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Increasing Productivity 10%, Wiser than Discounting Parts 10%

Automotive & HD Business Management Articles.
Bob Greenwood. January 22, 2014. ( over 3 years ago ) 656 views

Many service providers don’t really understand the benefit to their business of a productivity increase in the bays. Our industry has always spoken about top line activity rather than bottom line focus. When the part supplier brings additional value and helps shop management to understand this issue, it’s amazing how the focus of the conversation can change, and for the better of both parties.

It is critical to understand that the service shop is not in the commodity business like a jobber, but rather is in the knowledge business. The shop must diagnose the vehicle problem and set up the relationship with each client in order to obtain the proper labour hours billed to the client, ensuring the vehicle is maintained in accordance with the manufacturer recommendations, is safe and reliable for the client and as well have the shop service levels exceed the client’s expectations.

One important number the service provider should know about his/her business which measures whether the shop is achieving the right vehicle maintenance service levels with each client is the average number of labour hours produced per repair order (invoice).

To calculate this number it is recommended that you take at least six months of sales. The longer the time frame the more accurate the number.

First… take the closing number of the invoice and subtract the opening number. For example, the closing number of the invoice at December 31 is 22,474 and the opening number of the invoice on June 1 was 20,804. The difference is 1,670 meaning that 1,670 invoices have been written in the shop since June 1.

Second… add up the total dollar labour revenue billed in the shop from June 1 to December 31. For example, let’s assume the total labour dollars billed is $187,056 for the six month period.

Third… divide the total labour dollars billed by the labour rate of the shop. For example, if the shop is charging $80 per hour, then $187,056 divided by $80 = 2,338.2 labour hours billed for the six month period.

Fourth… labour hours billed, divided by the number of invoices written, equals the average number of labour hours per invoice. In our example we would take 2,338.2 billed divided by 1,670 invoices written, equals an average of 1.4 labour hours billed per invoice.

The average shop in the marketplace is currently averaging between 1.2 and 1.7 hours per invoice. The industry must achieve a garage productivity level average of 2.0 to 2.5 hours per invoice to provide the professional vehicle maintenance to the consumer. That is the goal to be achieved.

The obvious question to be asked is, “What is the effect on the shop’s gross profit and potential net profit if we can get a shop to increase their productivity by ten percent?” In our example, this shop is averaging 278.3 invoices per month (1,670 invoices written divided by 6 months) and averaging 1.4 hours of labour per invoice at $80 per hour.

Without increasing the volume of invoices written and keeping the labour rate at the same charge-out rate, if we increased productivity by 10 percent from 1.4 hours to 1.54 hours per invoice, the results to additional gross profit (and net profit) would be as follows:

 

  New Old
Average number of invoices written per month 278.3 278.3
Times average number of labour hours per invoice 1.54 1.40
Equals total labour hours billed per month 428.5 389.6
Times the current hourly labour rate $80.00 $80.00
Equals total labour revenue produced per month $34,280 $31,168

 

The difference between the new productivity and old productivity is $3,112 PER MONTH!!! This will create an additional $37,344 gross profit and net profit from labour revenue alone for the shop in one year.

These figures are significant. They represent a substantial additional amount of monies earned compared to any discount on parts could ever contribute to the shop’s bottom-line profitability. In addition to that we haven’t even accounted for any gross profit earned from the part sales that would be made as well with the increase in labour productivity.

Math is a very precise science. The numbers do not lie. Consider talking about how to slow the shop processes down and increase productivity per vehicle rather than spinning everyone’s wheels trying to bring more volume of vehicles into the bays and take a further parts discount from the supplier. Let’s teach the industry to work smarter, not harder.

Bob Greenwood


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