Think carefully about total costs and how to recoup them fairly.
If a city, county or state has more than a few hundred vehicles, it is likely the motor vehicle division (MVD) will operate a parts room dedicated to providing parts and supplies to repair and service the automotive equipment.
Although an automotive parts room, as a department within the MVD, is separate from thedepartment, it must operate under the regulations developed by the city, county, state or federal agency.
For example, in the case of Everett, Wash., our MVD has buyers assigned to purchase the parts and supplies we need on a daily basis. The city's purchasing department manager provides technical guidance and oversight to the MVD to ensure purchasing policy protocol is followed.
Our MVD is an internal service fund, basically set up to run like a private company within a government agency. We are reimbursed for the services we provide using fees we set up to recapture costs.
The MVD pays the city's purchasing department for services they provide to our internal service department. Fees include:
The cost to process equipment bids (that are written and managed by the MVD but must be processed through the city's purchasing department);
Parts requests over $2,000 (both individual requests and multiple requests for the same type of items); and
All parts bids. Bids are written for like items when competitive bids could produce a lower price for goods used by the MVD.
In our parts operation, it is important to remember who our customers are, who owns the equipment they use and how we are reimbursed for the money we spend.
Our "customers" are all city agencies, for example:, police, fire, EMS, planning, finance, legal, , accounting, IT, purchasing, engineering, animal services, , parks, golf, transit and telecommunications.
Municipalequipment can be owned by the individual department or by the MVD. Regardless of how an operation is set up, the end result should be the same. If you spend $1,000 to repair vehicle "X," you will recapture that cost in one of two ways. One is through equipment rental fees charged to the department. This process requires an adequate cash reserve within the MVD because rental fees are based on last year's average. If costs exceed projections, because of accident or major repair costs, there must be cash on hand to cover these costs and then recapture those costs in next year's rates. With this process, you will always be one year behind in recapturing your true costs.
The other process to recapture costs is on a cash basis: The equipment is assigned to individual departments, which pay the cost of operating their equipment on a monthly or annual basis.
In either case, the service department provides the "customer" department with a projected budget based on past history, although this projection does not include major breakdown costs or accident costs that cannot be predicted. In a perfect world, regardless of whether the equipment is directly assigned to individual departments or not, and assuming no major breakdowns or accidents, the budget projection would be exactly on the mark. However, because costs fluctuate, the question is: Do you recapture your costs by using an annual cost average or a cash method?
The majority of equipment within a municipality is operated by the same people (an assigned crew) in a particular department. Because the equipment is used by the same department, year after year, it could easily be assigned to that department permanently with them paying for usage of the equipment on a cash basis, thereby eliminating the need for a cash reserve within the MVD to cover the cost of unpredictable repairs. The "customer" departments need to understand the full cost of ownership; using a cash basis to cover the cost of repairs as they happen provides that understanding.
In order to reduce your MVD's costs, various departments must reduce equipment inventory or else maintenance repair costs will continue to increase.
So how much of a cash reserve do you need if you operate as a private company (enterprise or internal service fund)? I believe that amount does not need to be more than two times one month's operating expenses. So if your monthly cost is $200,000, you do not need more than $400,000 in operating cash.
Consider what it costs to operate the parts room. And, what costs do you include in your estimate?
- Labor costs, for parts room staff;
- Rental cost (by the square foot). Whether you actually pay a rental fee to someone or not, this is a cost you need to know if you are to be competitive;
- Cost of lights;
- Cost of phones and long-distance service;
- Computer software system (one-time cost with annual maintenance fees);
- Office furniture (one-time cost);
- Parts storage bins (one-time cost);
- Fees charged for services provided by city departments to the MVD;
- Overhead costs;
- Capital asset costs; and
- Leases, dues, subscriptions.
Let's say you have two people who work in your parts room and all of the above costs total $200,000. And let's say your parts markup is 25 percent on every item (which would be high for parts that cost over $100, but let's use it for the example). So if you purchased $800,000 in parts, at a 25 percent markup, you would receive an income of $200,000, enough to cover your operating cost.
Using a simple flat rate markup is easier, but it might not be fair to the customer, especially if one of your customers uses parts that are very expensive. In that case, that customer would be paying the majority of your operating budget.
In the private sector, the parts markup on low-dollar items could be as high as several hundred percent and for high-dollar parts, as low as 1 percent or less. For our operation, to be fair, we must mark up parts using a scale of from 1 percent to whatever, in order to ensure one customer is not paying the majority of operating costs. For example, the cost of a diesel engine and transmission can easily cost $20,000, and at a parts markup of 25 percent, the fee to order this item would be $5,000. That fee does not represent the amount of time needed to order, receive and issue this part. A more realistic charge might be 1 percent ($200 dollars) or less.
In our parts room in Everett, Wash., we use various percentages and dollar amounts to more closely match the actual amount of time we need to order, receive and issue the ordered part. We also check operating costs and income received monthly to insure our income-to-expense ratios are correct.
In order to run an efficient and competitive parts room business, you should have the answers to these questions:
- How many competitive bids do you have, and when do you consider writing one?
- What is your parts turn rate per year? Some of your stock may not move on an annual basis, but you need to know what does, what does not and why.
- Of all of the parts you issue, what percentage is from stock?
- How many expendable items do you have on hand?
- What is the cost of your inventory parts on hand?
- What is your annual inventory accuracy?
- What are your rental costs?
- What are your labor costs?
In determining what amount your markup should be, you need to know how much you spend on parts in each of these cost categories: $0-$99.99, $100-$499.99, $500-$999.99 and so on. In what price category do you spend the largest amount of money? In our case, 40 percent of the parts we purchase cost between $.01 to $99.99, and another 40 percent is for parts costing between $100 to $499.99. The remaining 20 percent is for parts costing above $500. This is important in determining what your part markup should be.
The bottom line is you cannot be competitive if you do not know all of your costs. Regardless of how you recapture your costs, your method must be fair and competitive. The key here is to be competitive. If the cost to run an internal parts business within your organization is not, then you might need to consider one of the reputable parts companies that can come in and operate your parts room for you.
About the author
William DeRousse is fleet superintendent in Everett, Wash. Email him at email@example.com.