State Farm Parts Bidding Program Draws Fire
State Farm Insurance Co.’s launch of a pilot online parts ordering and bidding process earlier this year has sparked controversy among shops in test regions. The program, which is being tested in Tucson, Ariz., Grand Rapids, Mich., Charlotte, N.C., and Birmingham, Ala., requires shops affiliated with State Farm’s Select Service direct repair network to source parts from vendors through a Web-based process facilitated by Parts Trader. Repairers are required to submit parts orders through Parts Trader, and vendors bid for the sale by offering their lowest possible price quote.
State Farm says the program is anticipated to become the standard for all Select Service network shops across the country. Dick Luedke, media relations specialist for State Farm, says the parts bidding program is meant to curb problems with parts returns and cycle time by improving quality, part availability, process efficiency, order accuracy and competitive pricing.
“Our focus is to provide customers with a consistently remarkable experience. Efforts to improve repair efficiency and reduce delays within the repair process support that focus,” Luedke says. “We believe it is in our policyholders’ best interests to pursue initiatives that help promote a competitive marketplace. We believe that repair quality, efficiency and competitive price are all important aspects of our repair program. Anything that benefits our shared customers is good for repairers and good for State Farm.”
Luedke says State Farm analyzed the parts ordering process used by the industry, and identified an opportunity to reduce the amount of time and effort involved with searching, locating and sourcing all part types.
“We anticipate that the repair process will be enhanced as repairers gain the ability to see a larger selection of available parts to make their purchasing decisions,” Luedke says. “The electronic parts ordering application is another resource that can assist repairers in managing their overall performance.”
But some repairers in test regions have experienced different outcomes. A shop operator in one of the test markets, who has been using the program for two months and wrote a letter to industry professionals highlighting concerns, says the process is actually hindering efficiency and parts profitability (find a full version of the letter here). The shop operator declined to use a name to maintain relations with State Farm. (Find a rebuttal to the letter here.)
Here’s a breakdown of how the new program works:
1. Shops write a complete estimate with OEM parts listed in the database and save in preliminary status.
2. That estimate is exported to the shop’s EMS directory. The Parts Trader software pulls the parts listed in the estimate into the application automatically.
3. Within Parts Trader, the parts needed for a repair are forwarded to parts suppliers for price quotes.
4. Suppliers have a minimum of one hour to submit price quotes back to the shop. When the quote time expires, shops review the price quotes and order selected parts.
5. Shops update the original estimate with the part types and prices they selected.
6. Lock-in and upload the final estimate.
George Avery, auto claims consultant—P&C Claims for State Farm, says the program is not intended to dramatically change repairers’ part selection processes. Shops do not have to alter the vendors they source their parts from, and are not forced to meet price requirements for parts.
Avery says State Farm visits each of its Select Service shops and asks for a list of suppliers they use. That list is submitted to Parts Trader, which contacts each of those vendors to set up them up with the program if they choose to participate.
“The system is populated with only those suppliers that repair facilities already use,” Avery says. “State Farm does not put any suppliers into the system, and does not take any off. It’s all a result of what repairers do.”
Although roughly 98 percent of suppliers within the test markets are involved with the program, Avery acknowledges there is a possibility that a repairer’s regular supplier could refuse to get involved.
“That is perfectly fine. There is functionality within the system to continue interacting with those suppliers,” Avery says. “Shops do not have to work only with suppliers who participate with the program.”
The bidding process is the first piece of the program that the anonymous shop operator found problematic. The shop is experiencing delays ordering and receiving parts because the process requires a minimum delay of one hour to receive price bids, afternoon cut-off times for orders can be delayed until the next workday, and there are delays uploading estimates to State Farm.
“I can say with authority that [the program] is an administrative burden, which has created inefficiencies that have dramatically slowed down our time-proven processes by a minimum of 30 percent,” the shop operator says. “Before we were forced to use this bidding software to procure our parts, our repair center had the capability to estimate damage, disassemble the vehicle for inspection and blueprinting, and have parts ordered all in less time than it takes to receive quotes through this new ‘efficiency improvement’ process that State Farm has forced us to use.”
The shop says the program is hurting efficiency in two other ways as well. Once the shop receives price bids from vendors, it has to manually re-enter parts prices and information into the estimate before it can be finalized. It’s also cumbersome for the shop to capitalize on OEM price-matching offers for parts because it has to write new estimates and submit bids multiple times.
“We write an initial estimate with all OE parts and wait a mandatory one hour before quotes are available for review. Then the estimate needs to be re-written using those quotes and submitted to another program for price-matching options. After the second round of quotes are reviewed, the estimate is re-written again,” the shop says. “That means writing the same estimate up to three times and parts are still not ordered. How does that make part ordering easier and more efficient?”
Avery says those inefficiencies are mainly due to a lack of integration among all segments that participate with the program. The company is working on implementing improvements by integrating the program with industry information providers—CCC Information Services, Mitchell International and Audatex, a Solera Company—parts suppliers and shop management systems.
With the lack of those three levels of integration, the system does currently have some inefficiency. Right now, shops have to wait a period of time before price quotes come back. Integration will remove those problems,” Avery says. “By integrating with suppliers, for example, suppliers will be able to pre-price parts and functionality will be immediate.” However, State Farm does not have any timeline in place of when those improvements will be completed.
State Farm says the parts bidding program is meant to promote competition within the parts industry. Shops are able to obtain the lowest possible prices by enticing suppliers to compete.
But the test market shop says that competition is hurting profitability on the company’s parts sales because part suppliers reduce the standard list price.
For example, say the standard list price of a fender is $120. As vendors compete for the sale, one supplier might drop the standard list price to $100. If you typically aim for a 30 percent profit margin on parts, shops only obtain a 30 percent profit margin on $100 rather than $120.
In addition, according to documents provided by the Society of Collision Repair Specialists (SCRS), some parts dealers have recognized their reduced profits due to offering lower bids. So some have started raising repairers’ costs to purchase the part, which is shrinking profit margins by multiple percentage points.
Avery says the bids that suppliers offer are completely up to them. There is no requirement to offer any discount. “State Farm is not involved in the relationship between suppliers and repairers as it relates to paying for parts. We don’t have any business in that space,” he says. “State Farm could require discounts or concessions, but we don’t think that’s the long-term model down the road. Our focus is on competition.”
Avery adds that repairers also have full control over what parts they select and where they’re sourced. There is no requirement for repairers to select the lowest bid.
But the test market shop is wary of that claim because of State Farm’s scorecard system. Competitive price is one component that State Farm rates shops on, and the shop operator feels that failure to select the lowest bid could reduce the company’s score and tiering within the Select Service network. And as a shop’s scorecard rating and tiering is reduced, it receives fewer job referrals from State Farm.
State Farm says its Select Service shops do not need to worry about being removed from the program if they don’t select the cheapest bids.
“Using the program is a provision for repairers within the Select Service agreement. Repairer refusal to use the program would cause us to part ways,” Avery says. “But actual part selection will not be the basis for removal. Over time, repairers might find the program actually helps improve their scorecard rating.”
Although neglecting to select the lowest bid for a part seemingly defeats the purpose of the program, State Farm’s Luedke says the program benefit is wrapped in that initial three-pronged approach: quality, efficiency and price.
“If we can quantify this in terms of points, if we can gain two points in quality, we’re willing to give up one point in price,” he says. “We want the best possible combination of those three elements.”