What Impacts Dealer Absorption Rate?
Our new guest writer, Walter McDonald, is President of The McDonald Group, Inc. Over the past 4 decades has developed and presented over 2,600 machinery dealer management workshops. He recently completed publication of his 10-volume Master’s Program in Dealer Management. “What Impacts Dealer Absorption Rate?” is his first blog post for Learning Without Scars.
The absolute number representing “Absorption Rate” is interesting but not a call to action. It only indicates your current position relative to the target score of 100%, a very desirable financial goal for your machinery dealership. Many dealer managers look at their current score and say “WOW!” with little insight into how to make any improvements.
This Absorption Rate formula is something that you can use when you review Absorption Rate and discuss it with your management team. I recommend your team review the components of Absorption Rate weekly. To support your discussions, produce a weekly flash report of your sales and gross profit by parts, service, and rentals plus departmental and overall dealer operating expenses.
The formula below illustrates inputs to Absorption Rate from Service, Parts, and Rentals.
Absorption Rate Formula
Gross Profit from Parts, Service Labor and Rentals
Absorption Rate = Parts, Service Labor and Rentals
Fixed Operating Expenses
Fixed Operating Expenses are those dealer expenses that do not change or vary with sales volume. Sales Commissions are variable and are not included in Absorption Rate calculation. There are other possible variable expenses, but for purposes of simplicity, we only use the big one, sales commissions, in this formula.
In your management review, ask what we can do to improve our position in each area.
Above line (numerator) items that can be controlled to improve Absorption Rate score include:
- More maintenance contracts and inspections drive Labor Sales and Gross Profit up.
- Improved service labor productivity drives Labor Sales and Gross Profit up.
- Expanding technician apprentice program drives cost down, Labor Gross Profit up.
- More maintenance contracts and inspections drive Parts Sales and Parts Gross Profit up.
- Weekly or bi-monthly e-mail promotions drive Parts and Service Sales and Rentals Gross Profit up.
- Parts Customer Price Discounts drive Parts Gross Profit down.
- Better Parts purchasing practices drive parts Cost of Sales down and Parts Gross Profit up.
- More discounts earned drive parts Cost of Sales down and Parts Gross Profit up.
- Regular Stocking orders and vendor freight programs drive Cost of Sales down and Parts Gross Profit up.
- Higher dollar and unit utilization drive Rental Sales and Rental Gross Profit up.
- Improved inter-location unit availability information drives Rental Sales and Rental Gross Profit up.
- Better turn-around time from rental return to rental ready drives Rental Sales and Rental Gross Profit up
- Better control of maintenance costs drives Rental costs down and Rental Gross Profit up.
Below the line (denominator) items include expenses generated by each department.
- Reduced service department Fixed Operating Expenses improve Absorption Rate.
- Reduced parts department Fixed Operating Expenses improve Absorption Rate.
- Reduced rental department Fixed Operating Expenses improve Absorption Rate.
- Reduced machinery sales department Fixed Operating Expenses improve Absorption Rate.
- Reduced administrative Fixed Operating Expenses improve Absorption Rate.
If you and your management team review the components of Absorption Rate weekly and have your ultimate destination of 100% in focus, progress will be much easier.
I would welcome your comments: walt@mcdonaldgroupinc.com