Dec. 1, 2008 – A six-month report on an extreme makeover
December 1, 2008
Filed under Features
By Neil Pascale
P.J. LaMariana is experiencing what many dealership principals are confronting after an arduous 2008.
His multibrand dealership’s new unit sales have plunged 21 percent compared to the previous year and for the first time in his store’s five-year history, overall revenue will be down year-over year.
Unlike so many other dealers, while LaMariana’s sales are down, his store’s gross profit percentage is up. Considerably up.
The Albuquerque dealer has made massive business changes in the past year as part of “The Italian Job,” a dealership profitability program run by Ducati North America and the RPM Group, the industry’s largest 20 group provider. The two companies have worked closely with LaMariana and his staff since early spring to install significant changes in his service, parts and sales departments.
“The business is getting much easier. It’s completely different,” said LaMariana. “We obviously have some work to do over the winter to improve the processes and systems throughout. But it has changed quite a bit.”
The changes have been widespread. Some included a restructuring of staff, including the elimination of a general manager position and the removal of another department manager who did not want to adopt the new processes. LaMariana has had to make his own changes, including giving more oversight and decision-making responsibilities to department managers.
“It was kind of uncomfortable trying to get this stuff implemented,” LaMariana said, noting quite honestly that it’s “just not fun to change things on people and have them feel uncertain about it.”
What is certain, however, is the impact the changes have had on the dealership’s profitability. Consider one benchmark used to measure profitability: absorption. This term indicates the ability of the PG&A and service departments to pay a store’s entire operational expense so that new unit revenue goes directly to the bottom line. The national trend as measured by RPM Group dealers is 67 percent, meaning on average, PG&A and service departments are paying for two-thirds of overall operational expenses. Whereas at P.J.’s, those two departments are not only covering all expenses, but also adding to the bottom line.
Plus, the store’s gross profit margin is now more than 14 percent, double the average gross profit margin for metric and Ducati dealers nationwide, according to RPM Group data.
LaMariana noted perhaps the biggest surprise in the project is “now the service department makes money, which is kind of a first.”
Here is a closer look at some of the changes that LaMariana and his staff have made to different departments and the results of those changes.
Inventory processing and locking up pricing — mainly the ceasing of discounting — have been the main areas of concentration.
P.J.’s has installed a “Min/Max” ordering system where each product is provided a minimum and a maximum order level on the dealership’s management system. On a weekly basis, parts department staff compare actual stock levels to the min/max levels and order appropriately. LaMariana provided an example of the system that is still being installed in some areas of the department. “If you had widgets, your max was 10 and your min was two,” he said, “and on Saturday you’re placing orders and if you only had one, it’s going to alert you” of the product shortage and prompt staff to make the necessary order.
Previously the ordering was mainly random, with no set system in place to determine how much of a particular product the company should carry at any one time. “It’s helping,” LaMariana said of the min/max system, “and it’s helping in service (department) as well.”
The new system, plus a shift in carrying fewer brands but with more depth in the remaining brands, has paid off. “We used to stock a lot of different items from different vendors so we could have everything for everybody,” he said. “But we didn’t have much of anything for anybody.”
What the dealership also no longer has in the department is discounting. In August, the store created a loyalty program, the P.J.’s Riders Club card, that provides a 10 percent rebate that customers are able to use on a future shopping trip. The new program not only has allowed LaMariana to discontinue discounting, which was previously rampant and inconsistent, but led to an improved department profit margin. LaMariana has found the redemption rate on the loyalty program equals about 2.5 percent, much below the discount levels that parts staff was giving previously.
“The department is becoming much more process-oriented than people-oriented, and it’s working,” he said.
Staffing remains a work in progress, but there has been considerable change to the department’s structure. In order to improve efficiency and hence profitability, the department has drastically changed the ratio of support staff to techs. Previously, the dealership had two support staff assisting five techs. Now it has three support staff helping 21?2 techs. (Both the number of support staff and techs are expected to increase during the dealership’s busy season.)
“That has panned out for us,” LaMariana said of the shift in personnel.
Equally important has been tracking and accountability tools the service department manager installed as a result of training from Assurant Solutions, the parent company of the RPM Group. Key department benchmarks have increased dramatically, with productivity up 30 percent and dollars produced per tech up 49 percent.
Tire penetration also has increased noticeably due primarily to two factors: better inventory management and standardized pricing. The latter was something the dealership had wrestled with for a long time as its prices constantly fluctuated, from a retail price to dealer cost. A large area dealership that sells its tires at 50 percent off did not help matters, nor did the occasional customer service issues that came up as a result of the fluctuating prices. LaMariana ultimately had his staff examine online and magazine tire prices and settled on a standardized price list that could compete with those — although not with the larger dealership’s 50 percent off price — and still maintain some profit margin.
But LaMariana believes the inventory management control, using the min/max system, that ensures sufficient stock is on hand has been just as key as the new pricing structure.
Making inventory reduction a priority and altering how deals are done are two key changes P.J.’s has made in sales.
After training with Assurant, P.J.’s revised its sales process so all vehicle price decisions were made by the sales manager, “the person who gets rewarded if (the department’s profit margin) is positive,” LaMariana noted. As a result, sales gross profit has increased 26 percent.
Still, LaMariana notes the department has much to do to continue to refine and improve the sales process. “Every transaction is different and we’re trying to normalize it where everything fits into a parameter that we can control, and that’s a tall order,” he said.
One element that has received significant attention is new unit inventory. A flooring aging report is combed over weekly to identify units of concern. The increased attention to inventory has helped reduce the store’s inventory by 57 percent. That drop also has led to an 18 percent decrease in monthly flooring costs.