Car Biz Today, April 2017 – By Jim Leman

Good OEM relations aside, manufacturers have their bottom lines, and you have yours. You have every right under the law to get your full accounting of parts warranty reimbursement dollars due you.

Jim Leman writes about automotive retail operations.

Unfortunately, perceived fear of OEM intimidation can cause dealers to falter here. This undue precaution can stop them from asking their OEMs to review and raise their warranty reimbursement rates.

The issue is whether you’re being reimbursed at retail or near-retail rates for the parts and labor expense you incur performing OEM warranty work, explained Mike Volkman, a warranty reimbursement expert and founder and CEO of Service Department Solutions.

Forty of 50 states have some variation of the law which requires auto manufacturers to reimburse the dealership for warranty repairs at the average rate of what the service department would charge the retail consumer. Reimbursement guidelines and rates are set by state law.

Most OEMs extend their dealers a 40 percent parts markup, the standard reimbursement rate, less than OEMs should pay, he said.

The issue is whether you’re being reimbursed at retail or near-retail rates for the parts and labor expense you incur performing OEM warranty work, says Mike Volkman, a warranty reimbursement expert and founder and CEO of Service Department Solutions.

Petitioning OEMs for a scaled up parts reimbursement rate to 50 to 60 percent is why dealerships should ask their manufacturers to re-rate their reimbursement level. A dealer using matrix pricing for parts could expect a 100% increase in markup; a dealer using list pricing can expect to increase gross profit by about 50 percent.

“It is found money,” said Bill Kelly, formerly the dealer principal for Kelly Cars, an FCA brands dealer in Pittsburgh. He sold the dealership last year. “The higher markup dollars increase fixed operations profitability as related to warranty parts and labor. That helps the bottom line tremendously.

“A re-rate means more expense to the OEM,” he said, “but they do want their dealers to be profitable. I heard nothing from Chrysler they were annoyed or upset with me for having done this.”

Dealers can lack the staff for doing this activity internally, and even the sharpest of service managers can get the first review application wrong or not get the hoped for increase. Success relies heavily on knowing the reimbursement process, OEM reimbursement policies and the state laws regulating warranty reimbursement.

OEMs have staffs of people reviewing their dealers’ warranty claims. Some OEMs, Volkman noted, can take a hard stand against reevaluation requests. That can frighten dealers.

“Success is founded in knowing the right way to approach and appeal to OEMs on this matter. I have gone back into dealerships who’ve failed at this, resubmitted and gotten a 10-to15 percentage point increase,” said Volkman, a former dealership technician who then spent 34 years with General Motors and FCA in positions of dealer placement, parts, and service operations.

Critics of the practice hold a contrary position. They say today’s dealer-OEM relationships and positioning – big dealer groups have lots of power – don’t put dealers at OEMs’ mercy anymore.

Noted the law firm Morgan, Lewis & Bockius LLP, in a position paper, State Regulation of Motor Vehicle Warranty Claims: Special Interest Legislation Run Amok:  “Retail reimbursement laws are significant, unwarranted wealth transfers that benefit dealers at the ultimate expense of consumers.” The firm prefers warranty legislation be eliminated and “allow competition for warranty sales and good dealers to develop cost-effective warranty systems.”

A reasonable individual could conclude, however, that whatever the nature of the work flowing into a dealer’s service department, the technicians, advisors, and others responsible for managing that flow and correcting vehicle issues want fair pay. This holds true whether the work they’re doing is customer-pay or warranty.

Is it reasonable then to ask employers to take a hit to their wallets because the work is to correct factory or factory supplier flaws in their products? Should the dealer be O.K. with being reimbursed less for this work when the same time might bill higher customer-pay retail?

Certainly, warranty work keeps shops busy. That busyness can be addictive. Ask any service manager doing increasing volumes of warranty work if he or she has not noticed a drop in customer-pay volume and revenue.  With continuing unheard of numbers of safety recalls, the balance will not swing back soon.

So, how does the shop, for which warranty work is a primary revenue stream, meet its door rate and fixed operations goals? Keeping bays busy is part of the answer, but active stalls not billing door rate hours cannot stretch enough to make those goals – whatever the OEMs and pro-consumer folks want to believe. Days here on earth are 24 hours long and no more. Within that, technicians, advisors, and consumers must sleep too.

So while a handful of OEMs seem to recognize this and reimburse warranty work claims at a retail or near-retail level, many do not.

“Most OEMs will not voluntarily increase their standard rates,” Volkman said.

Marty Cancila Auto Group stores in suburban St. Louis did seek re-rating. “This is a new revenue stream to fuel new equipment purchases, training, and other reinvestments to keep us competitive,” says Jason Dorton, Fixed Ops Director for Marty Cancila Dodge Chrysler Jeep Ram in Florissant, Missouri, and Marty Cancila Chrysler Dodge Jeep Ram, across the Mississippi River in Jerseyville, Illinois.

Dorton prepared documentation for the Missouri store to seek better markup on labor rates, which succeeded, but the effort was laborious and time-consuming. “It’s too much to do yourself when you’re also trying to conduct business in a fast-paced environment as a service department,” he says.

Volkman said dealers should request warranty reimbursement reevaluations every two to three years, as the cost of living continues to erode labor hour values. Part reimbursements can be adjusted once.

Jim Leman has been writing about automotive variable and fixed operations since 1992. Reach him at jimleman@gmail.com