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Friday, November 09, 2007

Recycled parts? With the right incentive…

Using more recycled OE parts may be good for the environment, and good for the insurer’s bottom line, but it is not always good for repairers yet. To get collision shops choosing recycled more often, insurers need to make recycled parts a more profitable option.

Auto recyclers have a role to play in helping to ensure collision repairers and insurers are profitable. Increasing the use of recycled OEM parts is often seen as one of the last frontiers for insurers managing their costs and repairers lowering the incidence of total loss vehicles.

In reality, most auto recyclers today are in the parts business, not the business of recycling vehicles for profit. Every vehicle has its share of recyclable metals for the scrap industry, and cores for the rebuilding industry, but the cost to get at these elements generally can’t cover the cost to buy, tow, catalogue, disassemble, drain, or crush the vehicle.

So today’s recycler is really in the re-use business; all the processing activity is geared to get at those valuable parts for re-use, and to do so in an environmentally sustainable manner.

Changing dynamics between recyclers, repairers and insurers
Auto recyclers interact with collision repairers and insurers in two fundamental and intertwined ways -– we acquire total loss vehicles as our basic inventory supply, and we sell recycled OEM parts. Recycled parts are also referred to as LKQ (like kind and quality) or salvage parts.

This positive cycle of re-using total loss vehicles to decrease claims severity has been going on for decades. But subtle events have changed the dynamics within these inter-related industries, leaving each party grasping for solutions.

- Insurers across Canada have been clamoring for the increased use of “alternative” parts, meaning recycled or aftermarket parts, in order to control their costs. At the same time their asset managers want to maximize the return on vehicles sold as salvage.
- Repairers have seen an unprecedented rise in total loss vehicles leaving their facilities, resulting in fewer repair opportunities.
- Recyclers are starved for inventory, or better stated, starved for the right inventory at the right price, resulting in lost sales and redundant inventory.

Traditionally, there has been precious little dialogue between these industry stakeholders to solve collective problems. Some jurisdictions have better success than others. While this is not a call for public insurance, it does seem that provinces with a single insurer are better able to address industry-wide solutions. But we can all learn from these unique and somewhat controlled circumstances.

As an example, in Manitoba, Manitoba Public Insurance (MPI) funds the operation of the Recyclers Central Office (RCO). The RCO functions as a data clearinghouse between the auto recyclers and MPI. Every claim is transmitted to the RCO, which re-broadcasts the part requirements to members of the Automotive Recyclers of Manitoba association. The recyclers reply to the RCO within a set time period, listing the availability of the requested parts; prices are not involved.

The RCO sends the responses to MPI, and where recycled parts are available, they are written in to the estimate. The repairers are paid 60% of OEM price for each part (assembly pricing is not utilized) over 10 years old, 45% for 11 years and older.
Recyclers sell parts to repairers at 25% less than this 60%/45% compensation rule.

The result? MPI saves millions every year, and Manitoba has the highest recycled part utilization in Canada.

Profitability is built in
There are several reasons this model works. Self-policing with regard to quality is built in to the system -– recyclers selling junk are weeded out early because they are responsible for freight and warranty claims, and can ultimately be removed from the system. All order cancellations or returns require a cancellation number which is tracked and auditable. Parts can’t be returned on the whim of a repairer.

Technology is also a factor -– having every estimate scanned for recycled parts ensures accurate information is delivered to the right person at the right time. Similar technological tools exist in every part of Canada, such as the Allied system in BC, Audatex’s Real Steel Download, Car-Part.com, Mitchell’s QRP, ARPAC.com in Quebec, etc.

I believe the truly unique thing about the Manitoba situation is that the profitability of using recycled parts is built in to the system, and has been for some time. Once the right economic incentives are in place for a repairer to make a fair return, the other “issues” with using recycled parts tend to solve themselves.

Let’s face it, we are all in this game to generate a profit, for our shareholders, for ourselves, or just to keep the doors open. Operational decisions, including what parts we use, are fundamentally economic decisions. Of course there are quality issues, safety issues, CSI issues, cycle time issues, but often these mask or are a proxy for profitability issues.

Private insurers turning to incentives
Some private insurers are also getting on board and generating increased recycled parts usage by allowing a higher markup on recycled parts. These markups bring the profitability closer to that of new parts and they help to compensate repairers fairly. The messaging is pretty powerful: “We want you to use more recycled parts to save us money, so we are going to pay you accordingly.”

I know of two insurers who are allowing 25% and 30% markups respectively, and they are willing to look at higher markups because the response has been so dramatic. To be fair, those insurers are also looking at program-wide changes with full consultation with recyclers and repairers, so they are playing with the full tool set – pricing, education, knowledge, communication, targets, etc. But if you talk to a shop on the program, they repeat the obvious: “We make more money now using recycled parts.”

Allowable markups are but one part of the equation in recognizing recycled parts profitability. Again, if insurers want more recycled parts usage, they need to look at the suite of options available to them.

Insurers shoot themselves in the foot by refusing to add time, or limiting the extra time, for clean up and prep. We sell used auto parts – “road tested” in the marketing vernacular. They’re made to factory OEM specs (because they are factory installed), they come with all the extras, and they fit, but they can require clean up and prep. This needs to be recognized in the estimating software and by insurers policies. You can probably predict how far ahead the mantra of “Use more used, but I’m not going to pay you for it” will get any of our three industries.

Recycled parts have other profitability angles. They can positively impact cycle time as they are readily available for same or next day delivery in most cases (quality recyclers are spread throughout Canada. Recycled parts generally come as assemblies, thus saving on total part cost, labor time and cycle time. A good example of all of benefits is a quarter panel with a wheel housing assembly. If total cost is considered, this part should be included in a repair because it would be better quality, faster, cheaper, and readily available.

How do we make this happen?
So you’re saying, “Great, the guy who represents auto recyclers in Canada wants my shop to make more money using his product.” Great, as a shop owner, I’m convinced. I want to make more money using recycled OEM auto parts too. How do we make this happen?

Public insurers have been working on this for years, and in my opinion are way ahead. Private insurers, because of the nature of the business, tend not to share this type of information. For those insurers who are using market-based pricing models, take note -- the market has changed regarding how other insurers are approaching recycled OEM parts. All insurers need to look at their total compensation package for recycled parts and make sure they are sending the right messages.

For repairers who are not receiving those higher markups, tell insurers that a new benchmark exists in the industry. Recycled OEM parts are part of a smart, safe, productive repair and you deserve the right type of compensation to make sure they are included in every estimate.

Let’s make new OE parts the alternative, not the standard. But make sure shops’ bottom lines don’t bear the brunt of this transformation, or it will never happen.

Recycled parts are a “green” solution – for your business and the environment.
Good recyclers (and yes that does imply there are bad recyclers – but that’s another article) provide the last owner of a vehicle free stewardship for the numerous potentially hazardous materials in today’s vehicles. We properly drain, store and dispose of oils, gasoline, tires, mercury switches, CFCs, antifreeze, windshield washer fluid, etc.

In a time of increased sensitivity about environmental matters and climate change, recycled OEM parts are about as green as it gets. Increasing their usage is not only good for an insurer’s bottom line, but with the right policy changes and incentives it could be good for repairers – leading to a greener tomorrow for us all.

Steve Fletcher, Managing Director, Automotive Recyclers of Canada

1 comment:

David Gold said...

Hi Steve, (March 26th, 2009).

In preparation for the Recyclers-Insurers-Repairers Rountable discussion tomorrow I have just reviewed your article agian and I think you hit the nail on the head here. The issue with Repairers using our parts boils down to "profitability" and we have to crack this nut and do whatever is necessary to solve this issue for the good of all stakeholders and the public in our society. Thanks, David Gold, Standard Auto Wreckers, Toronto, Ontario.