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Turning Off Warranty Losses
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:
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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Warranty as a Cost Center?
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.
Here’s an example of an invoice for a minor repair on a leaking hydraulic line:
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:
EXTENSION
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.
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Are you afraid of your dealer business system?
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:
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:
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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