Archive for category: Chris Kohart

Turning Off Warranty Losses

Guest writer Christ Kohart is back this week with a continuation of his topic on warranties with his blog post, “Turning Off Warranty Losses.”

In our last discussion, we reviewed the cost (financial loss to our dealership) of replacing a simple hydraulic tube covered by an OEM standard new equipment warranty. We also discussed the importance of sharing our dealership’s value-add with our customers; that example was a small hypothetical of what a dealer’s service operations extend to support our customer base daily.

How do we properly allocate these write-offs without dumping them into a general cost bucket? Here are two ideas:

Simple Method: We can look at our warranty write-offs for the previous fiscal year and allocate a percentage as a line-item cost to each new whole goods sale during the upcoming fiscal year. While the cost recovery trails the expense by one year and is subject to market fluctuations (good vs. bad years), it is a starting point. In this example, let’s assume that our write-off account shows a net negative balance of $200,000 at the close of our current fiscal year. To fairly allocate this loss to our upcoming fiscal year, we can’t divide our forecast unit sales count by the $200K loss as it will unfairly allocate to lower-cost machines. For this example, we use our forecasted OEM whole goods cost (exclusive of rebates, allowances, freight, etc.) of $10,000,000. If we do some quick and simple math, adding 2% to the cost of each new machine we bring in during the year should net us out with a close to $0 warranty loss. This 2% becomes a line in your build spreadsheet, just like inbound freight, receiving, PDI, standard prep, etc. Beware: the downside to this simple method is that one specific large warranty hit during the year can skew the numbers and hurt your competitive position – you’ll have to carefully gut-check your results.

More Accurate Method:  Consider allocating the warranty costs by OEM, model type, and, potentially, application. Depending on your dealership’s software, this can be relatively easy or complicated. Due to the limitations of the software platform deployed in my old dealership, this was an arduous exercise but well worth it once we began extracting meaningful data. While this will take some time to assemble, once the data model has been created, you should be able to run a routine to update your numbers regularly.

I’m going to limit the sample for our example, but this formula works for almost any size dealership:

1. Three-year lookback
2. Two OEMs represented.
3. Three different model classes (types) spread between the two OEMs.
   1. Class 1 = 15-30 MT hydraulic excavator
   2. Class 4 = 80-150 HP tractor dozer
   3. Class 10 = Medium skid steer loader

High-level steps to make the data meaningful:

Run a detailed report and export it to any solution that can manipulate data, by OEM, of all whole goods sold by model class. You need this information to establish the quantity of each model class.

Run a detailed warranty report and export it using the same criteria. Ensure the report includes all costs and all recovery; this should include any additional policy or extraordinary cost reimbursements received from your OEMs.

Let’s review some of the information in this spreadsheet. We can quickly see what our average warranty loss per machine costs our dealership to support – we’ll discuss the lost profit potential on all those labor hours given away at cost in an upcoming blog. We can also see trends if the average loss varies yearly; in our example, they stayed close. 

We now have data that is accurate by OEM and model class, we’ll discuss adding application as a factor in a future blog. It makes sense that a small skid steer will cost us much less in terms of warranty support than an excavator. This report would also highlight an outlier you would want to adjust manually; using the “simple method,” this would not stand out.

Run this model for your dealership – hopefully, the results are not a surprise when you review them, although they usually are. If you think the numbers are overstated, start with a percentage – even at 50% of the numbers presented above, our sample dealership will add approximately $421,000 to the bottom line in the upcoming fiscal year if you use a three-year average as your basis. While the numbers used have been kept low for this example, I hope they shed some light on the power of accurately tracking these costs. 

Set up at least one revenue GL account (preferably by OEM and model class) to begin recording the offset to your warranty loss account(s).

This is an example of setting up your company to stop writing off warranty losses. If your business system cannot provide this information, many excellent third-party products integrate with most of our industry’s business systems and will ease your journey. The cost of your investment in the project, and perhaps the third-party product, will be returned quickly.

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Are you afraid of your dealer business system?

Guest writer Chris Kohart Tackles our reluctance to update the software systems we use in “Are you afraid of your dealer business system?”

Dealerships invest heavily in people and the infrastructure to support the business, so why do so many dealers still utilize antiquated software solutions to manage their operations? Many deployed these “state of the art” business systems more than 25 years ago and still support their operations on these outdated platforms. Technology has transformed our business in many areas, from how our customers want to do business with us to telematics. What makes us believe a 25+-year-old business solution enables us to keep even or get ahead?  Thinking about changes, what was state-of-the-art business technology like in the late 1990s?   Here’s a short list that comes to mind:

1. Personal Digital Assistants – remember the Palm Pilot?
2. CD-ROM – remember when they were state of the art for data storage?
3. Dial-up connectivity –internet access or point-to-point communication with your OEM?
4. Fax machines – great for expediting signed documents, but remember those 100-line parts orders?
5. Desktop CRT monitors – mine took up 1/3 of my desk space, and I’m convinced that’s what caused me to start wearing reading glasses

I guess that, excluding a few fax machines still in service, all the above have long been retired from your business and home.  Since software and hardware are many generations ahead of the 1990s, why is your dealership still relying on 25+-year-old first-generation software to operate?  Some dealers probably still remember the pain of training the entire dealership on how to use the system and the extremely high hardware and software costs.  Many of these dealerships are still maintaining nightly or weekly tape backups.  Perhaps it is easier to muddle along using the same solution (quick fact: most of these older “legacy” systems are on life support, and there has been no new development for years).  Think about that every time your dealership pays your vendor’s software license and support invoices.  Most legacy dealer software providers have been sold or merged a few times and probably don’t resemble the company you started doing business with. The newer consolidated entities are trying to maintain the dealers that have not joined modern times by developing middleware that allows the 25+-year-old legacy system to communicate with more modern graphical user interface (GUI) solutions.  It looks great in a PowerPoint sales presentation, but for those utilizing these tools, everyone experiences issues with two or more disparate solutions trying to communicate in real time.  Latency, loss, or corruption of data are prime examples.  Many dealers deploying this hybrid approach experience employee and customer frustration, increased license and operating costs and decreased operational efficiency.  Why would a dealer principal subject themselves, their employees, and their valued customers to this?  

The top reason: is fear of digital transformation. How many ERP projects fail? On average, 55 to 75%.  That’s a scary number, and I understand why it keeps many from moving their dealerships to modern times.  Let’s flip the averages above – why do 25 to 45% succeed?  Three reasons: people, process, and planning.  Let’s briefly break these three down:

People:

We all run lean; it’s the nature of our high dollar – low margin business.  The senior management team must make in the very early stages that your best people (senior, middle-management, and junior) be assigned.  Depending on the size and complexity of your dealership, some individuals will be assigned full-time for the duration while others will be part-time.  Most dealerships should be able to find a balance of experienced forward-looking thought leaders to participate part-time during the project.  The input, guidance, and deep understanding of your dealership’s functional (and cross-functional) areas will be a critical factor in your success.  Please ensure these individuals have your unqualified support and are provided with backup in their departments so staff and business operations don’t suffer.

Process:

Virtually no digital transformation project will be successful without going through the tedious and critically necessary task of mapping every process from levels one through five.  Don’t be surprised if you identify hundreds of processes throughout the dealership; the depth and quality of your process mapping will significantly affect your success or failure.  You will also be able to identify processes solely required by your 25+-year-old system that add no value to your operations; reviewing these processes will allow your team to map processes that make business sense instead of processes created to satisfy the requirements of the software. When you have completed your process mapping and reviews, you have a roadmap for the minimum requirements of a more modern dealer business solution.

Planning:

As mentioned in a previous article, the more steps you take upfront, the more successful your project will be.  Here are a few very high-level areas that you must consider early:

 

• Perform a complete audit of your current business systems.  This includes your legacy solution and anything else, right down to excel or extensions written in-house, payroll processing, HR management, etc.  Don’t be surprised if your list exceeds 50 disparate solutions; it’s pretty common.  You will most likely discover software being used within the dealership that you’re unaware of.
  • Map every solution to the business area(s) it supports and understand why it is being used.  Is it mission-critical, or did someone start using it, unaware there was a better way within an existing solution?  The more granular your team is in this area, the better.
• Create a functional requirements document.  Using the above audit, identify your business functions that are not currently being supported (possibly equipment yard management, key reporting metrics and BI, the share of customer wallet) and begin recording this information.
• Talk to your peers– what are they using, and how does it support their operations?  The goal is to identify those who have made a successful journey and are now running their business without feeling software-based operational or growth constraints.
• Talk to your OEMs – what dealer business system software do they support in communication (equipment, parts, service) and their sub-functions? 

Once you’ve completed the above, you can evaluate the various solutions providers – many excellent, technologically current dealer business systems are available today.  Take the time to review all of them and weigh the benefits and pitfalls of each solution.  While the ROI may be nebulous, you can take measures to validate many of the productivity and time savings you will gain, not to mention deploying a modern, user (and customer) friendly business system that will continue to update as technology advances. 

Suppose you’re concerned about organizational depth or team availability to carry all of this out internally. In that case, it makes sense to bring in an outside consultant who understands the industry, dealer software, and how to integrate successfully.  It’s a small investment in the success of your project and, ultimately, your dealership’s long-term viability. 

Considering this, why would any dealership still deploy 25+-year-old software to run their business?

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