Turning Off Warranty Losses

/in , /by

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.

Did you enjoy this blog? Read more great blog posts here.
For our course lists, please click here.

Warranty as a Cost Center?

/in , /by

Warranty as a Cost Center?

Guest writer Chris Kohart takes a look at the warranty department in “Warranty as a Cost Center?”

Many equipment dealers view warranties as a goodwill cost center; why don’t we view this highly visible service we provide as not only a goodwill builder but also as a source of revenue or at least a break-even? Our OEMs have set us up to take warranty on the chin, but does it have to be this way? There are plenty of reasons to say no – read on.

A few eons ago, when I became the dealership’s product support manager, one of the first significant financial sinkholes I wanted to solve was curing the dealership’s annual six-figure warranty write-off (loss). The belief within the dealership was that it was a cost of doing business. In addition to staunching this loss, I wanted our dealership to highlight the significant value-add we provided to our customers that was not being positioned in our favor.

  • First question:  How many customers know the value add your warranty service provides? (at my dealership, the internal management’s consensus was, “It doesn’t matter, they expect it to be fixed for free under warranty”). If you’re not maximizing this extraordinarily costly and valuable benefit you offer your customers, it’s time to rethink your strategy. 
  • Second question:  Do you invoice every warranty repair to the customer at prevailing retail charge out rates showing a warranty discount at the end, bringing their cost to $0.00? That’s an impactful selling tool; once we started sending these no-charge invoices to our customers (I could write another article or three on the gyrations we went through to make our business system support that), we began to get feedback from customers as they had no idea of the additional value our dealership offered.  

Here’s an example of an invoice for a minor repair on a leaking hydraulic line:

 

DESCRIPTION QTY UNIT EXTENSION
Tube, hydraulic feed 1.00  $685.98  $685.98 
O Ring 4.00  $16.20  $64.80 
Hydraulic oil per gallon 4.00  $5.00  $20.00 
Inbound air freight 1.00  $218.90  $218.90 
Parts Total $989.68 
Field Labor per hour 3.00  $180.00  $540.00 
Travel Labor per hour 5.00  $180.00  $900.00 
Labor Total $1,440.00 
Mileage charge per mile 50.00  $1.75  $87.50 
Tolls 1.00  $45.00  $45.00 
Supplies & Materials $115.20 
Invoice Sub – Total $2,677.38 
Less OEM warranty coverage ($934.11)
Dealer Courtesy credit     ($1,743.27)
NET DUE FROM CUSTOMER $0.00 

It is pretty interesting when this is presented to a customer. They see a net total of $2,677.38 and owe the dealer $0.00. It’s a powerful selling tool for whole goods and your dealership’s product support operations. So, we’ve shown our good customers that as a dealership, we absorb 66% of this fully covered warranty repair while the OEM only covers 34%. Start reinforcing this huge dealership advantage before your OEMs encroach directly in your trading area as we get deeper into the “no-maintenance” electric construction equipment era (more to come later).

Now, let’s go a little deeper into this work order and review our actual P&L:

 

DESCRIPTION RETAIL

EXTENSION

   Actual Dealer Cost OEM Allowance Profit (Loss) Comments
Tube, hydraulic feed $685.98    $583.08  $437.31  ($145.77) Stock order discount is listed less 25% & 15%
O Ring $64.80    $41.31  $41.31  $0.00 
Hydraulic oil per gallon $20.00    $16.00  $0.00  ($16.00) OEM does not pay for fluids
Inbound air freight $218.90    $218.90  $0.00  ($218.90) OEM does not pay for freight
Parts Total $989.68    $859.29  $478.62  ($380.67)
 
Field Labor per hour $540.00    $324.00  $432.00  $108.00  OEM reimbursement rate is 80% of charge-out
Travel Labor per hour $900.00    $540.00  $0.00  ($540.00) OEM doesn’t pay travel time
Labor Total $1,440.00    $864.00  $432.00  ($432.00)
 
Mileage charge per mile $87.50    $87.50  $0.00  ($87.50)
Tolls $45.00    $45.00  $0.00  ($45.00)
Supplies & Materials $115.20    $115.20  $0.00  ($115.20)
 
Invoice Sub – Total $2,677.38    $1,970.99  $910.62  ($1,060.37)

In our example, this basic, simple warranty repair cost our dealership $1,060.37, and we lost $700 in profit opportunity. Where does your dealership book this cost today? (our dealership booked it as a new “OEM” expense). It’s not hard to see how this balloons over a fiscal year to be a six-figure write-off for many dealers.  How do we solve this dilemma? More thoughts to come in a subsequent article.

Did you enjoy this blog? Read more great blog posts here.
For our course lists, please click here.

Are you afraid of your dealer business system?

/in , /by

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?

Did you enjoy this blog? Read more great blog posts here.
For our course lists, please click here.

Go Live Success!

/in , /by

Go Live Success!

Tonight, guest writer Christ Kohart shares the ins and outs of how to succeed at ERP in Go Live Success. 

How to Succeed at ERP despite what you’ve read!

Time to upgrade your dealer business system (ERP)? In a continuing series, this question was recently asked of you. If you answered ‘Yes’ or ‘Maybe,’ the following information is for you.  Approached wisely and thoughtfully by both the dealership and the ERP provider, an ERP upgrade will reap the rewards starting with day one. This article will share one of the best practices that delivered positive experiences for those well-prepared dealerships (and for their business partners). The dealership that provided the bullets below had a successful go-live and continues to thrive on its ERP.

Here are a few improvements experienced shortly after going live on the new ERP:

  • Increased accuracy
  • Ability to track your dealerships share of customers spend
  • Instant, real-time reporting
  • Financially close an accounting period within two business days
  • Simplified transaction structure
  • Immediate updates to global data from all areas of the solution

How were these results apparent so quickly? Preparation, research, planning, establishing metrics, training, and execution. As with anything we approach, properly planned new endeavors have a much higher chance of success than when planning was only at a high level. This article will look at the importance of reviewing processes you use throughout the dealership and then the subsequent implementation of standard processes throughout your dealership.

At this dealership, during the early stages of transformation (before committing to a specific ERP), there was extreme pushback from staff regarding the number of processes requiring review and standardization. There is still the thought process in our industry that “we’ve been successful for decades doing it this way, why change?” I’m going to continue those out who do not standardize processes now, whether or not the dealership is considering digital transformation. Why? If you do not embrace standard processes throughout the dealership, you are not creating consistent, repeatable (and reliably reportable) results. This same dealership demonstrated the fortitude to thoroughly review 300 processes across all business areas (Accounting, Sales & CRM, Rental, Product Support).   At the start, many processes had not been standardized between departments (such as purchasing) and locations (“every branch has their individual way of doing it”). At the end of this endeavor, the dealership had created a solid purchasing and purchase approval process and standardized operational processes across their branch network. The first result realized before selecting an ERP:  The dealership had the documentation necessary to establish metrics used during the ERP selection process. The second result:  The dealership solved their difficulty in capturing and correctly categorizing purchases, whether for internal consumption, resale on a work order (how many times have you received an invoice for outside work & materials long after a work order was closed and invoiced without the charges?), or components that should have been capitalized vs. expensed when installed on prime products?

Let’s address each bullet point and how cleaning up and standardizing their processes affected the outcome after going live:

  • Increased accuracy. By creating standards (processes), every manager and staff member creates and enters information in the same format. If your staff doesn’t format correctly, the entry will not be accepted until corrected. You are now reporting on clean, accurate and identically formatted data from all sources.
  • Ability to track your dealership’s share of customer spend. Suppose your machine ownership database is accurate (I will save that for a future article). Your employees follow an established process for tracking all sales and activities by equipment (asset). In that case, your ERP can produce a report based on product support sales by specific equipment and customer based on operating hours vs. sales. Telematics can further enhance this activity, and I’ll reserve this topic for the future. The bottom line is that you will gain the insight necessary to increase your product support sales to your customers.
  • Instant, real-time reporting. Since ERP’s run in real-time, the overnight batch functions required to update different modules within the business system disappears. A couple of examples: Once a rental contract is created, the status of a rental asset instantly changes from available to reserved; once it’s on rent, status changes from reserved to on-rent. When you close a work order, it updates A/R and is available for review within service history.
  • Financially close an accounting period within two business days. You deployed standardized purchasing processes: when goods are received, they are on the books whether or not you have received the vendor’s invoice. In Service, work orders or individual segments close the day after the completion of work, and labor hours are entered and posted each day. Closing periods become more of a final review. The ERP either automatically creates reports or advises management when the period is closed and allows them to create their custom reports.
  • Simplified transaction structure. Everyone undertakes the same activity the same way, and fewer steps lead to greater efficiency and fewer mistakes. It also allows personnel to cover/take over other activities as a standard process guide is available. Many ERPs will enable you to upload your process documents directly in the program help files.
  • Immediate updates to global data from all areas of the solution. Since you have deployed ERP, information entered in one area updates all pertinent information system-wide. Your CRM connects to Sales, Rental, Product Support, and Accounting instantly. For example, suppose a PSSR makes a customer visit and discovers they are unhappy with a recent rental billing. The PSSR can enter this information in CRM. The responsible rental sales representative, branch rental manager, accounting department, and anyone within the dealership who needs to know are notified instantly. This is all driven by a standard process that drives activity within CRM and, if you deploy it, workflow.

While only one of many steps, it’s incredible how vital the “boring” process becomes when running your business. It’s imperative to undertake this review if you want to have excellent odds to succeed when you go live.

Did you enjoy this blog? Read more great blog posts here.
For our course lists, please click here.

Everything Seems Obvious in Hindsight!

/in , /by

Everything Seems Obvious in Hindsight!

Chris Kohart has over 30 years of direct management experience in the heavy construction equipment distribution industry and more than a decade in the technology sector directly supporting equipment dealers globally. Chris is Principal of C.A. Kohart & Associates, a management and marketing consulting firm dedicated to equipment dealerships, private equity investment firms working within the industry, as well as OEM’s and industry solutions providers.  He brings substantial knowledge in all aspects of dealer management, product support, sales, financial planning, cost control, operations, customer retention, and the technology that best fits their needs. Chris possesses a unique ability to translate conceptual models into specific processes and growth strategies, increasing operations excellence. Tonight, he shares some of his thoughts on technology in “Everything Seems Obvious in Hindsight!”

The thirty-plus years in dealership management roles and twelve years in the IT world supporting dealers globally has provided me with an understanding of how dealership management views the “digital transformation” revolution. No matter the location or the size of the dealership, the concerns are always very similar: our dealership management platform is not ideal, but we know how it works (or we think we do), and we don’t have the time (or money) to make a change; we’ve asked our customers what they want, and the resounding reply is that we need to be leading with current technology to manage their fleet and their business successfully. 

 

How do we get the dealership to the point where we’re giving our customers (they are our business partners) what they need while removing some of the constraints placed on our business by the current business system? How do we accomplish this without breaking the bank or severely limiting operations while the conversion takes place?  It’s an extraordinarily complex and challenging process to undertake, but very necessary. Here are suggestions for basic first steps before making a decision:

 

  1. Ask your business partners:  
    1. Do you use our online tools now? If not, why not?
    2. How do we improve our current digital offerings to you? 
    3. What can we add to our digital presence to better serve you? 
  2. Audit your current business system: 
    1. Are you using your existing software to its capacity? 
    2. What functions that are available in your solution are you not using and why?
    3. Can we find a way to utilize/optimize the functions we are not using? Why not?
    4. What are other software programs used within your dealership today? Why are these functions not being completed within your business system?
  3. Does your current solution incorporate integrations with?
    1. OEM’s: (e.g., whole goods and parts ordering, warranty claim and reconciliation, telematics, standard repair hours, machine intelligence)
    2. Your financial institution, credit card processing, sales tax management, purchasing solutions such as Ariba
  4. Map out and identify every single software package deployed within your dealership. 
    1. “One-offs” that may only be used by one or two individuals.  
    2. Understand why these are being deployed separately instead of completing the process within your business solution.  The higher the number, the greater the chance you are either on the wrong solution, or your people do not fully understand how to utilize your current solution. 
  5. Are your internal reporting capabilities able to meet current requirements?
    1. How many reports run automatically every month? How many are necessary?
    2. Are your people able to quickly generate ad-hoc reports?
    3. What reports are mission-critical for the growth and success of the business?
      1. How do we deliver them?
  6. Review your three and five-year business plans: will your current software support the organizational and market changes you plan to accomplish?

 

If the results to the above points are all positive, and you’re using few, if any, “one-offs,” you are in good shape. However, if the results indicate your current business system is lacking, you should begin preparing to either upgrade or replace it.  Here are some thoughts on decision-making steps to take (in parallel):

  1. Upgrade or replacement:
    1. Does your current solution provider offer a more up-to-date version of the software you’re currently using?  If so, that may be the most cost-effective solution to your problem.
    2. Begin understanding the solutions on the market that fit your dealership today and where you plan for your dealership to be in five years
  2. Cost of transformation (over five years)
    1. Pre-selection costs (all due diligence expenses)
    2. Software (including enhancements and support)
    3. Hardware (servers, upgraded laptops/desktops)
    4. IT services (either internal or contracted) to support the entire IT landscape
    5. Implementation services (everything from data migration to employee training to go-live and post-go-live support)
    6. Add 30% to the above as projects rarely are completed on time or within the original budget
  3. Effects on your customers, employees, and daily operations:
    1. What are the positive and negative effects of staying on your current solution vs. upgrade or replacement?
    2.  How do we accentuate the positive and mitigate the negative?
  4. Net long-term benefits to the dealership
    1. What customer-facing improvements do you require? (Suggestion – for now, stick with the absolute “must-haves”)
    2. What operational efficiencies (ROI) will you gain (people, time, customer satisfaction)
  5. Dealership Processes:
    1. Identify and understand every process in all departments.  This evolution will create the hierarchy for new solution requirements and provide you with a map to compare dealer management solutions accurately.
    2. Chances are, there are many different variations of each process in your dealership today. Your dealership needs to conform to one set of standard processes for every area of the business. Enforce the golden rule of the “standard process,” and your eventual upgrade/replacement will run smoother, and the operating efficiencies gained will be enormous. Your process maps can also become the basis for employee training and system reference, reducing training time and cost.

Replacing your dealer business system while operating your business is difficult but possible if the proper planning is done and expectations are set within your dealership and with your business partners. There are no universal or straightforward answers in making these decisions. If you decide to seek outside help, many qualified individuals can help guide you successfully through the process.  There are plenty of ERP selection consultants; make sure the firm you engage has a track record of working with dealers your size and that they fully understand the industry.

Did you enjoy this blog? Read more great blog posts here.
For our course lists, please click here.