FIXED ABSORPTION: SAFEGUARDING DEALERSHIP PROFITABILITY IN UNCERTAIN TIMES

In the ever-fluctuating market, Fixed Absorption serves as a critical shield against the uncertainties of market volatility. This vital metric measures a dealership's ability to cover all its overhead expenses through its fixed operations—service, parts, and body shop—without relying on new or used car sales.

THE FORMULA:?

Fixed Absorption = (Gross Profit from Service, Parts, and Body Shop) ÷ (Total Dealership Overhead Expenses)

Absorption Targets: The Path to Financial Resilience

• 100% Absorption: The ultimate goal, where fixed operations alone are sufficient to cover all overhead costs. Achieving this provides a robust financial cushion, particularly crucial during periods of declining new or used car sales.
• NADA 20 Group Benchmark: A 75% absorption rate is considered a realistic and healthy target, reflecting effective overhead management through optimized fixed operations.

Departmental Benchmarks: Paving the Way to Optimal Absorption

To reach these absorption targets, each department must perform at its peak:

• Service Department: Aim for a 70% gross profit margin.
• Parts Department: Strive for a 38% gross profit margin.
• Body Shop: Target a 65% gross profit margin on labor and 30% on paint and materials.

The Lifeline of Fixed Absorption

• Stability in Volatile Markets: A high fixed absorption rate ensures profitability even during downturns in vehicle sales, providing much-needed stability.
• Operational Efficiency: It promotes a culture of cost control and revenue maximization across all fixed operations.
• Long-Term Sustainability: A strong fixed absorption rate contributes to the dealership's overall financial health, enabling it to navigate economic challenges with confidence.

Key Takeaways for Dealerships

• Track and Analyze: Regularly monitor fixed absorption and departmental gross profit margins to identify areas for improvement.
• Set Ambitious Goals: Develop strategies to enhance underperforming departments and strive towards the target absorption rate.
• Invest in Fixed Operations: Provide your service, parts, and body shop teams with the necessary resources, training, and support to excel.
• Leverage Technology: Implement tools that boost efficiency, productivity, and customer satisfaction across all fixed operations.

In Conclusion

Fixed Absorption is more than just a metric—it's a strategic imperative for dealerships. By prioritizing and optimizing fixed operations, you can build a resilient business model capable of thriving even when the new and used car markets face challenges. A strong fixed absorption rate acts as your dealership's insurance policy, safeguarding profitability and ensuring long-term success, regardless of market conditions.