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by RON STURGEON, AutoSalvageConsultant.com

One of a continuing series of articles on increasing profits and cash flow.

Some of the auto yard owners who come to me for advice ask for help increasing profits. Many have owned yards for years and are struggling to earn what they did a few years ago.

Most of the time, they want me to give them a formula to sell more parts. They think the easy way to more profit is more sales.

I lay out the capital needed to buy more cars and the cost of added marketing to bring in more part sales and I let them know that building the momentum to raise sales might take several months or longer.

Sometimes, they don’t have the money to invest in inventory or promotion. I always suggest that we take a look at the expense side of the ledger or find low cost ways to get add on sales.

Cutting expenses can be done right away and can improve cash flows in weeks, not months. Then the better cash flows can be invested in more inventory and better marketing and revenues will go up.

One of the best ways to work on the expense side of the ledger is to revamp compensation from hourly to pay for performance. In past articles in this series, I have discussed pay for performance for inside sales, dismantlers, parts pullers, delivery drivers, inventory people, and outside sales. This installment is about selling extended warranty.

Part of giving your salespeople the right incentives to perform has to be a solid extended warranty program. If you are not offering warranties on parts, you are leaving a lot of money on the table.

When I sold my Texas yards to Ford in 1999, we were selling about 15 million per year. About one million of that was extended warranty. When Ford was doing its due diligence, they asked about extended warranty claims.

We had studied extended warranties and knew that a warranty sale produced a claim less than five percent of the time. They thought our numbers were too good to be true. We gathered more data and re-did the analysis.

It was still below 5 percent. That means extended warranties are insanely profitable. I was glad to pay 20 percent commission on these add on sales. We excluded some parts with proven high failure rates, but most parts we sold had at least one warranty option.

Many recyclers offer extended warranties only on mechanical parts. Why? Why not offer one on a fender or a wheel? Your customers are buying a fender because theirs was smashed in a wreck. Yep, we guarantee to replace that fender even if that happens again. Think about it, what are the odds?

If you have a top-performing, well-trained sales staff, extended warranty should be 10 percent of your sales. It’s found money! Why wait to start adding it to your bottom line? Some of your competitors have been milking the extended warranty cash cow for more than a decade.

Some yards don’t do warranty because they worry about returns. Remember that used parts almost always fail right away if they are going to fail. You are probably already offering 90 day warranties and a return in this period is a return, not an extended warranty claim.

How many parts come back more than 90 days after they were purchased? Almost none.  

I remember one Mazda RX 7 owner who got two replacement engines over a five year period. We took his picture and used it in our warranty sales brochure. His picture made me a lot of money even though he was the exception. Who keeps a 10 year old car for 5 years? And engines today are lasting longer than they ever have.

Published in the July 2014 Edition of American Recycler News