We are now going to take a look at internal charges. The rental department profits help strengthen other areas of the business. So the rental department starts to become a customer of the parts department, it can become certainly a customer of the service department, and the sales department starts to become a beneficiary of some of the activities that go on in the rental department. And then across the entire enterprise, when a rent-to-rent department gets established, now we've got another contributor to help pay overhead. So let's take a look at where some of the profitability of rental ends up. First of all, it can offset the overhead. So instead of just parts, sales, and service helping pay for everything, now we've got a rent-to-rent department that should start to pay its fair share associated with the space that it occupies, some of the insurance-related activities, certainly depreciation on vehicles and assets that it uses, and so on and so forth. The next area that starts to benefit is the parts department. So the rental department needs to get some replacement parts. So it puts in a parts request, hands it to the parts department, they place the order for that required parts, the parts come in, they have to receive it into the system, and then they have to dispense it to the rental department. Should all of that work be done for free? And so pass the parts across the table, if you will, at cost. My opinion on that is no, because services were being rendered. And so the parts department, they're in the business of making money as well. So they had to spend some time and energy to create an order, to place the order, receive the order, and so on. So the question becomes, what is a reasonable amount of profit for the parts department to make on that particular exchange? Because if the parts department did not exist, then the rental department would have to do all of those same activities on their own, and so it would require manpower systems and so on and so forth. So the parts department needs to treat the rental department as one of its very best customers. And so a discount is in order. How much a discount, you're going to have to talk that over. I think probably for a department that is normally making about 30% to 35% gross profit, being most parts departments, being able to give a 10% to 15% discount to the rental department is probably in order. You're going to have to figure that out at your dealership, what makes sense. The reality is, what you're asking is, where do you want to show the profit? Do you want to burden the rental department so bad that it inflates their cost of maintenance and repairs so that the parts department can show all the profit? Or do you want to put it somewhere in the middle where it's reasonable for both of them So the parts department should be highly motivated to take care of the rental department, and the rental department also has an expense associated for the services that are being provided. Let me give you a heads up. So if the parts department is highly motivated on gross profit margin, it's possible that they will sit on a parts request from the rental department because they are trying to get potentially free freight, or they're trying to get a dollar value high enough to get certain terms, or maybe an extra discount. Well the problem with that is, that as the rental department has a machine that's broke down and you're waiting for this part, the rental department really doesn't care about getting an extra 2% discount on that part. Time means more to them because they may be losing $300 to $500 a day on rental revenue, and the parts department is trying to save $25 on freight. So heads up to you, rental manager, you need to stay on top of the parts department making sure that they are ordering your parts when you give them the request. And if they're having to, if they're not on the shelf, you might have to help them understand what types of parts they need to have available because it's actually hurting us. We're the internal customer, and if we've got machines sitting around because we don't have parts available, that's a problem. So who else makes money off of the rental department? Well the service department of course. So the service department, in some operations, they want to write a work order every time a machine comes back from rent. And then they want to charge a retail price or maybe a discounted price, and I would say more times than not, retail service costs today or retail pricing for labor is north of $100, it might be $120 an hour. And so the shop wants to charge that internally or maybe even if they did 10% off or 15% off, it's still $90 an hour to have somebody wash the equipment. Well that's not reasonable for the rental department because what that means is that it's overburdening the rental department and the service department gets to show all the profit. So we need to talk about this, and my belief is that the rental department should have two or three service tech type folks. Not highly skilled, they haven't gone to factory training, but they are people that you wouldn't mind having them use a pressure washer, you wouldn't mind having them being able to inspect fluid levels, they can read, they can help with the quality control and go through the checklist and make sure everything works correctly on the machine, and they are 100% dedicated to the rental department. So they don't work on customer's equipment, and they are flexible to change the priority throughout the day because the rental manager is the one that is going to give them direction. They would not get direction from the service manager because he really doesn't know what's going on at the rental counter and how priorities may change throughout the day. So we have our own service techs for the rental department for routine maintenance, but if we have a machine that is broken and we're not able to fix it according to lesser skilled mechanics, at that point is when it moves into the service department, a work order is created, and now we become a customer of the service department, and at that point we can discuss what's reasonable in terms of pricing. My opinion is that I would prefer to get excellent treatment in terms of speed, and I'll gladly pay whatever the retail price is, because if I am in there at a discounted price and the service manager is looking around to see what else he can repair at retail price and then he gets around to the rental machine, again we've lost potential revenue opportunities to the tune of $200 or $300 or $400 or $500 a day because we were a 10% or 15% discount on labor. So we don't want that. So as the rental manager, you need to work with the parts and service departments to try to iron out what is reasonable for those departments to be able to make a profit, they're entitled to that, but we want excellent service because again, going back to our processes, we don't want our equipment stuck in the service department. Lastly, we come to the sales department. So how do they make money off of the rental department? Well, if you recall our opening slides when we talked about the acquisition costs, it's possible for the sales department to make money if an extended warranty is sold. It's possible for them to make a very slight margin if there is a transfer price where maybe a margin is taken from the sales department to the rental. I'm not a big proponent of that. I don't know that it happens very often, but it's possible. And then secondly, during the owning and operating period of the rental machine, depending on the depreciation choices that have been made, it could be that the depreciation is being accelerated, which means that the burden to the rental department is greater than it maybe should be, and what we're really doing is building equity into that machine. So what happens there is the rental department does not show as much near-term profit because it's getting hammered with accelerated depreciation. And then when that machine moves out, it goes over to the sales department, and it's got a very low book price, and when they sell it at market price, they make a nice, fat gross profit margin. So that gross profit margin shows up over in the sales department, and all the rental department got out of it was extra expenses. So again, there is this fine line between being fair so that we show the reality of really what's going on in the rental department, and we don't do that at the expense of the rental department so all the other departments show a lot of gross profit. So I have been in some dealers that haven't been in rental too long. They haven't worked out this issue with internal charges, and so within a short period of time, the stakeholders, when they see operating statements, they go, wow, rental's not doing too well, but I really like the margins that I'm making on used machine sales. Looks like the service department's doing well, and the parts department's making money. And now I have a fourth pillar to help pay for the overhead, but I don't know that I want to invest any more money in the rental department because it's not making money. So I want you to make sure as the rental manager that you understand where some of your profits go to so that you can explain to other people, or you can effectively negotiate with the parts and service department and the sales department what is reasonable charges and margins.

internal charges

rental department profitability

parts department

service department

sales department