Dave Baiocchi

Inflation Strategy—Part Two

Posted on Apr 20, 2022 in Featured, Features

As we traverse the road forward in 2022, the business climate is becoming clear.  High demand, dwindling supply, rising prices, and an uninspired workforce.  What a combination!  In my March 2020 column (Inflation OMG!), I laid out a series of strategies that could be employed in order to reshape and align the sales department in this new and different distribution landscape.  At the end of the March article, I promised some ideas on similar strategies for the rental, parts, and service departments.

This month I am going to make good on that promise.  My first intention was to provide these strategies in my April column.  I rethought that course of action.  Because the disruption to our businesses is so acute, I thought it better to do “first things first”.

The first step in the creation of an effective plan is to take stock of your resources and use your collected data as a basis for a SWOT analysis (Strengths – Weaknesses – Opportunities – Threats).  In times where resources are running low but customer expectations are high, we tend to panic and naturally react by “shooting” before we “aim”.   This consumes resources even more quickly.

Although you can re-read the April issue, in short, a properly executed SWOT analysis does the following five things:

1. SWOT Slows everyone down. As customer urgency rises, our response is to “speed up” and answer quickly.  SWOT counteracts this by preplanning responses and understanding the ramifications of a kneejerk reaction.
2. SWOT tells the TRUTH about existing and future resources. It is, what it is. We are not magicians.  We can’t simply wish more resources into existence.
3. SWOT defines how resources will be distributed. No shortcuts, no workarounds, no rogue ideas
4. SWOT defines what we are best at doing. When supplies are short…. they MUST be pointed at the CENTER of your target.
5. SWOT warns us about what we struggle with. Don’t throw shrinking resources at a black hole.

With a well-defined SWOT analysis behind us, we can now talk about rental, parts, and service strategy.  The reason I wanted to talk about a SWOT analysis BEFORE I present strategies is because not every idea presented here will square with your SWOT findings.   So, use what fits.  Discard what doesn’t.

Rental Department Strategies

Make no mistake.  Rising prices and the absolute lack of new inventory in 2022 will mean that the OTHER departments in the dealership have to produce more profitability for the dealership to meet its obligations.  The rental department is critical to producing these profits.

Rental asset decisions

One of the natural tendencies that dealer principals have, when inventory is in short supply, is to reallocate new equipment (ordered for the rental fleet) to the sales department to fill waiting customer orders.  I understand the temptation to do this, and on its surface, it might seem like the right decision to make.  The downside to doing so however must be recognized.

The benefit to the dealership as a whole is served by rental assets adhering to a cycle of replacement that is proven in our industry.  Extending the rental life of units in rental service increases maintenance costs affects depreciation allowances, and most importantly, precludes the rental department from raising their rates in an inflationary environment (see next section).

As attractive as these rental assets may be to the sales department, the fact remains that the sales department’s long-term appetite for inventory will likely not be satiated.  The needs of the DEALERSHIP will be better served by putting that new unit in service at an existing rental customer.  This will allow the unit currently in service, to be retired, refurbished, and made available to sales.  It also may allow the rental department to RAISE THE RATE on the new replacement.  Additionally, it provides a depreciation benefit to the dealership and reduces service expense and exposure.   Surrendering rental assets to the sales department may placate a nervous customer, but it gives the dealership no hard financial benefit.  In fact, the sales department will still get a unit to sell in the end, it’s just used, instead of new.

Price increases – Base Rates

As the acquisition price of rental assets rises, the rates must follow suit.  For the last 20 years or so, short-term rental rates have been stuck in neutral for a myriad of reasons.  Low inflation, low-interest rates, and better technology leading to decreased maintenance costs are all factors that held retail rental rates in check.

The newest inflation spike however will serve to force all of us out of that rut.  As supply dwindles, so will the available units for rent on your lot.  There is no reason not to raise basic published rates now.  Do some math here.  Historically, best practice suggests that monthly rental rates should represent 4% to 5% of the net acquisition cost of the equipment.  In most dealerships, we have not kept that ratio.  Even “preferred customers” are going to have to stomach an increase, and quite frankly, I don’t think they will be surprised.  After all, every other cost is increasing at the same time.

Hourly Usage Charges

Another unexploited area is the over-use of short-term rental assets by customers.  Your rental document probably specifies that the rental rates quoted, allow for eight hours of equipment usage per day, 40 hours per week, and 160 hours per month.  It should also specify the “per hour” penalty for exceeding these thresholds.

My observations are that these charges are seldom levied on customers and the entire issue of short-term overtime billing is routinely ignored.  For long-term rentals (mostly full maintenance units), we don’t hesitate to explain these penalties, because we are constrained by the finance company to do so. Not collecting for over-use of equipment is especially damaging in seasonal and agricultural applications where units are literally run around the clock.

My advice is to use the shortage of available rental inventory at this juncture, to shift your policy towards enforcing the hourly stipulations.  If you EXPLAIN it, and DOCUMENT it BEFORE the unit is delivered…. you are more likely to be in a position to COLLECT it after the rental is completed.

Damage

In the past, you may have ignored that scrape along the side of the counterweight, that chunked tire, or that hole in the seat.  These are expenses created by the customer and should be paid by the customer.  One reason they are not addressed is a lack of a solid check-in policy that includes inspections. photographs, reporting, and billing on the same day that a unit is returned.  If a customer damages a rental in any way, the dealership must invoice that damage WITH THE FINAL RENTAL INVOICE.  There is a direct correlation between early billing and the probability of collection.   The rental administrator must have a menu of repair costs, that can instantly be added directly to the final rental invoice.  It’s usually the same items that come up time after time.  Tires, forks, carriage bearings, hoses, seats, lighting, levers, and safety devices should all have ready replacement prices that the rental administrator can put right on the bill.

The billing must be sent with digital photographs of the damage.  This used to be a hassle…. but not with the technology we now have.   Shore up this SOP with the rental department and create a way to prebill for damages.

Insurance

Do your customers file a certificate of insurance with your rental department naming your dealership as “additionally insured” in the event of an accident?  This is another area regularly ignored by a lot of dealerships.  If a rental unit goes into service at a customer location, that customer should be responsible to ensure that unit, just like everything else on their site.

The car rental industry has always done this.  The RENTER is clearly responsible for any damages to the asset.  If the renter has not pre-arranged coverage, the rental company charges the customer for a loss damage waiver (LDW).  That cost is usually prohibitive.

Why are we not doing this? Oh, you’re not in the insurance business?  Sure, you are!  In fact, you’re SELF-insured! If the customer doesn’t pay, then YOU do. Even if YOUR insurance company pays to replace the asset, your rates will undoubtedly go up.

I’m not suggesting that a charge for an LDW should be used to buy a standalone policy.  Put those funds in a rental credit GL and accumulate funds to offset the costs of the unexpected mishap.

Rental Fuel

Do you charge for rental fuel?  A smart policy is to charge for a full tank of fuel on EVERY initial rental invoice.  Don’t be shy.   Mark up the fuel costs to include a profit.  The customer can’t really argue.  If you charge for a full tank every time a unit leaves the yard (even for a day), the customer can return it empty and it’s never an issue.

Next month I will touch on ways the parts department can use the supply chain issues we are experiencing to make SOP changes that cut costs, control inventory, and build alliances with suppliers.   Have a great May!

About the Author:

Dave Baiocchi is the president of Resonant Dealer Services LLC.  He has spent 40 years in the equipment business as a sales manager, aftermarket director, and dealer principal.  Dave now consults with dealerships nationwide to establish and enhance best practices, especially in the area of aftermarket development and performance.  E-mail [email protected] to contact Dave.