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“DST Asks”: Adding Service/Installation as an Additional Profit Center in a Parts Enterprise

How many readers know that Starbucks, the ubiquitous coffee retailer, actually began operating as a coffee roaster in Seattle, selling bags of whole bean coffee in Pike Street Market? It took a visionary leader, Howard Schultz, coupled with an ambitious operating plan and enterprise management technology to morph the business into the worldwide coffeehouse chain and merchandising success story we see today. And this all happened in an incredibly short period of time…with growth from 17 outlets in 1987 to 7,225 outlets today. All of this was based on the simple premise, “We already have customers who buy our coffee beans — what if we brewed the coffee for them, too?” We see a similar opportunity in parts distribution.

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MISSION VIEJO, CA — How many readers know that Starbucks, the ubiquitous coffee retailer, actually began operating as a coffee roaster in Seattle, selling bags of whole bean coffee in Pike Street Market? It took a visionary leader, Howard Schultz, coupled with an ambitious operating plan and enterprise management technology to morph the business into the worldwide coffeehouse chain and merchandising success story we see today. And this all happened in an incredibly short period of time…with growth from 17 outlets in 1987 to 7,225 outlets today. All of this was based on the simple premise, “We already have customers who buy our coffee beans — what if we brewed the coffee for them, too?”

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We see a similar opportunity in parts distribution. Why just sell parts at wholesale when you might also add service to your business mix? Our “DST Asks” question last week was: “What is the likelihood that your parts enterprise will be adding service and/or installation facilities as an additional profit center in the future?”

Fifty percent of our respondents either have plans to add service to their parts business within one year, are currently in the process of doing so, or already have. One particularly interesting comment from a respondent who has observed the trend voiced the worry that service outlets would begin becoming parts distributors as well. That concern is an indication that the business mix can profitably work both ways. As always, any anonymous respondent can contact DST directly to discuss the matter and how it might apply to one’s own specific business by e-mailing us at [email protected] or calling us toll-free at 1(800)700-4DST.

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We’ve noted a growing trend in our customer base to expand their business scope, growing from parts distribution into new service categories, or from a foundation in service to parts distribution as the auxiliary business. While more typical in the heavy duty parts business, we’re seeing more of this vertical business integration even in the traditional automotive segment. Whether through expansion or acquisition, it often makes sense to consider this strategy.

First, you can increase total revenue and improve operating margins and net profit — service business can command a higher incremental profit margin while allowing you to sell parts at a full retail margin, not the wholesale margin you would get through a store sale or direct to an installer. So, what’s the catch? Why isn’t everyone doing it?

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Service is indeed a different business. New people and processes will be required. Investments in plants and equipment will be required. And most importantly, a technology plan will be required. Our customers who’ve undertaken this journey have relied heavily on business systems that discretely track profit centers and support multiple business processes across these seemingly unrelated business categories…technology that manages parts inventory at all stages in the expanded business just as adeptly as managing the new customer mix along with their vehicles, service histories, needs and preferences.

The modularity of a well-designed, sophisticated parts distribution software system empowers parts businesses to add service components as they wish. For example, DSTWare has the ability to add labor time packages and a number of our customers are taking advantage of this feature. Auto Air of Macon, Ga., is an ACDelco parts distributor, and DSTWare user, with service work now making up 10 percent of its overall revenue. Another DSTWare client, Powertrain of Savannah, Ga., is a heavy duty parts distributor with 33 percent service revenue.

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We would be negligent in our consultative duties to our customers and prospective customers in the parts business if we did not point out the need to have the ability to add service components to their parts distribution system when desired.

From a business management standpoint, typically 50 cents of every revenue dollar is labor in the service environment. That means that you need to be able to manage your labor component at least as well as you manage your inventory. Typical service packages are designed for working on either cars or trucks only and capture information that is usually dependent upon Year/Make/Model data. DST recognizes that we have customers in the rebuilding community as well who don’t just work on cars or trucks, but do component repair, such as driveline, transmissions, hydraulics, and injection pumps. On a software architectural level, we allow the customer to define and customize the information they want to capture as a “unit,” which maximizes the flexibility of the system. Our systems manage labor as a completely distinct and separate entity. Labor can be sold as desired…flat-rate, time and materials, or rate to the tenth of an hour. Multiple technicians at varying rates, the amount charged to each customer as compared to actual cost, the burden to workmen’s compensation insurance and uniforms and overhead are calculated to determine the true cost of the labor component. Our systems truly manage the labor component. The detail captured in the service history can be used for future jobs and for marketing purposes.

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Technology can enable new business opportunities that you might not otherwise consider. And new profits that you didn’t realize were there.

“We already have customers who buy parts from us – what if we installed them, too?”

We’d love to hear your thoughts on the topics we post, suggestions for additional questions and anything you’d like to share. Send us an email at: [email protected] .

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“DST Asks” is written and sponsored by DST Inc. The opinions expressed in “DST Asks” articles appearing on aftermarketNews.com do not necessarily reflect the opinions of AMN or Babcox Publications.

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