Are you on auto-pilot when it comes to passing costs on to customers?

I am sure everyone has become sensitized to pricing in commodities. These include oil prices by the barrel, gas prices at the pump, manufactured steel and scrap prices, tires on mining trucks and other large vehicles, freight costs, copper, zinc, wood, the list goes on and on. Phew!

Most of our suppliers – the equipment manufacturers and assemblers, the component manufacturers and the specialty suppliers – are all running at or near capacity. Yet demand still outruns supply worldwide. Imagine that scenario.

I want to address an area that results from these run-away cost increases. How are we going to address these changes in our businesses? How are we responding to the changes in prices, and what are we doing to get ready for the rest of the story?

So, what do we do with our parts pricing?

So far, all I have seen is a knee-jerk response to price changes. We pass them along to our customers. The suppliers send out price adjustments for parts, sometimes on a daily basis, but certainly on a monthly basis. And there are still annual changes on a wholesale review basis. How do dealers evaluate these changes? Typically they don’t review the changes very well. Many times it is a weakness in their business systems. Sure, you will see what the impact is on the price change, but that is normally on the inventory value.

We need to see a serious evaluation of the changes implemented by your suppliers. This evaluation should cover the following items and many more.

  • Total part numbers from the supplier
    – Total part numbers your business sell
  • Percentage of total part numbers you deal with
    – Percentage of the part numbers that had an increase
    – Percentage of the part numbers that had a decrease
  • Total Dealer Net (DN) value of all parts from the supplier
  • Total Dealer Net value of all parts the dealer sells
    – The same for Recommended Consumer List (CL) Price
    – The same for the gross profit provided between D/N and C/L

With this type of evaluation you can make a decision on what you need to do with your pricing locally. What do you do with those parts that have a price decrease? Do you hold the price fixed for the part until you have sold your inventory for that part? Not many dealers do that. Most dealers just make the price change and continue on.

I would ask you to take another tack. Examine your costs. Reduce your operating costs in the parts department. Continuing to do what you have always done, even as the world around us continues to change at an insanely rapid pace won’t work. Re-examine best practices in the industry; purchase the Product Support Opportunities Handbook from AED. Implement the changes exposed in the Handbook.

What about improving productivity through system changes? Technology has made incredible strides in recent years. Are you still working with old technology? Look at productivity gains overall in the U.S. – productivity growth in the country is greater than in any other country in the world. What are you doing to improve yours?

Now we need to turn to labor charges. Most of you know that I believe that we under-price our service skills. You know that I completely disagree with the “one” price for service work that most dealers use. At the same time, we have a knee-jerk reaction in the service department. When the labor costs go up we pass the charge on to the market. This is totally wrong.

We need to get very serious about what it is we do. We need to price our parts and services properly. This means that we have a responsibility to manage the businesses so that we can deliver adequate profit to the owners, while at the same time pricing our wares so we can attract more customer business.

We have not done this very well. In fact, I believe that this is a novel concept for many of you. But with the world and the country in the condition it is, perhaps now is the time to look at our pricing and our costs and apply serious solutions. Don’t think you can just pass on the costs to your customers. Pretty soon they won’t take it anymore.

Challenging times are a test of character, not theatrics. This is a true test of character, isn’t it?

by Ron Slee
Sepptember, 2008
CED Magazine

About CED Magazine

Construction Equipment Distribution is published by Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada.

With CED, content is king. No fluff, no advertorials – CED just gives AED members what they want to read: business information, industry and association news, plus fresh, original and useful feature articles that they share with their management teams. Our subjects range from rental, product support, sales strategy and customer service to technology, construction markets and legislation – and much more.