einstein and Stephen Hawking, but I think we can learn something about business from the elementary physics.

While it is certainly true that you can only manage what you can measure, if you don’t understand what you are looking for, or can’t agree on what you are counting, the numbers can be misleading.

Measuring profitability, for example, has become increasingly problematic. The issue that many of you still have trouble with is how to generate the appropriate profit in a market where prices have been slowly sliding downward, inventories have become subsequently devalued, all while the cost of operating your business has been increasing.

Yet many if not most of you continue to apply very old rules for calculating pricing. To make matters worse, there are even a number who think they are applying the old rules, but mess up the math, and end up even worse off.

Now, for those of you who have a firm grasp on exactly what it costs for you to run your business, and know exactly how many dollars you need to generate for each category and level of product you sell–value line, private label, mid-priced, and premium–in order to fulfil your financial obligations, and have a staff that fully understands all these things in a changing market, you may now leave the room or turn the page, or retire with your fortune.

For the rest, it’s time to forget about percentages and start thinking dollars. This is where the physics come in: does it cost you less to take an order, pick the order, and “drop off” a value part than a premium part? So why do you accept that it will generate significantly less dollar profit?

To my mind, the problem starts with the question. What do I need to charge to generate X% gross profit? What you should be asking is how many dollars you need to generate to make the sale appropriately profitable. The trouble is that there is far too much of the former, and far too little of the latter. Value parts, priced using the same formula, can generate 40% to 50% less profit per piece.

A 35% profit margin on a part you paid $40 for will require a price of $61.60, and yield $21.60 in gross profit; a $30 piece would only generate $16.20 in profit at the same margin percentage. And you won’t sell nearly enough more to make up the difference.

Worse yet, once you factor in the costs of the sale and running your business, which probably only nets 3% or so, you may actually be in a loss position with that value-line sale.

The irony is that one reason businesses seek value lines is to allow them to increase their coverage in the face of parts proliferation, but they end up reducing the dollars they have on hand to do that.

Yes, you should be efficient and be conscious of your costs, but it is only part of the job. If you can’t generate enough profit to keep your staffing levels up, your inventory well-stocked, and your trucks on the road, it really doesn’t matter a darn how little you paid.

What many are learning right now is that you cannot save your way to growth and profitability, any more than you can repeal the law of gravity.

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