Parts pricing and sourcing is an integral component of the sales process in a Tire or Auto Repair business. Labor and parts are the 2 basic elements of services provided and both contribute to quality and price. It is important to keep the objectives of setting parts prices in mind when making this decision. First there’s profitability. Every business must earn a sufficient profit to be successful. So parts sold must generate enough profit to cover business operating costs as well as supply a reasonable profit. Second, part prices must be in line with what the market will bear. Third, quality and reliability of the part must be considered. Poor quality may result in higher profit margins initially but end up costing much more in the long run. All these factors should be considered when setting part prices.
Evaluating the Cost of Procurement
Prices are usually set based on market conditions and purchase costs (what the vendor charges) but the cost of obtaining the product should also be taken into consideration. The process by which a part is ordered, received and paid for all contribute to the real cost. For instance if a part is ordered by phone, received, installed on a vehicle, added to a repair order then a vendor invoice is entered into an accounting system a certain amount of time is required to complete these steps. In contrast if a part is sourced via an electronic interface to the shop management system, added to the repair order, ordered electronically then received and the vendor invoice generated automatically a significant amount of time is saved. Therefore the real cost of procurement is reduced. If this is considered in the context of the total number of parts that are purchased over a month the savings can add up to a significant amount. So a supplier that offers integrated interface capabilities with all other factors considered equal would be favorable to one that doesn’t. Gross profit margins may be the same but real profit would be more favorable for the supplier that offers the integration capabilities.
Making the Most of Tire and Auto Parts Supplier Relationships
A vendor that supplies tires or parts wants the same thing as any other company – a consistent steady supply of business. In exchange for an agreed upon volume of business greater discounts may be offered. One way to make the best margins on parts is to comparison shop then buy from the supplier with the lowest cost. But just as above in evaluating the cost of procurement there is a cost associated with comparison shopping. It takes time and if purchases are spread across multiple suppliers the actual cost may end up being greater than working with a smaller number of suppliers that are willing to make price concessions in exchange for giving them a level of business. This evaluation should always be included when looking at cost and setting part prices.
Gross Margins and Actual Bottom Line Profit
Setting prices based on what the market will bear is always the best practice. Then achieving the lowest possible costs to ensure maximum profitability will bring the greatest success. Gross margins should not be the only consideration when determining the profitability of parts. The cost of procurement should also be a part of the decision because the impact on actual bottom line profit can be considerable.