Brokered Parts-Blessing or Curse?

Recycler Management Article – June, 2002

Please don’t mail me any rotten tomatoes. I know some of you won’t agree with me, but I hope to bring some perspective to this discussion. When I see some folks shooting for a certain percentage of brokered parts relative to total parts sales (with a bias towards increasing brokered parts sales), I have to enter the debate.

Brokered parts are an outgrowth of poor purchasing; they stem, in part at least, from a lack of good information from our computer management systems about what we need to meet customers’ demands, and from our never-ending search to increase profits. I am convinced that we have added costs through the years and made our businesses unnecessarily complex. Some of the most profitable operations I know broker only tiny amounts of parts, and they certainly have the highest sales per employee. That’s because they only do what they do best and don’t fool with all the other “stuff”. Many of them are newer yards that haven’t added all the “extras” through the years.

In the “good old days”, before we had intense competition and many other adverse circumstances, it was easier to make a profit. (Certainly we can agree on that?)

Now, let me ask you a question. The last time you contacted Sears with a request for a whiz-bang-didly-doo and they didn’t have it, did they offer to call over to some other store and get it for you? No, of course not, and that’s because they pride themselves on stocking what they think will sell.

I know, you say we need brokered parts to keep our customers happy. Is that what we are doing: trying to keep our customers happy? Or are we trying to make sure we get every dollar from them we can, at least partly to keep someone else from getting those dollars? A good analogy can be found in grocery stores. If every time we went to the grocery store they only had 50% of what we wanted, and we had to go to a different store to get our groceries, but they only had 50% of what we wanted (but a different 50%), would we become loyal to one store? Is this about customer loyalty? I believe that in order to have loyal customers, we must do at least one of the following:

Have a very high percentage of what a customer wants, with consistent quality and good value. (Wal Mart?)
Do a perfect job every time on those items on which we purport to be experts. (Starbucks?)

We don’t do either, most of the time. We can’t do the first item, period. Even with good purchasing, we will only have 50%-60% of what the customer needs, and with brokering and huge inventories available via URGNET, ORION, or EDEN, we would be lucky to get to 80% order fill. Try telling any other sales business that your business concept is based on an 80% fill rate and they will laugh at you.

All this assumes, of course, that the customers will always be 100% loyal, and the pricing will always be competitive, and the parts will always be as promised and on time. Boy, what a mouthful! We struggle to control (but can!) the items from our own stock but try to be accountable for everyone else’s performance as well.

I recall a conversation with one of my “die-hard do anything for the customers because they will always appreciate it managers”. I observed him spending an hour to pull a bunch of springs and clips off a backing plate (for which he could charge hardly anything) to help a customer in dire need.

He-We did that because he’s a good customer.

Me-So you think he will remember us in the future because you helped him today?

He-Yes, and he will always use me because he appreciates the service.

Me-So you believe he will call you next time he needs a part, say an engine?

He-Yes.

Me-Okay, I give you that. So you think you will get the first call for that engine?

He-Yes.

Me-And when you give him the price, say $450, is it possible he might call someone else to price check you?

He- (head droops)-Yes, he will probably price shop me, but he is a loyal customer anyway.

Me-Okay, so if he finds the engine elsewhere for $425, is it possible he might order it there?

He- (head droops farther) Yes, I suppose he might.

Me-So what happened to his loyalty and the help you gave him on the brake parts?

Let’s face it, folks. We send our customers to our competitors every day, by one means or another. But it’s ok! Let’s focus on making their experience with us the best it can be! We can control most of the factors in our own yard.

Many years ago, when I got sick and tired of the huge payables each month on brokered parts, I vowed to buy better and try to meet the demand from my own stock to the best of my ability. It’s a bit painful at first, but the bottom line will reward you. Also, the customers will reward you by always giving you the first call because they know your quality and service will always thrill them. They want to give you as much of their business as possible.

I believe many of us think that because we mark up the parts 30% or so, we are doing ok. I am convinced that if you study the extra work on the back end of the store, the A/P, the A/R, the P.O.’s, and complications to salespersons’ commissions, you will be shocked. Don’t kid yourself that all parts bought but bounced are returned to the vendor, and don’t even try to measure the dissatisfaction concerning quality and timeliness of deliveries issues and their effect on your company’s reputation. My old controller said brokered parts sold were the bane of his existence. Those were always the fastest moving parts, sold at the greatest discounts, with the highest credits and the slowest receivables.

There are times where brokering is good, in addition to the occasional need to help a customer or make good for one of your own parts (ahem, mistakes?). Also, when you really do have an insurer or customer that absolutely calls you and only you, and then buys new if you don’t have the part, it makes sense. At least one prominent upper Midwest Recycler, an old friend, has such an arrangement, where the appraiser calls only him, every time, adhering to a written policy, and if he can’t fill the order, the customer buys new. BUT, the recycler gets to mark the parts up dramatically in most cases, much more than 30%.

Brokered parts are a drug. If your computer system will automatically identify which parts are selling, and automatically show you the parts that need price adjustments, and automatically tell you which vehicles you need to buy and how much to pay, you are on your way. Unfortunately, only Pinnacle does that, and it’s a powerful tool to remain competitive.

I am not advocating anything but building customer loyalty – but let’s do it without excessive brokering. There will always be a need for some brokered parts.

I always try to talk about solutions, as the problems are easy to identify. Here are some:

First, improve your buying. You may very well need to upgrade your computer to do this, but the savings on just a few well- bought cars will pay for this.
Work your prices to be competitive. (Again, your computer may not be able to do this easily.)
Put robust systems in place for verifying P.O.’s, quality, and timeliness of deliveries, but be prepared to eliminate most of your vendors.
Set a target for reduced brokered parts sales and purchases, on a declining scale, to correspond with your increasing salvage purchases.
Move to a system of referrals, with or without an override. This will still help your customers but remove you from the loop.

OK, so it’s ok to set a target for brokered parts. Try reducing them to 3% of sales.

I hope I made you think about this topic. Please don’t try to order pork chops, or a ham sandwich (or even another type of drink!)the next time you are at Starbucks, as they aren’t interested in earning a margin by selling other peoples merchandise, even though it would make you a happy customer!

Remember, only you can make BUSINESS GREAT!

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