It’s no secret that State Farm has been beta testing a new parts procurement program that they contracted with PartsTrader of New Zealand to develop. They claim it will reduce parts ordering inaccuracies and be a win for all parties involved: consumer, repairer, vendor and insurer. The program is not proprietary to State Farm and will be available to any company or repairer to use. Select Service shops, though, will be required to participate in the program.
According to State Farm, repairers are free to pick their own vendors and work out their own parts discounts. The insurer also says that the only data that will be mined will be from the Select Service shops that use the application. Any shop not on the program is also free to use the application, and any shop is free to use it on all their jobs, not just State Farm jobs.
State Farm said their intent is not to get involved in the parts process or affect profit margins. They simply hope to introduce competition in the marketplace. And if competitive bidding for parts sales has the effect of lowering parts prices, State Farm says that would be the result of increased competition.
Profit = Bad?
Profit is not a bad word to anyone who has hung up a shingle for any type of business; it’s what’s needed for that business to survive.
In any business, there are only so many profit centers that contribute to its overall profit margin. It’s a fact that even insurance companies try to make a profit. I read an article recently in the Insurance Journal that stated that, because of the tornado season last year in Missouri, insurers would be raising their rates on homeowners. Those insurers could be the same ones that made huge profits in the third and fourth quarters of 2011.
In these challenging economic times, collision repairers must make correct decisions 100 percent of the time. All have built their business plans on profit margins that translate into profit dollars.
If you keep the same profit margin goal and prices change, that affects profit dollars. If those dollars are taken away, they have to be replaced somewhere else. With their costs going up daily, it’s not greedy for repairers to want to keep their profit dollars at the same or higher levels. This makes it easy to understand why repairers are so concerned over more intrusion into their business.
As a result of this program, the collision repair industry could potentially be facing a reduction in one of the last profit centers in an economy that’s continually increasing their operating costs. Reducing their profits, which are minimal compared to other industries, leaves them a higher or even impossible mountain to climb.
In the name of progress, we have some who are claiming that 20 percent of the repairers do 80 percent of the available work. If the purpose of any program (no matter if you claim its purpose is to introduce competition) is to indirectly facilitate reducing the number of repairers (as was done in the United Kingdom), those introducing it should realize that there’s stiff competition out there already because of an overabundance of shops. Also, the 20 percent cannot do all the work if the others fail. This would leave the insurance industry in quite a fix with the consumer. Economics 101 would take command and handle any overabundance of facilities.
As an industry, repairers are going to have to decide whether this parts procurement program is yet another obstacle in the daily task of running their businesses or a win for everyone involved. The repairers I’ve spoken with feel this is yet another intrusion into their businesses.
I imagine that this new program will be the subject of a lot of debate in the future. Even if this program is well meaning, it’s centered on only one stakeholder’s profit and not the good of the entire industry. I hope I’m proved wrong, because the repair industry has enough issues to deal with.
I’m also concerned about this spreading to not only other collision facilities but other profit centers. Very few profit centers are left that aren’t operating at breakeven or below, leaving parts as one of the last healthy ones.
In looking at how a small change affects the repairer’s bottom line, a simple matrix was constructed some time ago. It evolved from an instructional session I took when I was an adjuster in my first week of training.
The statement made then was, “If you can just save us $5 per claim, think what that means to our book of business.” ($5 tells you how long ago that was.) It was meant to impress upon newbies the importance of being financially responsible.
Many years later, I thought to apply this to the individual collision shop as well as the industry as a whole. In the new parts initiative, this shows how a small change in margin dollars can be important to the individual repairer as well as the collision industry. It’s plain grade school arithmetic. And we haven’t even talked about the potential taxes to be gained or lost by the states and federal government.
Snake in the Grass?
Is there a snake in the grass? I would say at the very least the grass is moving, and everyone should be wearing high-top boots.
We all know that the collision industry has been snake bit enough. To be fair, though, there are times it has been repairers’ own fault. So it’s up to everyone to gather good information, make their own decisions and/or support their chosen associations.
What I see at the moment is the single benefit of helping State Farm save dollars on parts expenditures. As business people, we can’t fault anyone for trying to cut expenses, but should this be done at the expense of an industry that’s stretched thin as it is? Too many casualties in the collision industry could result in adverse effects for the vehicle owner and insurer.
If the repairer isn’t penalized by having to accept smaller parts profits and the insurer can find a way to keep those profit dollars as good as they are or better, then maybe the program has merit. Nobody wants to take a step back, not even the insurer even though they’re more able to bear it because, by choice, they’re in the risk business and the repairer is not.
I do not see this program benefiting consumers through lower premiums. Over the many years I’ve spent in the industry as a professional and a consumer, I’ve never seen this happen but only used as a rationalization. A good example is my own personal vehicle. I went from driving 50,000 to 75,000 miles a year in business to only 2,000 miles of total use last year because of a second vehicle, and my premiums went up for less coverage.
In an ideal world, I can see where this program might introduce some efficiencies. But the collision repair world is full of things that keep that “ideal” scenario from being so. It doesn’t matter whether you’re lean or not, big or small or how you manage your business, there are things unforeseen that creep in to destroy the order of things every once in awhile.
The views expressed in this guest editorial do not necessarily reflect those of BodyShop Business magazine.
Bob Smith is the owner of Storm Appraisal & Management Service and has 44 years of combined experience as both an appraiser and a collision industry and legislative consultant. He can be reached at (816) 519-5858 or email@example.com.