Management thinker Peter Drucker is often quoted as saying that “You can’t manage what you can’t measure.” DMS systems are different than standard ERP or accounting software by the way they measure gross profit for dealerships.
Compared to other companies like CDK that recently reported two billion in revenue, dealerships use gross profit more than any other metric to manage their operations. Dealers don’t care if revenue increases; selling more cars and servicing more vehicles without enough gross profit can be a quick road to disaster.
In the sales department, gross profit is carefully measured; average per deal, per salesperson, make, and model. In the service department, we measure labor sales gross profit percentages and parts profit percentages by sales type, but do we study how much we are making on each repair order or parts ticket? Instead, there are reports that measure effective labor rate, hours per RO, and technician productivity. We hope that by keeping these metrics high, the gross profit for parts and service will fall into place at the end of the month. Doesn’t it make more sense to treat repair orders like car deals and measure the gross profit per repair order?
“Doesn’t it make more sense to treat repair orders like car deals and measure the gross profit per repair order?”
As a controller, I had the opportunity to work at a heavy duty Mack truck dealership. After my first month, I closed the books and brought the draft financial statement into the dealer. He studied it and then said, “Looks like you need to work on open repair orders; we’re short in the shop.” I had reviewed the list of open repair orders and it didn’t seem excessive, so I had closed the month. Confused, I went back to the shop and met with the service manager. He pulled out a log that resembled a sales log and he had a column for the gross profit for all his repair orders. Most were over $1,000, even as high as $6,000 each! I didn’t realize that they made that much per repair order on big trucks. We ended up closing some of them back to the previous month and the profit now matched what the dealer had expected.
Some third-generation DMS systems display gross profit per RO and parts tickets in reports. So now dealers can use the same analysis that they do for car deals for repair orders to determine gross profit by make, model, advisor and even technician. In profit accounting training, we stress the need to increase gross profit in parts and service to provide higher absorption of your expenses. This absorption provides better stability in slow times.
If your current second-generation DMS does not provide gross profit per repair order or parts ticket, you’ll have two different ways to get this information; accounting journals or the parts and service modules.
In the accounting module, you download the journals for parts and service and any other fields that are available, especially if you use Control2 or another field for the advisor, tech, or vehicle description. After you get it in Excel, merely subtract sales from cost of sales to obtain the gross profit.
Some DMS journals show the total gross profit by document, so you can download those lines once and then use a lookup table in Excel to find the total gross profit in your detail lines. In the parts and service modules, most service advisor reports do show gross profit, but they might have only labor gross. Again, you’d need to download the parts gross profit and use Excel’s lookup function to join the amounts together. If you’re a “little short” of gross profit, Digital Dealer 22 has fixed ops, pre-owned sales, and F&I sessions that can help you increase gross profit.
Author: Sandi Jerome
Sandi Jerome is the owner of Sandi Jerome Computer Consulting. Sandi founded DealerStar, a web-based DMS. She is a former CFO, System Administrator, Fixed Operations Manager, and Controller with over 30 years experience in the auto industry.