What will it take for insurers to part with
aftermarket parts and for repairers to allow recycled parts to
play a major role in their repairs?
Examining what our industry is doing compared
to what it should be doing is a very subjective thing to do -
and this examination often leads to very opinionated and diverse
views. Why? Because, many times, we're so close to the issues
that we can't step back and see clearly what makes sense for the
repairer, the customer and the insurer. It's hard to be objective
when you're one of the parties involved.
Two related - but very different - topics
that have been debated for many years are aftermarket and recycled
parts - what this article is about. But my goal for this article
isn't to get you angry. It's to get you to stand back and take
a glimpse at my possible (and maybe likely) soon-to-happen vision
of aftermarket and recycled parts.
The Aftermarket Issue
You've probably reviewed as many articles
as I have regarding the hassles, benefits and hardships of aftermarket
parts, so I'm not planning on reiterating those same messages.
In fact, I'm going to look into the near future a bit and expect
the aftermarket issues to be non-existent.
Will it be because of customer demand for only OEM parts, the increased quality of aftermarket parts actually becoming as good as OEM, liability issues not allowing their usage, or OEM prices dropping in response to the pressures of aftermarket part prices? I sincerely hope you aren't holding your breath for any of these to triumph.
A few years back, I remember attending a seminar hosted by an OEM manufacturer. The seminar was about justifying the costs of OEM parts, and I was amazed at the attempt to compare OEM crash parts to another industry's parts-replacement cost. Of all industry products to compare us to … a clothes washing machine! The OEM had comparisons of what a washing machine would cost if it were built with replacement parts, and then they justified that a vehicle built with replacement parts was in line with this other industry's replacement cost.
I laughed so much inside thinking about how different Maytag commericals would be if washing machines were operated by "our drivers" and were in accidents on our highways at the rate cars are. The lonely Maytag repairman on television would finally have something to do other than wait for a phone call.
The point totally missed by our host was that volume makes a big difference. What we in our industry are facing today is increasing volume with lower margins, which we generally refer to as gross profit. This is a very fine balancing act for us and will also be for all parties involved in the collision repair process, including the insurer.
Then why no aftermarket parts issues in the future? Simply because it will all come down to economics for the insurer. Insurance companies don't just make money by containing the costs through lowered collision repair pay outs. In fact, that's really only a part of the big picture. Insurers make money by investing their money. They keep more money by lowering all their costs involved in the claim - hence came DRPs.
Some may claim DRPs were designed to improve customer satisfaction since, theoretically, the speed of completion can be improved when the initial steps of pre-inspection, adjusting the loss and handling the re-inspections are eliminated on the insurer's side. This, in turn, should make the customer happier since he got his damaged vehicle back sooner, right? Sort of. This can be a byproduct of the DRP if everything else works right, but the key here, again, is time. DRPs have also effectively shifted a very costly portion of the administration to the collision repairer, which has reduced overall costs for the insurer.
Still, there's a bigger factor that would eliminate the aftermarket issues. I'm sure you've heard the saying, "Time is money." And this is as much true to an insurer as anyone else. From the time the claim is open, it costs the insurer money. The more times an insurer handles a file, the more it costs the insurer money. The more hours it takes to repair a vehicle, the more it costs the repairer and insurer money.
The trend is to further reduce cycle time for the entire claims process. Many definitions are used for cycle time, but for this article, we'll define cycle time as the time the claim occurs (open file costs money) to the time the file is closed (file no longer costs money).
We, as repairers, have been working on improving our portion, called "turn rate," in our repair facilities for the last few years, but cycle time goes much further in aiding the insurer. We can improve our turn rate by implementing procedures and policies that improve efficiency as well as by utilizing new equipment and products. This will be the key to success or failure for many collision businesses in the very near future, especially if they attempt to become the volume, low-cost provider in an area.
So how do aftermarket parts become an economic mistake? It'll cost the insurer more money to use aftermarket parts than to not use them due to increased cycle time. The shipping back, okaying of OEM parts and additional labor expenses will all increase cycle time. This will be the main negotiation point to volume-based business decisions, not the $20 it may save on paper.
On the other side of the coin, be prepared for the establishment
of penalties for missing the "turn rate standard" for
each type of repair being processed. This penalty will exceed
the possible savings of aftermarket parts. So, in the long run,
aftermarket parts have little future in the medium- to high-volume
collision repair businesses that have truly industrialized. It'll
be cheaper to use new OEM than aftermarket.
Using Used Parts
What about salvage or recycled parts? This is an area that could
actually assist with improving turn rate, lowering claims cost
and improving profitability of the repairer - but major industry
changes need to occur to make them a viable alternative.
Certain part assemblies have been and will continue to be a good alternative to OEM. An example of these include doors, decklids, hoods and fenders. In some situations, engine, drivetrain and suspension items have also added value.
Sectioning techniques using recycled structural assemblies can also assist in lowering claims costs and turn rate by requiring less welds to be performed at the shop level. Only required welds are in the sectioned area. This keeps the vast majority of OEM welds intact and requires less work for many other operations, as well as including restoring corrosion resistance.
A number of years ago, I-CAR and Tech-Cor combined efforts and developed a Recycled Parts Request Form to improve the communication between the recycler and the repair facility. This form is used to draw where sections should be cut and to list other needs. This form is still a valuable tool and can be ordered through I-CAR at (800) 422-7872. The form's part number is 30064.
So what's the problem of using recycled parts? Even though the recycled parts industry has made great strides in upgrading their industry, they'll have to go much further to become an alternative to new OEM parts. The same concerns with improving turn rate will be the basis for using recycled parts. If deliveries can be made timely and parts are in usable condition and available, they'll assist turn rate and lower costs.
Looking into a crystal ball, what should happen then? In the future, the recycler will do business much differently than today. The vehicle will always be dismantled upon entering the facility (this is already being done by many), structural sections will be inventoried in bins, each part will be cleaned and thoroughly checked for condition and operation, any damage will be repaired, the part will be digitally recorded and carefully inventoried, and this digital inventory will be available "on-line" on the Internet, backed by a powerful search engine that can easily locate each part anywhere it's inventoried. On-line ordering will take place, and the parts will be shipped immediately, all through management and estimating systems. Some of these features are currently available but, in the future, they'll be much more reliable.
What value-added services would assist more with turn rate? Structural sections will be cut and pre-drilled in the proper location - no more "halves of vehicles" dropped off. Other parts will be properly trimmed and ready for use. Other body parts may come already "jambed" the color you need. All trim and mounting hardware will be removed and neatly packaged so proper refinishing can be completed and installation improved. No more grease, dirt or painted inventory numbers on parts!
Does this sound extreme? Possibly, but to make recycled parts an alternative to new OEM, they're going to need to be as easy (if not easier) to get and use. Our industry is industrializing and striving for more of an assembly-line process. Dismantling a vehicle is the opposite process of manufacturing, which lends itself to an assembly line process very well. The repairs of individual parts can also fit into an assembly line, so having the above come true is really nothing more than an evolution of what's happening today, not a complete revolution. The increased profits of recyclers will be realized once the system is implemented and the product is readily available.
Of course, some other factors will need changing too. Currently, it's common for insurers to "mark up" recycled parts 25 percent. This must change to standard business practices and truly allow equitable margins for using recycled parts. A few years back, I had a conversation with a supervisor of a major insurance company about the difference between a 25 percent markup and a 25 percent profit margin. His comment was that I was using "slight of hand" to demonstrate it took 33 1/3 percent of markup to equal a 25 percent profit margin. I'm sure you've had this discussion too!
This core misunderstanding of our business by insurers and also by some repairers doesn't make recycled parts a favorable option. For recycled parts to be an alternative, they must be worth the effort financially. If recycled parts costs became standardized, based consistently on a new OEM, they could become an alternative to many new OEM parts. For example, if the standard cost became 50 percent of new OEM, then assuming availability and condition have reached the above-mentioned levels, what would it take to use recycled parts?
First, about a 30 percent profit margin (42-43 percent markup). It'll save the insurer in overall parts costs significantly. Currently, part margins of new OEM overall range between 25-32 percent nationwide. Depending on your mix of automobiles, it could even be less or slightly more. Consistent-quality recycled parts will reduce the overall cost of the claim and allow for equitable profit margins for the repairer.
Second, the key will again be the condition and usability of the recycled parts upon delivery, since the use of recycled parts may decrease the overall parts profit dollars. This must be overcome with better turn rate. In other words, it does no good if it takes longer to do the repair using something that has less profit dollars.
Your profitability must be measured by the amount of profit dollars
divided by the time spent producing those dollars, not a percentage
on a profit-and-loss report. You can't spend a percentage. This
factor will also determine the future of recycled parts.
A Part of Your Life
As mentioned earlier, discussing topics such as these often lead
to people loudly expressing their opinions and views, which often
then leads to heated discussions. And that's OK. The key is to
be open to views that are different than yours.
Maybe you totally disagree with what I wrote in this article. That's OK too. But, in my opinion, if the factors I discussed can be stabilized, everyone will win: the repairer, the insurer, the recycler, the environment and the customer.
And, frankly, whether it will happen really shouldn't be the question.
The question should be: How can we work together to make it happen?
Contributing editor Tony Passwater is a long-time industry educator and consultant who's been a collision repair facility owner, vocational educator and I-CAR international instructor; taught seminars across the United States, Korea and China; and is currently an industry consultant. He can be contacted at (317) 290-0611 or Tony.Passwater@aeii.net.