From: May Issue Southern Automotive Journal
PartsTrader, State Farms Testing New Pricing Model for Parts Procurement
by: Michael Winters
Originally built by New Zealand’s largest insurance company IAG for its own use, PartsTrader is gradually finding itself a new home in the United States. Not only does every insurance carrier in New Zealand currently use it, but some insurers in New Zealand in fact refuse estimates that do not contain PartsTraders’s pricing model for parts. Rob Cooper, who created the program in 2003, now works for State Farm; test markets have begun to be set up in Birmingham, AL, Tucson, AZ, and various other markets across the nation.
PartsTrader, in short, is a parts procurement tendering system. In New Zealand, for example, a repair facility searches for and downloads the parts required to repair the vehicle and sets how long they want the bidding process to stay open; by default, this is normally 24 hours. The facility’s parts request is posted on the PartsTrader web site, where it is sent to local dismantlers or new parts franchisers. After the bidding period has ended, should there be no bids, the bidding process can then be opened up to the entire country of New Zealand. At this point, bidding is free game for anyone who wants to enter into the process and submit their bids. This can either be for individual parts or a bulk price.
Once closed, the repairer will have the opportunity to review the bids submitted and choose the best package with respect to cost, time to supply, and type of parts (i.e. new or used). They will then select the bid they believe is the best one based on the above criteria. If it is not the most cost effective of the options, they are required to indicate to the insurance appraiser why they chose that package. Once the approval has been granted, the repairer will make the selection and the supplier will be informed that he has won the bid. The supplier then supplies the parts to the repairer, and it is the repairer’s responsibility to pay the supplier.
In New Zealand, the supplier pays PartsTrader a small percentage which is built into the bid price. The repairer gets a mark up percentage, depending on if the parts are new or used; this percentage varies between insurance companies. Since the program went into place, the parts markup has dropped for many shops from 20% to closer to 10%; a 50% reduction in the maximum markup accepted by New Zealand insurers. However, State Farm has notified vendors in the U.S. that there will be no initial cost to suppliers to use the program and that further information on pricing will be provided by PartsTrader. Currently, this is consistent with how the program is operating abroad.
Decreasing parts pricing is suspected to be a big part of State Farm’s decision to implement the PartsTrader program in the U.S. And while their representatives have repeatedly stated that they do not intend to affect the repairer’s margin on parts, if PartsTraders’s bidding system forces pricing down, bottom line parts profit will certainly be impacted. In short, if the discount percentage stays the same, and the price of the part is bid down, that means the profit dollar will be driven down as well. What remains to be seen is how procuring parts from multiple—and possibly unfamiliar—vendors impacts the repair facility efficiency and the cost incurred by the shop waiting for parts.
It is also difficult to determine at this point who stands to benefit from this program other than State Farm.
The PartsTrader program is essentially designed to force repairers into soliciting bids for all parts on a repair order, which could potentially sacrifice business relationships with their dealer networks and part suppliers of many years. And despite being reported as contributing to a reduction in parts profit in the other countries it currently operates in, it is being favorably pushed by the largest property and casualty insurer in the U.S. However, when trialed in Australia, the program was ultimately rejected because of the strong business relationships that existed with the parts dealers mentioned above, coupled with the comparatively lesser use of used parts in that country. But despite the opposition already underway, there are not many options for those repairers already participating in the Select Service program.
State Farm secured agreement from the participating shops before the PartsTrader program was announced, effectively ensuring that the shops agreed to participate. On this end, parts suppliers received a letter from State Farm highlighting this stipulation:
“All repairers currently participating in the Select Service program have agreed to use automated replacement parts locating services or application if requested by State Farm, and will be required to use PartsTrader.” Recent meetings conducted by State Farm, such as in Charlotte, NC, advised shops that they were required to use PartsTrader, but that they also had the option to discontinue their participation in the Select Service program if they didn’t want to use the program. But while it remains to be seen what effect PartsTrader will have on the collision repair industry overall, it is certain that State Farm’s implementation of this program will not be without its hurdles.n