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May 2004

Turning an Auto Recycling Yard Around in 90 Days
by Mike Gibson

Recently I had an assignment from a large insurance company that had purchased an auto recycling yard. The company had purchased the recycling yard three years earlier and sales had steadily declined from about $80,000 per month to $40,000 a month average. They bought this yard, wanting to experiment with disposing of their salvage through a salvage yard, instead of through salvage auctions.

They decided at the beginning not to purchase vehicles, but to supply the yard with totaled vehicles they received after settling claims with their customers. They would re-build some or sell as is, and part out the remainder. The problem was their inventory supply was not matched to their customer demand and so sales declined. (They made the mistake of thinking that their claims and total loss vehicles should track with the vehicles their recycling customers would be driving). Of course, they also had too many employees, poor management, and no systems.

When I received the assignment, their average monthly sales were $40,000 per month with about $20,000 per month in re-built vehicle sales and about $20,000 a month in parts sales. The cost on re-built vehicles was over 50% and they had eight employees. Expenses were running around $44,000 per month. It didn't take but a few minutes to see they had negative cash flow. Also, if you allocated the employees, with, say, two handling rebuilders and six handling parts operations and sales, they were selling about $3,500 per employee. Remember, the goal is $15,000 to $20,000 per employee per month, and much less than that will not provide a positive cash flow or profit.

After three years of this negative cash flow drain the insurance company decided they wanted to sell the recycling yard and get out of the business. The problem was no one would want to purchase a yard with negative cash flow. They hired autosalvageconsultants.com to come in, and improve operations to get cash flow positive, so they could find a buyer.

I found no systems in place, and the yard was a filthy mess. When a part was sold, someone simply got the vehicle, took it to dismantling, removed the part and returned the vehicle to the yard. I implemented a cradle to grave system in the back of the yard for dismantling. Once the proper systems were installed, the process flow corrected and the yard cleaned up; (about four weeks) I reduced the staff from eight to five. The yard was then re-inventoried, and I sold cores, surplus inventory and scrap. I sent out a direct marketing piece (thank you Mike French) to wholesale customers and installed a purchasing plan based on customer demand and pay for performance. Within two weeks after pay for performance was installed one salesman quit bringing our staff down to four. Salvage sales increased to $25,000 the first month, a small improvement, but with only four employees, cash flow was getting better. The second month was much better with parts sales of $42,000. By the third month sales were up to $45,000 and we had a positive cash flow. Keep in mind all of these sales were used part and warranty sales with a cost of goods of about 35%, and total expenses were reduced to around $20,000. In this period, no new cars were purchased or sent from the insurance company. (They had cut off all cars). In the third month, we started buying cars at the local salvage pool, based on customer demand.

During the fourth month I was able to sell the yard for the insurance company and net them a good price, a little more than they had paid for it a few years earlier. In the two months since the sale the new owners have continued with the systems I installed, and installed The Pinnacle Yard Management System and they are now producing $70,000 a month in sales.

I see these same problems over and over again in my consulting assignments. I always find excess employees using bad systems (usually no systems), weak or non-existent financial and operating goals, and a lack of accountability. The lesson here for all small businesses? You don't know what you don't know (think about it), so surround yourself with others that can help, and stay focused. I will be giving a presentation at the URG conference, with one of our clients, a successful operator who sells $60,000 per month, with 3 employees, and makes well over $100k per year. Be there!

Don’t forget to subscribe to my free monthly auto recycling e-newsletter, with news and tips, register at www.autosalvageconsultant.com.

Remember, only you can make BUSINESS GREAT!

Ron Sturgeon is past owner of AAA Small Car World. In 1999, he sold his six Texas locations, with 140 employees, to Greenleaf. In 2001, he founded North Texas Insurance Auction, which he sold to Copart in 2002. In 2002, his book “Salvaging Millions” was published to help small business owners achieve significant success, and was recently reprinted. In June 2003, he joined the new ownership and management team of GreenLeaf. He also manages his real estate holdings and investments. You can learn more about him at WWW.autosalvageconsultant.com He can be reached at 5940 Eden, Haltom City, TX 76117, (best) rons@rdsinvestments.com or 817-834-3625 ext 6#.

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