Last month we began modeling service profit makers – the fundamental key elements, which drive the bottom line upwards. Unfortunately, there is no “one” area, which does it all, but rather the precise management of a multitude of ongoing measurements. We examined RO counts, labor income per RO, labor gross profit margin, tech staffing, and shop output (proficiency) prior.
RO count management activates with an effective day-one sales to service introduction program, setting the first “required” service visit (related to the valuable on-going vehicle warranty coverage), then the practice of the Active Delivery process at each visit, where the next “required” service month (at least) is scheduled for dealer follow-up. This is especially important with the used vehicle customers since they will actually have some weighty service needs in the next year or two, versus the new vehicle loser oil change and rotation program.
Labor income per RO is related to the age / mileage of the vehicles being worked on – period! If someone tries to tell you otherwise, sell him or her beachfront property outside of Phoenix. Attracting the older crowd starts with your own customer base. With the average household having some three vehicles (usually one newer), your 20,000 vehicle database actually has some 60,000 possibilities. Even a half-ass effort at getting that business would gain substantial results.
The overall labor gross profit margin minimum is 75% after labor adjustment. The factors here are dispatching, effective labor rates dependent on rate and flat rate hours paid per job, correct staffing to skills necessary, tech pay rates related to “actual” abilities, and flat rate pay versus clock hour pay (including proper tech clock hour accounting which is seldom done – read the accounting manual for the facts).
Tech staffing is vital since the entire health of service and parts revolves around their capacity to produce labor and parts sales. If you are understaffed, CSI, employee attitudes, as well as profits suffer. I just placed some huge “Hiring Technicians” magnetic signs on my client’s customer shuttles and wholesale delivery vans, as well as beginning an aggressive radio ad campaign. Why waste time when over $100,000 in annual sales per stall is at stake! Pay a signing bonus if necessary.
Shop output – simply put, survey the techs, ASM / TSM staff, and parts shop counter personnel; they know all the output issues, complaints, whining, and even some related solutions you need to increase this most valuable measurement. Ten Techs x 10% Daily Output Increase = 8 Additional Flat Rate Hours x $120 Parts & Labor Sales per FRH = $960 Per Day x 21 Working Days = $20,160 Additional Labor & Parts Sales Per Month – more than chicken feed. At 55% overall labor and parts gross profit retention, that creates an additional annual $133,000 plus service and parts profit if the bills are already being paid. Consider what a 20% increase would provide.
“Customer pay ELRs can get complicated, in fact, the more you advertise and gain customers from the omnipresent oil change / rotation service, the lower the customer pay ELR will be.”
Additional Profit Makers
Effective Labor Rates – Customer pay ELRs can get complicated, in fact, the more you advertise and gain customers from the omnipresent oil change / rotation service, the lower the customer pay ELR will be. Make a study of the most common operations because that’s where a positive adjustment may be in order either on labor charges or tech times, or both.
Secondly, ensure that for diagnostics and skilled repairs the labor rate allows you to retain at least a 75%+ margin versus the skilled tech flat rate hour pay. You know the drill about dispatching light maintenance to the lowest cost techs – when’s the last study you made of that? Oh, and older, high mileage vehicles have the highest effective labor rate by far – more repairs – another win with older vehicles.
Working Clock Hours – Where there are no ridiculous overtime laws for flat rate techs, I like to work a nine to ten hour tech day, particularly when the vacation season hits, and then reducing back to eight in the dearth of winter if needed. Most techs like the notion of making supplementary money when the sun shines. And the service department bills don’t change much with the seasons, so more gross is always needed. Figure a low-side hourly figure of $120 labor and parts times ten techs working an extra hour produces $1200 additional dollars per day, $25,200 per month!
Working Days – Producing labor and parts sales on a piece of cement (tiled for you high-enders), is the guts of profit-making. If the work is available and no one produces it, game over. Techs working five and a half days when the fruit is flowing is a winner for everyone. In some markets, Sunday is a viable production day, and in most, Saturday is a no-brainer. Some clever service chiefs use part-time technical personnel on the weekends to handle primarily maintenance, internal needs, and emergencies. More working days create more working hours and you just saw the calculations above. Gets my heart pounding.
Last time I offered an Excel profit-calculating tool you can have by writing to me at Ed@Dealer-Communications.com and put on the subject line “Service Expense – I can beat it.” It will demonstrate how some overall adjustments in the areas I reviewed will dramatically improve your profit position – your profit priorities will show prominently.
Before departure, I have to share this tidbit with you. I have the fortunate opportunity to write for a vintage racing magazine, so I get to interview many famed drivers and owners. At an Amelia Island Concours this year, celebrated racers and engine builders were discussing racing today versus the past, when this comment popped out regarding current day spec racing, “I call it socialist motorsports.” Thought you would get a kick out of that poignant observation.
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 Ed@NetProfitGroup.com.