You are probably thinking, “great another number to remember and calculate every month.” We get it! You’re busy running your heavy equipment dealership, you’ve got a lot to do, and working out mathematical equations probably does not seem to add immediate value to your business or department.
No doubt, tracking a bunch of numbers that do not have a meaningful impact on your dealership is a waste of time. But what if there was a single metric that stood apart from all the others that could tell you the overall health of your heavy equipment dealership, not just your service department? Would that number be an important number to pay attention to? What has been confirmed by our experience working with many heavy equipment dealers (of all types and sizes), is that the highest performing dealers understand the importance of and diligently track absorption rate.
Dealer Absorption Rate in Our Recruiting Operation
It’s an interesting term, and as heavy equipment recruiters, we’ve come to adopt a form of absorption rate in our operation. Many people know what absorption rate is at a high level but may not understand its true definition. Our simple definition is the ability for a dealership’s parts and service gross margin to absorb the overhead or operating expenses of the dealership.
If you take our recruiting business as an example, much of our income comes from executive search fees. The challenge though is we don’t always know when we are going to pick up a new search or when an existing search is going to close. This makes forecasting a real challenge, which makes for very lumpy cash flow and lots of stress.
The same is true for dealerships that rely heavily on big-ticket machine sales, which typically have low margins. This likely creates a feast or famine financial outcome that can cause a lot of stress on a business, and not just financial stress. It also impacts culture, supplier relationships, banking relationships, and OEM relationships to name a few.
The Importance of High-Performing Product Support Teams
Parts and services are typically the highest gross profit-generating aspects of your heavy equipment business, not including used equipment sales. While top-line revenue is a sexy number, many dealerships have fallen prey to top-line growth at the expense of profitability. Absorption rate is typically considered a financial metric, but the reality is, if your absorption rate is low this means your service department is likely impairing tomorrow’s machine sales. We’ve all heard the phrase, “Sales will sell the first, but Service (including parts) sells the rest.” Heavy equipment OEMs also know that high-performing product support teams make all the difference in helping them gain market share and retain customers.
What is a Good Target Dealer Absorption Rate?
The general rule of thumb is 100%. This means that your product support team, which includes parts and service, are generating enough business to cover at least 100% of the dealership’s operating expenses. Now, perhaps this number varies depending on the type of dealership, such as small agricultural equipment dealer versus heavy dirt, but generally speaking, 100% absorption rate is the industry’s best practice. This allows the gross profit from rental and equipment sales to go straight to the bottom line. The healthier the bottom line, the healthier the business because now it can invest in itself, build insulation from financial downturns or setbacks, create investment capital to grow, as well as drive healthy and thriving cultures.
Below is a simple absorption rate calculation example for a heavy equipment dealership.
| Parts & Service Gross Margin | $1,300,000 |
| Dealership Operating Costs | $1,400,000 |
| Absorption Rate Calculation | $1,400,000 / 1,300,000 = .92857 |
| Absorption Rate | 92.86% |
In this simple example, absorption is below the target of 100%, but it’s still a great number and can likely be improved upon!
Ingredients to Success
If we’ve learned anything in recent years, relying on the profit of your machine sales to sustain your heavy equipment business is a risky proposition. Today, with constrained supply chains, it doesn’t matter how great your sales representatives are if your OEM can’t get you inventory. Lead times today can be as long as two years on some construction equipment. So, if your dealership isn’t maximizing the opportunities to drive parts and service gross margin, then it is never too late to start. If you need help building a stronger service or parts team, let us know. We can start with an assessment of your parts and service talent at your dealership.
In the end, your talent is the base ingredient to your success. If your talent and team are weak, then driving numbers to the bottom line will likely be a persistent problem.
