So then the negotiating begins. And with that, the “us vs. them” mindset takes hold, and the departments become more adversaries than teammates. Because doing what’s in the best interests of the individual departments starts to be in conflict with the best interests of the company as a whole.
I’ll share a case with you to illustrate.
Shops, Sales, & Other Silos: A Case Study
Note: Names hidden and numbers changed to protect the innocent.
Let’s say you’re a car dealer. You sell vehicles, parts and accessories, as well as services such as mechanical repairs, oil changes, body work, and vehicle detailing. When you acquire used vehicles (via trade, auction, or other channels) they typically need to go through a process of reconditioning to get them in the shape that will be appealing to resell to consumers.
Once your team has inspected a newly acquired used vehicle, they determine the reconditioning work required, set a target selling price, and buy the parts and components your shops will need to do the reconditioning.
In an attempt to keep negotiating and infighting at bay, company policy authorizes each department to “sell” to the other departments at up to a 20% gross margin.
In this case, a customer has just purchased a new car from you. As part of that deal, your dealership paid the customer $15,000 for the car they traded in.
After the vehicle was inspected, parts were purchased from suppliers for $3,500. Once the parts arrive, the parts team delivers them to the shops and records “internal sales” to the shops for $4,375.
The shops’ technicians put in 24 hours of their time to get the reconditioning work done. For the sake of simplicity, let’s assume the burdened hourly rate of tech labor is $100. So, when the work is done, an internal sale is recorded from the Shops to Sales for $8,469.
The vehicle now waits on the lot for the customer who will buy it, carried at a cost of $23,468. If you’re keeping track, that’s $15,000 paid for the vehicle itself plus the $8,469 that Sales has “bought” from the shops for the reconditioning work.
The last step, of course, is selling the reconditioned used vehicle to a customer. In this case, a new customer pays the dealership $25,999 cash for the car. The gross margin recorded is $25,999 selling price minus $23,469 cost, which is $2,530 (or 10% of selling price). This is the gross margin that the Sales Department is graded on.