Growing up in a family dealership I spent much of my time working in the parts department. Like most dealerships, that included ordering, receiving and stocking accessories. Frequently, our sales team would “throw in” an attractive accessory at no charge to close a deal on a unit. The sales department was charged the cost of the accessory, and the parts department received credit at cost. I was glad we sold another unit, but all the work I did with that accessory was done for free.
Don’t get me wrong. We need to sell units, and this is a team effort, but there is a better way to handle internal sales between departments. The same logic should be used with your service department. If we ask them to prepare a unit for delivery, or install accessories on a new unit, the service department needs to be compensated. Another example would be parts “sold” to the service department. We need the service department focused on billable hours and it doesn’t help to cloud that with parts margins.
There are three ways to handle inter-company sales, noted here:
- Sell internally at cost: You probably already know what I am going to say about this one. It is not fair to the “selling” department. They do the work but are only compensated for the cost of the product. I realize money coming in and out of a dealership is all in the same pot. However, if we want managers to step up and run their departments like small businesses, we have to account for it that way. Don’t feel alone if your dealership operates this way. Many of the dealers I work with handle inter-company sales at cost.
- Sell internally at list price: This is a growing trend. I know a lot of dealers who have implemented this strategy, and it is working for them. The biggest shift is in budgeting. You need to plan the switch in advance and realign the departmental budgets. The caution here is that you still need the flexibility to close a sale or keep a customer happy.
- Sell internally at a transfer price: This price would be somewhere between your cost and list price. In this scenario, you need to establish a mark-up, and it should cover all your operating costs. To get started, calculate your department’s operational costs, not including the product cost. Divide the operating cost by the total cost of sales for your department. Ideally you would use a 12-month window to measure operating costs and cost of sales. This percentage would be added to your product cost when selling internally. This is also a growing trend and is a great middle ground between the other two options.
Personally, I am a fan of anything other than selling at cost. We run the risk of sending a customer out the door without accounting for all our costs. It might feel like extra accounting work to calculate and charge a Transfer Price or set up departmental P&Ls.
Sometimes I am told, “We don’t need this. Everyone has the dealership’s best interest in mind. We work like a team.” I understand and appreciate that, however, I have seen the next level, and it looks different. You need focused and motivated managers as you grow.
They are working toward a common vision but have different objectives:
- The Sales Team’s currency is whole goods. They are measured in number of units, total sales dollars and return buyer rates.
- The Parts Team’s currency is products. They are measured by gross margin, fill rate and inventory turns.
- The Service Team’s currency is time. They are measured by technician efficiency and productivity.
Before you dismiss the idea, think about what it takes to get a part into your customer’s hands. Unless you have volunteers, you are paying labor to do this work:
- Source the product
- Establish an inventory plan for the product
- Order the product
- Receive the product
- Stock the product
- Check Inventory Accuracy (Cycle Counts or Physical Inventory)
- Retrieve the product
- Manage the risk of inventory (obsolescence or shrinkage)
- Return product that does not sell
- Manage product supersessions
We could also include inbound freight charges, and someone has to pay vendor invoices. A similar list of costs could be made for the service department. You may not be passing these real costs on to the customer if you sell internally at cost.
Get ready for the next level and don’t lose money selling to yourself.
