Wednesday, 31 January 2001 17:00

Recycling yards change to meet challenge of consolidators, greater demand

Written by John Yoswick and Richard Neubauer

If you think the collision repair industry is changing rapidly, spend a little time talking with the owner of your nearby auto salvage yard:

Consolidation? Independent yards around the country are being gobbled up by larger corporations like LKQ Corporation and Ford Motor Company.

E-commerce and computer technology? Body shops can shop for used parts on-line at several websites, including iSalvage.com, NextPart.com, PlanetSalvage.com, and CarStation.com, and many yards are connected to each other by co-op networks such as United Recyclers Group.

Changing business demands? Savvy salvage yards are fighting for your business by improving delivery services, offering written warranties and learning how to better prepare and describe parts for shops. Some of the yards now have digital imaging capabilities, allowing them to e-mail you a photo of the part you're buying.

Want more proof that the yards are changing? Just look at the stringent guidelines for a yard to earn the Automotive Recyclers Association's (ARA) "Gold Seal" designation, a program designed to recognize those recycling yards that meet the highest standards for environmental law compliance and business practices; practices such as an accurate description of each used part and a fair returns policy.

"A lot of people in this industry still operate the way they did 50 years ago, and that's not acceptable," said Herb Lieberman, president of ARA. "We're taking the lead in changing that." About 100 of ARA's 2,000 members have earned the Gold Seal, according to Lieberman. Nationally, there are estimated to be about 12,000 recycling yards.

Problems for shops

As a direct result of the State Farm case in 1999 (now on appeal), many insurance companies have stepped back from their practice of writing estimates for non-OEM parts. Some insurers are now calling for "LKQ" parts, thereby elevating salvage yards and used parts to more of a mainstream role in collision repair. Most shop owners can tell you one or more "horror stories" about an attempt to use a salvage part - often at an insurance company's "request" - that led to a lot of lost time and money.

Mike West, owner of Southtowne Auto Rebuild near Seattle, Washington, articulated shop owners' frustrations: "In looking at the numbers, we found that when we worked on older vehicles, we used significantly more used parts, and when we used these recycled parts, the jobs were more labor intensive," West said. "Those jobs took more time, which we were often not compensated for. Cleaning and repair issues aside, even just the receiving of the part, inspecting it and verifying that it's correct, require additional time on the front end to avoid major delays after the job is in progress."

Those delays, he said, can occur when the shop discovers past repair work on the part; when welded-on hinges or other mechanical components on the part are worn or malfunctioning; when the part is from the wrong year or model of vehicle; or when the part is wrong because of an error in the "interchange manual" used by the salvage yard.

"After all the time you have invested in cleaning up the part, repairing minor damage and getting it in primer, you can go to install it and find that the welded-on hinge doesn't line up with the hinge half on the pillar," West said. "To use more recycled parts, there has to be more (financial) incentive, not just for insurers but for the repairers."

ARA's Lieberman agrees. "As a recycler, I have a responsibility to provide a savings to my insurance customer and an acceptable profit to my repairer customers, a profit that encourages the use of recycled parts."

Shop owners skeptical

"We had a used door last week that came in and fit perfectly. It was the exception," said Jerry Epstein, a former insurance adjuster and now a partner in Paramount Collision Specialists of San Mateo, California. "As a Service First shop for State Farm, we write our own estimates and we don't use many recycled parts, but when we do, they usually come in dirty, the molding is wrong, or they have holes. We're the one left doing the work to 'recycle' them. And we're not paid for it."

When Epstein does order a part, he does so through a yard he knows well. "The relationship is important. They know we'll do business again, and so they'll tell me the true condition of the part, and they'll take it back without a hassle if it doesn't work out," he said. Another common practice that irks Epstein is when a yard quotes on a part it supposedly has or can get, and then when he actually orders it, the part isn't available.

"Unfortunately, that's been common practice for too long," Lieberman reluctantly agreed.

Discounts vs. markup issues

Chuck Sulkala, owner of the Boston, Massachusetts body shop started more than 50 years ago by his father, may be on the opposite end of the country from Epstein, but he couldn't agree with him more. "We, as an industry, keep trying to tell insurance companies that we're not opposed to using salvage parts," Sulkala said. "But if you want me to use more salvage parts, make them better and more accessible. Make it worth my while to use those parts, and I will use them readily."

He believes that insurance companies must allow shops to make the same profit margin on a used part that they do on a new part. The discount on a new part can run up to 30%, instead of a 20% markup on a used part. And even if the percentage is the same, a 20% discount from a dealer on a new part produces a greater gross margin than does a 20% markup on the shop's cost of a used part.

Ed Milmeister, president of All Auto Parts in Fontana, California says he doesn't know why prices on used parts are quoted differently than OEM or aftermarket parts. "I've been in this industry since 1966, and it's always been this way. Would it not be better for recycled parts to be quoted the way all other parts are quoted?" Milmeister thinks so, and he thinks it would be better for everyone, including insurers. "It would be easier for the insurer to compare new and used. They would not have to argue with the collision repair shops over the markup and their 'puny' profit using recycled parts. The recycler could then negotiate a discount from list price based on the recycler's business relationship with the shop," suggests Milmeister.

Keeping wrecks for recycling

ARA president Lieberman also feels it is imperative that all rebuilt "total loss" vehicles have branded titles to show that they are rebuilt vehicles and that vehicles with a very high damage to value ratio should be declared non-repairable and be sold only to licensed salvage yards for dismantling and not to rebuilders for return to the road. These changes, he believes, would greatly increase the available pool of quality salvage parts.

Lieberman and shop owner Sulkala both said that branded titles also would reduce the selling price of salvage vehicles because the wrecked vehicles would be less valuable to rebuilders. Without the competition from rebuilders, recycling yards could acquire vehicles for less than they do today and would pass the savings through to insurers and shops.

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Norm Wright of Stadium Auto Parts in Denver, Colorado, reasons, "As the salvage pools continue to get more money for vehicles, the insurers look at it as an increasing percentage of recovery on their total losses," Wright points out. "As that figure continues to go up, they're going to say, 'Why are we fixing these cars? If we can get 30 or 40 percent at the salvage pool, why am I bothering with the collision guys and claimants. It's much easier to just give the owner a check.' So we need to work together, both industries, to curb that because they're taking those cars out of your shop, and I'm not selling any parts to you."

Yards improve services

While industry leaders look at big picture issues like directing more wrecks to recyclers, individual yards are working to address other problems associated with recycled parts, such as accurately communicating to a repair shop the condition of a body panel.

Robert Sibbio, owner of AAA Van & Truck in Phoenix, Arizona, now offers his customers a digital image of the body part. "We take photos all around the truck when it arrives, and then we'll photograph a specific body part and e-mail it to a yard." AAA inspects each part three times before it goes into inventory, and estimates the number of hours of work required on the part. "And if after all that, the shop can't use the part, we have a no-hassle returns policy for 30 days," said Sibbio. AAA was also the first Arizona salvage yard to go on-line with a national parts locating co-op, URG Auto Parts. "When we look up a part, we first see our own inventory, and then we can see where else it's in stock across the country," said Sibbio.

Consolidators raise the bar

In January 1998, Lieberman sold his Southern California yard, Lakenor Auto & Truck Salvage, to an industry consolidator, LKQ Corporation. He now works as a consultant to LKQ Corporation, which has more than 50 yards in about 30 states. He said one of the advantages that LKQ offers its customers is better availability and distribution of quality parts.

"Instead of having the availability of what's in my location and what I can get here locally, I have the availability of six stores ," Lieberman said. "We have distribution trucks that run the region, from Northern California to Phoenix, and no part is more than 48 hours away." LKQ also guarantees that its sheet metal parts will be free of internal rust and corrosion for the lifetime of the product.

LKQ, however, is not the only player in the consolidation of the salvage yard industry. Ford Motor Co. shocked many in the industry in mid-1999 when it announced the purchase of a Tampa, Florida, wrecking yard. "We're here to revolutionize the industry, to create a Fortune 1000 company from scratch to become a global, environmentally focused powerhouse," said William Li, the 29-year-old chief operating officer of the new enterprise, in announcing the first yard purchase.

Ray Howard, of B&D LKQ in Birmingham, Alabama said the consolidation will be good for the industry. "The independents, in order to compete, are going to have to raise their level of service, quality and reliability. With Ford coming into this industry, the acceptance of salvage parts by the consumer is going to be unbelievable, which is great for my business."

Said California shop owner Milmeister, "LKQ and Ford are raising the bar in this business. We have to be just as good - better, actually - if we want to survive and prosper. We have to deliver what the customer thought he ordered, and do it on time."

ARA's Lieberman particularly agrees with the importance of delivering what the customer thought he ordered. "A quality used part transaction begins with a total loss salvage and ends with an accurate description of the part required by the repairer that brings no surprise upon delivery. Not every part can be perfect, but every part description can be perfect."

Independents form marketing group

Consolidators may be getting all of the attention, but yard owner Milmeister said the independents aren't standing still, either. Across the country, they are banding together in regional cooperatives to shares their inventories. "We just formed QRP (Quality Recycled Parts) of Southern California," said Milmeister. "We have 20 independent yards from Bakersfield to San Diego, and we will be able to see each others' inventories on line and take orders for those inventories. The consolidators like LKQ have raised the bar in our industry, and now we're out to level the playing field by banding together. "

Milmeister said that QRP plans to accept requests for quotations both by e-mail and by fax at a central location and then immediately forward the request to each QRP yard. QRP will encourage adjusters and body shops to upload a digital image of a damaged vehicle together with the parts list from the estimating system. Participating yards would then competitively bid on providing those parts which they actually have in stock. Milmeister has proposed that the recyclers would respond within a 15-minute time-frame when a customer is waiting at a shop for an estimate, or 45 minutes if the customer is not waiting.

Milmeister says that such a real-time system would benefit everyone: "It reduces cycle time, improves estimator efficiency by minimizing phone calls while maximizing availability, and provides competitive pricing. If it's a common part, the customer might get as many as 20 competitive bids." Milmeister also noted that all 20 of the Southern California QRP recyclers intend to become ARA Gold Seal certified.

Choosing who to buy from

After hearing about ARA's commitment to quality parts and customer service, shop owner Sulkala said it's too bad that only the top one or two percent of salvage yards seem to have such high standards. And he challenges the assertion that shops should choose to do business only with Gold Seal or other top yards.

"In our state, the insurer indicates the yard at which they found a part," Sulkala said. "If we don't buy that part from that yard, we have a difficult time going after (a supplement for) additional damage or whatever may be wrong with it (the used part) because the insurer had selected the part from a certain yard. It's now our problem because we didn't get the part from the yard they selected. To that extent, I don't have the opportunity to buy from the outstanding operations that are out there. I am being told where to get the part."

ARA's Lieberman understands the problem. He said one solution will be when more recyclers subscribe to the business practices of ARA Gold Seal members, but cautioned that the growth of quality assurance programs such as Gold Seal depends on insurers getting behind the Gold Seal program the way they got behind I-CAR's Gold Class shop program. He said that only when insurers insist on getting their quotes from yards that adhere to high business standards will recyclers see the value in the Gold Seal program and change their practices in order to earn a Gold Seal designation. Milmeister agrees. "I try to run a first class operation, which means my costs are higher than the guy who delivers your used parts in a broken down truck and makes that delivery whenever he gets around to it."

John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988.

 

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