What Impacts Dealer Absorption Rate?

The absolute number representing “Recovery Rate” is interesting but not a call to action. It only indicates your current position relative to the target score of 100% Absorption Rate. Managers look at it and say WOW with little insight into how to make any improvements.

Fixed Operating Expenses are those dealer expenses that do not change or vary with sales volume. So, Sales Commissions are variable and are not included in Absorption Rate calculation.

The formula below illustrates inputs to Absorption Rate from Service, Parts and Rentals.

Absorption Rate Formula

Absorption Rate = Profit from Parts, Service Labor and Rentals / Fixed Operating Expenses

Above line (numerator) items that can be controlled to improve Absorption Rate
score include:
  • More maintenance contracts and inspections drive Labor Sales and Gross Profit up.
  • Improved service labor productivity drives Labor Sales and Gross Profit up.
  • Expanding technician apprentice program drives cost down and Labor Gross Profit up.
  • More maintenance contracts and inspections also drive Parts Sales and Parts Gross Profit up.
  • Weekly or bi-monthly e-Mail promotions drive Parts and Service Sales and Rentals Gross Profit up.
  • Parts Customer Discounts drive Parts Gross Profit down.
  • Better Parts purchasing practices drive parts Cost of Sales down and Parts Gross Profit up.
  • More discounts earned drive parts Cost of Sales down and Parts Gross Profit up.
  • Regular Stocking orders and vendor freight programs drive cost of sales down and Parts Gross Profit up.
  • Higher dollar and unit utilization drive Rental Sales and Rental Gross Profit up.
  • Improved inter-location unit availability information drives Rental Sales and Rental Gross Profit up.
  • Better turn-around time from rental return to rental ready drives Rental Sales and Rental Gross Profit up
  • Better control of maintenance costs drives Rental cost down and Rental Gross Profit up.
Below the line (denominator) items include expenses generated by each
department.
  • Reduced service department Fixed Operating Expenses improves Absorption Rate.
  • Reduced parts department Fixed Operating Expenses improves Absorption Rate.
  • Reduced rental department Fixed Operating Expenses improves Absorption Rate.
  • Reduced machinery sales department Fixed Operating Expenses improves Absorption Rate.
  • Reduced administrative Fixed Operating Expenses improves Absorption Rate.

This Absorption Rate formula is something that you can use when you review Absorption Rate and discuss it with your management team. I would do it weekly. Produce a weekly flash report of your sales, gross profit and expenses by department.