On Target

“Fact-Based Decision-Making”
Bruce Hodge, General Parts LLC
I have often been asked how we manage the labor rates
that manufacturers pay us for warranty service. My standard
reply is that we don’t! We manage the manufacturer
relationship and negotiate rates based on our business
needs and financial goals. Over the years our company
has developed a larger broad based approach to manufacturers
that looks at the entire block of business that is
driven by the relationship with that manufacturer. By taking
this approach, we are better able to measure the entire
relationship and the overall effect on our bottom line.
Today as it stands in our industry, warranty labor rates
are reviewed and adjusted only on an annual basis. In
some extreme cases, the review can stretch out two
years or more. This annual adjustment of rates would not
be so bad if the adjustments were substantial enough to
keep up with the spiraling costs of running a quality service
company. The fact of the matter is that these adjustments
do not keep pace. Currently, warranty labor rates
hover at levels from 15% to 35% below the rates we
charge our best end user customers and the gap is widening.
Many of us remember when that difference was no
more than 15%.
Additionally, the discussion centered on warranty service
rates is often one sided. Most manufacturers state what
they are willing to pay (either in dollars or a range) and
service companies, for the most part agree. There doesn’t
seem to be any real discussion involved or any substantive
exchange of ideas.
I don’t know whether this annual rate dance we do is a
hard and fast rule or done just for expediency, but I do
know that all businesses should have the ability to adjust
their pricing when significant changes in costs drastically
alter their bottom line.
In an effort to help us better understand what our warranty
rate should be for each manufacturer, we decided a
few years ago to take a different approach. First, we developed
a financial matrix that measures the amount of
overall business that the manufacturer brings to our bottom
line. This includes parts sales, non warranty service
labor and parts as well as warranty labor and parts. We
feel it is important to look at the whole picture.
Secondly, we divide the amount of money we were paid
for our labor by the total hours invoiced to determine our
“effective” billing rate. In every case this will be lower that
your contracted rate because of write offs, credits and
invoice adjustments. This effective billing rate is the core
measurement for warranty labor rates.
Third, we recently developed a manufacturer evaluation
that considers the other factors in the relationship such as
accounts receivable, parts policies, training and overall
support. The program assigns each component a numeric
grade. This scorecard is tabulated and measured against
a maximum score. The financial components of the
scorecard are weighted more heavily than the other sections.
After reviewing these three components, we have a realistic
idea where our warranty labor rates should be for
each manufacturer.
While the above calculations are necessary and helpful,
the process still leaves some wiggle room. To assist us
further in determining a walk away point, we developed
another financial matrix that measures fully our cost to put
a trained technician in the field in a properly equipped
vehicle. This model takes into account wages, training,
benefits and management oversight and distills it down to
an hourly rate. The hourly rate we are paid from any
manufacturer has to exceed that number in raw form and
also exceed the actual effective billing rate once all the
adjustments are made. Additionally, we have established
a combined overall gross margin of 45% or more for the
entire block of business that a manufacturer brings to us.
We have found it to be a poor business decision to represent
any manufacturer that fails to meet these basic criteria.
The determination to continue a relationship with a
manufacturer or to end it is then a business decision
based on empirical data instead of emotion.
Throughout the years, I have cancelled numerous manufacturers
based on their warranty rates. I continue that
practice today. Some of these were very large, high profile
companies. The difference is that today I have good
information to make an informed decision. In the past,
dropping a manufacturer had mixed results at best. While
our overall service margins did increase, sales in some
product lines decreased and our cost of parts for those
manufacturers increased as well. We also lost out on the
revenue that “special programs” such as installs, retrofits
and scheduled maintenance programs delivered that are
driven exclusively by the manufacturer. The real positive
that came out of it was that in future discussions with
these same manufacturers, they knew we were prepared
to enter into a more equitable relationship. By taking that
firm historical stance along with having hard data that we
share openly with them, we have managed to improve our
warranty compensation and forge stronger business relationships.
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