What does it take to make a substantial profit in the service department? At the rate some new vehicle departments lose money, it may be a do or die situation. While the answer may or may not be complex for certain applications, modeling for profit is a relatively basic set of department performance measurements – repair order counts, labor income per repair order, labor gross profit margin, tech staffing, shop output (proficiency), effective labor rates, working clock hours, working days, and all of this competing with those nasty expenses. Ok, maybe it is a bit complex after a few G&Ts, but I digress.
I have had the benefit of examining many successful and not so successful (profit-wise) service operations in the U.S. and abroad. The difference simply revolved around the ability of general and service management to manipulate and dial in these critical fundamentals to profit-making standards. Each contributes some piece of the profit pie, while no one measurement has all the impact.
Let’s take a look
I thought I would do a review, which might stimulate your management team’s go-get-it-ness, since you have the same answers I already have for creating profit. I find the average head-honcho execs to be bogged down in day to day same-old-stuff, which is burying their creative and general knowledge juices. Maybe a little stimulation is in order.
Repair Order Counts – Of course without patrons everything else is meaningless. RO volume is a combination of the size of prospective patron market and the penetration thereof. The good news is that new vehicle dealers create 100% of the market so they have the very first opportunity to retain (versus win over) the service customer.
On the surface, one would think that starting out with a customer is much easier than trying to flag one down with advertising and such. So, retention is the key ingredient here – having systems in place with which accomplish the basics – 1. I want your business, 2. I am the right and best choice, 3. If something goes wrong, I will fix it. That’s as complicated as it gets from the customer’s standpoint.
I ask you, how are you addressing these three retention essentials, starting with the critical sales-to-service handoff? I bet your dealer management team, driven by some aggressive administrator (maybe you?), can put some worthy solutions in place.
Labor Income Per Repair Order – Good news for the customer, bad news for service departments – both maintenance and repairs have been diminishing rapidly (over 90% reduction in FRH over 20 years!) as vehicles continue to be vastly improved, sans recalls, formerly known as TSBs. So, the answer here is longer retention (I mean 100,000 miles plus) and more importantly winning over second and third vehicle owners. Sadly, in the hay days of fat cat service, there was so much, it was easily handed out with no forethought (go there for your tires Bub), as a result dealer personnel managed to do a great job growing heady competition. Now the price is being paid in terrible long-term retention.
The better news is that the average vehicle on the road has some 140 to 180,000 miles on it (no kidding) and these vehicles often need serious repairs and maintenance. I was amazed to see the continued growth in independent shop repair facilities, up to some 84,000 locations. I bet you and your team can vet some good ideas for capturing some of these opportunities – it can be done I have discovered not surprisingly.
Labor Gross Profit Margin – Looking back I remember when the ‘mechanic’ labor margin was a 50/50 split and don’t ask for any benefits Lefty – you’re lucky to have a job. Today, considering the multitude of gratuitous benefits, federal and state add-ons, pensions, and legislated or not off time, a minimum of 75% labor retention overall is mandatory, including internal labor rates!
“I find the average head-honcho execs to be bogged down in day to day same-old-stuff, which is burying their creative and general knowledge juices.”
This margin is a combo of hourly labor charges versus tech flat rate hour pay, made much worse by clock hour maintenance techs producing, well, not much income.
I am thinking you could figure out what it would take to get the clock hour plebs on flat rate (with a guarantee of course) and put them on a course for creating profitable output (80% minimum). You might consider making a work mix study to find out what skills sets are actually needed, then start staffing to that. I bet there’s some dispatching of low labor rates to high tech wages on the buddy system, and maybe a position or two that should be replaced. You might be a questionable manager if you have an overpaid tech working for you, who you would not allow to work on your personal car – just sayin’.
Tech Staffing – If you want a jolt, calculate the amount of labor and parts sales one reasonably productive tech produces in one year – it will be over $100,000, sometimes way over – near the $200K range! Since the entire service business model is pieces of cement, what happens on them is the difference in plus or minus financials.
There are many ways to fill those cavities, starting with employee referrals, website presence, trade schools, sandwich boards out front, other signage, wholesale delivery vehicle magnetic signs, social media requests, and my favorite, reaching out to the current customer base – heck, I’ll pay them a referral fee. But you knew all these things and maybe you just let them simmer. I bet your squad can design an aggressive recruiting plan if they have a mind to – pretty expensive not to, starting today would be good.
Shop Output – The Big Kahuna – I can’t over-emphasize this calculation. The difference in a shop at 80% versus a shop at 100% is “ginormous” to quote my grandson. But, what affects output? Here’s a handy list – parts fill rate, parts attitude, RO problem descriptions, NPF (NFP for some) ROs, special tool management, waiting for authorizations, improper estimates, proper and immediate dispatching, key management or lack thereof, parking-where is it, the dreaded slow DMS programs (you know who you are), special tool un-management, testing equipment condition/location, tech attitude (usually formed from all of the above), so on and so forth.
Just an after-thought, but maybe your supervision unit can do a little better job with one or more of these – or not – your choice.
I have more but that will come in the next diatribe, err column. I do have something for you – an Excel profit calculating tool I will send you if you write to me at Ed@Dealer-Communications.com and put on the subject line, “Service Expense – I Can Beat It”. You will find these calculations quite valuable I think – shows where you can place some “profit” effort, and gain the most results. Till next column, surprise me.
Author: Ed Kovalchick
Ed Kovalchick is the CEO and founder of Net Profit Inc., Alabaster, AL, an international fixed operation consulting and training firm located in Alabaster AL. Mr. Kovalchick and his firm have assisted hundreds of dealers and manufacturers, and conducted workshops throughout the world for thousands of students since 1979. He has written columns for Dealer Magazine since its inception. Reach him at email@example.com.