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Let's say you have two people who work in your parts room and all of the above costs total $200,000. And let's say your parts markup is 25 percent on every item (which would be high for parts that cost over $100, but let's use it for the example). So if you purchased $800,000 in parts, at a 25 percent markup, you would receive an income of $200,000, enough to cover your operating cost.

Using a simple flat rate markup is easier, but it might not be fair to the customer, especially if one of your customers uses parts that are very expensive. In that case, that customer would be paying the majority of your operating budget.

In the private sector, the parts markup on low-dollar items could be as high as several hundred percent and for high-dollar parts, as low as 1 percent or less. For our operation, to be fair, we must mark up parts using a scale of from 1 percent to whatever, in order to ensure one customer is not paying the majority of operating costs. For example, the cost of a diesel engine and transmission can easily cost $20,000, and at a parts markup of 25 percent, the fee to order this item would be $5,000. That fee does not represent the amount of time needed to order, receive and issue this part. A more realistic charge might be 1 percent ($200 dollars) or less.

In our parts room in Everett, Wash., we use various percentages and dollar amounts to more closely match the actual amount of time we need to order, receive and issue the ordered part. We also check operating costs and income received monthly to insure our income-to-expense ratios are correct.

In order to run an efficient and competitive parts room business, you should have the answers to these questions:

• How many competitive bids do you have, and when do you consider writing one?
• What is your parts turn rate per year? Some of your stock may not move on an annual basis, but you need to know what does, what does not and why.
• Of all of the parts you issue, what percentage is from stock?
• How many expendable items do you have on hand?
• What is the cost of your inventory parts on hand?
• What is your annual inventory accuracy?
• What are your rental costs?
• What are your labor costs?

In determining what amount your markup should be, you need to know how much you spend on parts in each of these cost categories: $0-$99.99, $100-$499.99, $500-$999.99 and so on. In what price category do you spend the largest amount of money? In our case, 40 percent of the parts we purchase cost between $.01 to $99.99, and another 40 percent is for parts costing between $100 to $499.99. The remaining 20 percent is for parts costing above $500. This is important in determining what your part markup should be.

The bottom line is you cannot be competitive if you do not know all of your costs. Regardless of how you recapture your costs, your method must be fair and competitive. The key here is to be competitive. If the cost to run an internal parts business within your organization is not, then you might need to consider one of the reputable parts companies that can come in and operate your parts room for you.

About the author

William DeRousse is fleet superintendent in Everett, Wash. Email him at wderousse@ci.everett.wa.us.