The NCMi faculty members and the NCM Retail Operations field consultants have learned that managers who effectively manage the elements of “controllable profitability” within their respective operating departments normally produce a significant departmental net profit. This, of course, assumes that the majority of dealership expenses (limited-control and fixed) are fairly distributed to each operating department.

Many managers, however, lack the proper focus on controllable profitability because:

• They’ve never learned what the driving elements of controllable profitability really are, or

• Their compensation plans lack suitable emphasis on the elements of controllable profitability

The thrust of this article is to clearly define and communicate the elements of controllable profitability and to provide some best practice guidelines for your departmental targets. Let’s begin by looking at the combined New and Used Vehicle departments.

We combine the two vehicle sales departments for this analysis because:

1. Many dealers intentionally manipulate their new vehicle department gross to the advantage of their used vehicle department (or vice versa), and

2. Several expense categories (i.e. advertising, training, etc.) are difficult to accurately prorate between the two departments.

The first element of combined sales department controllable profitability is gross profit. This is a function of retail sales volume, overall $PVR, and inventory turn. When calculating gross profit to determine controllable profitability, you should include any and all gross profit that is recorded in Net Additions to Income (i.e., Doc. fees, hard packs, and manufacturer incentives related to “one more vehicle sale”). The remaining elements of controllable profitability are the expenses directly controlled by the department managers. We define the controllable expenses in the vehicle sales departments as follows:

• Salesperson direct compensation expense – this includes salaries, commissions, and other incentives for sales personnel, sales team leaders, closers, and may also include BDC personnel, and demo allowances

• Financial services direct compensation expense – this includes the F&I director, all F&I producers, and any dedicated F&I clerical personnel

• Other salaries and wages expense – this includes only the expense for the employees within the sales department over which the manager has direct control (i.e. porters, inventory attendants, clerical assistants, etc.)

• Net new and used vehicle delivery expense

• New and used vehicle policy, claims, and service loaner expense

• New and used vehicle demonstrator and company vehicle expense

• Net new and used vehicle advertising and sales promotion expense

• Net new and used vehicle floorplan interest expense

• New and used vehicle training expenses

In the fixed departments (Mechanical Service, Collision Center, and Parts & Accessories) we see common elements of controllable profitability. As in the vehicle sales department, the first element of controllable profitability is gross profit. This is a function of shop capacity (technician count and quality), transactional count (repair orders and parts counter tickets), transactional quality (lines per R.O. or ticket, hours per R.O., effective labor rate), and margins (business mix, technician cost of sale, parts mark-ups, and discounting practices). The remaining elements of controllable profitability are the expenses directly controlled by the department manager. We define the controllable expenses in the fixed departments as follows:

• Salesperson direct compensation expense – this includes salaries, commissions, and other incentives for service sales managers, service advisors, body shop estimators, front and back parts counter personnel, sales assistants, and may also include BDC personnel

• Other salaries and wages expense – this includes only the expense for the employees within the fixed departments over which the manager has direct control (i.e. shop foremen, dispatchers, production managers, technical specialists, parts inventory specialists, parts shipping and receiving, parts drivers, porters, shuttle drivers, bookers/billers, cashiers, and other clerical assistants, etc.).

• Net shop supplies and small tools expense (or profit)

• Policy, claims, and service loaner expense

• Company vehicle expense

• Net advertising and sales promotion expense

• Departmental training expense

We do not include supervision compensation in the controllable expense categories for any department because the department manager does not have any control over how he/she is to be paid, although he/she may have the opportunity to write his/her own pay check, based on the department’s performance.

NCM Retail Operations' field consulting staff has developed the following best practice guidelines for controllable profitability, which are based upon their experience with the highest performing dealers with whom these NCM professionals are regularly engaged.

Best Practice Guidelines for Controllable Profitability

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