Having worked for and with dealers for so many years, we can say definitively that a dealer’s most omnipresent question is ‘how can we be more profitable?’ While selling more trucks, increasing gross profit, and reducing expenses are important, there’s another critical element that often gets overlooked: service absorption.
For Heavy truck dealerships looking to boost their bottom line, one of the most efficient and least disruptive methods is to enhance Fixed Ops Gross through Warranty Reimbursement. By focusing on optimizing parts and service absorption, dealerships can significantly improve their overall profitability.
Understanding Service Absorption
Service absorption measures how much of a dealership’s total operating expenses are covered by the gross profit from its parts and service department. This can include not just the expenses for those departments but also some or all of the dealership’s fixed costs. When service absorption hits 100% or higher, it means the parts and service department is covering all its own costs plus the dealership’s fixed expenses.
When a dealership achieves a 100%+ service absorption rate, the sales department can be more competitive in the market. Increased vehicle sales create more opportunities for the F&I department to sell additional products, boosting overall profitability. High service absorption, more vehicle sales, and greater F&I profits all contribute to the dealership’s goal of operating profit.
Here’s a basic calculation for fixed absorption rate: If your dealership has $250,000 in gross profit from fixed operations in a month and overhead expenses (excluding vehicle sales-related costs like commissions) are $350,000, then $250,000 ÷ $350,000 = 0.714, or an 71.7% fixed absorption rate.
Having a low absorption rate means that your dealership will be overly reliant upon sales and F&I to be profitable. A dealership with an average of 71.7% absorption will likely be operating at a loss if sales and F&I were to drop.
According to the American Truck Dealers (ATD), Heavy Truck dealers have seen their average parts and service absorption decrease over the past year and a half to reach the lowest it has been in 3 years* – and with costs increasing for both labor and parts – it’s likely to continue to be a challenge for dealers to achieve 100%+ absorption.
So, what can be done? How can we optimize our Absorption Percentage?
There are a number of ways to try to optimize your dealership’s absorption percentage – sell more service, tweak your processes, raise prices. But truly one of the most effective and the least disruptive to the dealer is to increase your Fixed Ops Gross with Warranty Reimbursement.
The Power of Warranty Reimbursement
For as long as there have been franchised heavy truck dealers, the battle over factory reimbursements for warranty work has raged on. It’s a crucial revenue stream, yet dealerships often receive only a fraction of what they are owed. However, the law is clear: dealers are entitled to reimbursement by OEMs for warranty work at their retail rate. And partnering with a qualified vendor to ensure you receive what you’re legally owed will help get the most effective and efficient rate increase.
Legislation across the country supports dealers in seeking reimbursement at their retail rates for warranty work. Despite this, dealerships commonly fall short, receiving far less than they’re entitled to. The benefits of partnering with a professional vendor to secure these reimbursements are substantial. State statutes often are couched in the kind of legalese that make them nearly impenetrable to anyone who isn’t an expert in this space and undertaking this herculean task in house means taking the eye off the ball of other equally important operational needs.
Real Dealer Results:
Earlier this year, we worked with a multi-state Kenworth group, submitting both parts and labor reimbursements.
Of the locations we submitted for parts reimbursement, the average rate increase their dealerships saw was 35% and the average Gross Profit increase was 22.7%.
Of the locations we submitted for labor reimbursement, the average rate increase their dealerships saw was 20% and the average Gross Profit increase was 66.6%.
Through very minimal effort on the part of the dealer, and for work they were already performing, the ROI was significant and resulting in a true increase of their Absorption Percentage.
Raise Your Fixed Ops GP = Raise Your Service Absorption Rate
Don’t leave money on the table. It’s time to harness the full potential of your dealership’s warranty reimbursements and boost your bottom line.
For a no-cost analysis to determine what rate you qualify for, please reach out to [email protected].
*(Source: Per ATD Performance Measurement Data 2024)
Warranty Reimbursement Done Better