What's in Store for Recycled Parts Usage?
The use of recycled parts is declining. Why? What can we do?
What is happening to recycled parts use? With the high frequency of total losses, the average age of passenger cars on U.S. roads today the oldest in history, and the superior corrosion protection found on modern vehicles, the used parts business in the collision repair industry should be booming, right? Wrong!
Despite variables like the fact that American drivers are keeping their cars longer than ever before and actual cash values are higher, the use of recycled/salvage parts has declined steadily since 2005. In this article we will explore the factors behind this drop and determine what can be done to increase the use of salvage parts.
Location, Location, Location
Everyone knows that the secret to being successful in real estate is location, location, location - a mantra that may also hold true for the state of recycled parts.
Location - Area of Vehicle Damage Repair
Mitchell data indicates that 45 percent of collision damage occurs in the front of the vehicle. Interestingly enough, there is a 50 percent probability that when this area is damaged, the car will be declared a total loss - creating quite a series of domino effect issues. The parts in greatest demand - those falling within that 45 percent - are the parts that are least available because they're the most commonly damaged, creating another conundrum. When parts are available, the price is higher because of the demand, making recyclers hesitant to split up valuable front assemblies if the need is only for a hood and fender.
Location - Virtual Salvage Buyers Render Buyer Location Irrelevant
Around 2005, national parts vendors began selling salvage parts to international buyers via the Internet. Insurance Auto Auctions says it has more than 125 international buyers from various countries around the world, and COPART indicates that 26 percent of its vehicles are sold to international buyers. The importance of this information is illustrated in the chart on page 14, which clearly shows the steady decline that recycled parts use has endured since salvage pools went international. Because international buyers purchase vehicles to be rebuilt, they choose vehicles with damage to the sides or rear, making the turnaround quicker and less expensive compared to replacing collision and mechanical components found in the front end.
Location-Country of Origin Affects Availability
As much as the other two location factors impact salvage, the vehicle manufacturer country of origin also plays a significant role in salvage part availability. In the fall of 2007, new vehicle sales in the United States from the Big Three domestic manufacturers fell below 50 percent of the market. Combine this with the fact that Asian nameplate vehicles as a whole retain more of their value than their domestic counterparts, and you have a supply-and-demand problem. And to complicate the issue even further, because Asian vehicles retain more value, they "total out" at a lower rate, thereby limiting the availability of cars headed to the salvage pool. But, increased sales of Asian nameplates puts more of these vehicles on the road, making this vehicle category more likely to be involved in a collision requiring used parts.
What, if anything, can drive a shift in recycled parts use? The big game changer will be the rapid adoption of compliance and audit software in conjunction with improvements in recycled parts locating services - a phenomenon that has been evolving and changing slowly over the past 20 years.
For most carriers, the days of requiring an appraiser to call three shops to locate recycled parts are long gone. In the past, an appraiser would call a yard deemed dependable to provide high-quality parts at a decent price. If the yard didn't have all the parts requested, it would broker what it did not have in order to make the sale.
While this process was convenient for both parties, it created several issues. First and foremost, it added to the overall cost of the recycled parts, frequently making them cost prohibitive. The second issue commonly occurred when a rep called a yard to locate the "top three" parts that would make the biggest impact on the estimate, but then did not purchase items like wiring harnesses, air cleaner boxes or glass because the system did not classify these as collision parts. Clearly these types of issues needed to be resolved and the industry responded by going electronic.
The first generation of electronic offerings for recycled parts to hit the market were programs that used algorithms to project the "composite price" of a recycled part. The logic behind this approach, for example, was that "a month ago, there was an 85 percent probability of finding a driver's side Ford Taurus door for around $300." This method was not very accurate in terms of producing a cost-effective repair because when the part was available for less, negative supplements for the lower amount weren't seen, but if the part was available for more, there was always a supplement. Back to the drawing board ...
The industry came through again with the advent of electronic listings of inventories, which brought about the long-awaited change that many had been waiting for. Appraisers' systems are now updated overnight in their appraisal areas, enabling them to be able to identify actual parts available the previous day at an actual price. This system works for many carriers by giving them a means to establish a price for a used part and indicate to a repairer that this is the price they are willing to pay for a particular part. While this system has vastly improved the parts ordering process, there is still work to be done to eliminate current limitations - partially imposed by its users.
The key to overcoming some of these limitations in the parts ordering process are updates by salvage yards and appraisers - a factor not entirely within their control. Yards and appraisers are confined to the current Hollander Interchange software mapping system, which only allows them to search for parts assigned a "Hollander Interchange Number." Numbers are assigned through this system basically by using an OEM part number and matching it to a corresponding used-part number. But, as in the old days, the mapping still misses common parts that are not considered collision parts, like those parts we mentioned earlier - wiring harnesses, air cleaner boxes and glass. And if the parts aren't mapped, it makes them difficult to locate.
The workaround in this case is for appraisers to know how many parts are mapped. The more part types mapped, the greater the probability that these used collision parts can be located. Despite all of the growing and changing that the system has gone through, technology has the potential to take the system to even greater heights.
The most sophisticated option is now on the horizon - live inventory management locator systems. These systems are accessible wirelessly from the appraisal site and parts, both with and without a Hollander Interchange Number, can be searched. Additional information such as damage codes, color and trim level can be used to search for the best match. Parts procurement systems that allow for parts purchases upon location are available as well. And even if there is a long delay between the estimate being written and the vehicle arriving at the shop, there is no problem because the search can be refreshed to verify the parts. Plus, new parts that may not have been readily available when the estimate was written are there. Sounds pretty good? It gets better.
Along with all of this information, sophisticated management reporting is available to more accurately manage appraiser performance. Parts use performance previously was handled by management to determine the alternate parts percentage of total dollars spent. The only issue with this is that it rewards buying the more expensive alternate part, which is illustrated by the example below.
This simple example illustrates the issue created when this metric alone is used to measure parts use behavior. With the advanced management reports available from the live parts locating systems and accurate parts savings opportunities, part and vendor choice decisions can be managed daily to maximize performance.
So, while "location, location, location" rules the parts environment, savvy material damage managers can fight back by deploying the most accurate measurable parts locating system available.
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