Bad ratios, big losses

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IN HIS ONGOING SERIES ABOUT SIX KPIS THAT CAN COST SERVICE DEPARTMENTS BIG MONEY, JIM BELL TAKES A LOOK AT GROSS PROFIT ON CUSTOMER PAID LABOUR RATIOS

Jim_Bell_May2014Last issue, we introduced this series on the six KPI indicators for losing money in the service department. To recap from last month, when the bottom line of a service department is weak, it is more likely caused by small amounts of bleeding in a number of accounts, rather than a major hemorrhage in only one area.

In each subsequent issue, we’ll examine one of the six accounts in detail. So let’s move on to the first KPI that can cost you huge money in the service department — when your gross profit customer-paid labour ratio is running under 70 per cent.

Determining your ratio
We recently asked a new service manager to define what exactly is the gross profit on customer-paid labour. You have to understand that this particular service manager was recently promoted and had received zero formal training to do the job — unfortunately not an unusual situation. It might be a good idea then, to start with the basics and not make assumptions.

Gross profit on customer-paid labour in the service department is sometimes referred to as the first split of the dollar, or the markup between the selling price and the cost of sale. Let’s look at a few examples.

Example A: You pay a technician $8 for a job you sell for $25. Your gross profit would be $17 ($25 minus $8). To put that gross into percentage terms, take the gross profit in dollars and divide it by the selling price; $17 divided by $25 equals 68 per cent.

Example B: Let’s assume your door rate is a low $80 and your technician’s rate is $23. Eighty dollars minus $23 equals $57. Fifty–seven dollars divided by $80 equals 71 per cent. Therefore, with this example, you started out with a potential 71 per cent gross profit ratio on customer-paid labour.

What’s pulling it down?
The obvious questions is: If I have a 71 per cent margin between the posted rate and the technician rate, how come I only have 65 per cent or less showing up on the financial statement? This is a list of what we often find when analyzing what happened to the other six per cent.
• Poor effective door rate;
• Paying technicians to do semi-skilled work, like oil changes and tire rotations;
• The control tower over-paying technicians on flat-rate jobs;
• Service advisors discounting work and not being made accountable;
• Seniors’ discounts being given on already-discounted menu pricing;
• Incorrect estimating and the subsequent discounting which follows;
• Paying technicians for work and not correctly billing it out;
• Menu pricing improperly calculated;
• Too many one item work orders.

Here is a frequent problem: your technician beats the flat-rate system three jobs in a row by 140 per cent. Then they get a job that takes them 0.5 hours longer than estimated and then complain that the additional time can’t be charged to the customer. Sound familiar?

Do you really want to increase the door rate?
Last year, a dealer phoned to tell me he had increased the posted door rate and given the technicians a salary increase based on a percentage of the new rate. This had the effect of lowering his gross profit by two full points. The problem, was that the dealership had not taken into account the effective door rate, which is reduced by all the maintenance-priced items. Let’s look at a few examples that demonstrate this type of bleeding.

Example 1: A licensed technician does an oil change special. Labour is charged out at $10, with the filter at $6.49 and oil at $13.59. The technician is paid 0.3 at $23 per hour, which translates to $6.90. Your gross is $10 minus $6.90 or $3.10 divided by $10 equals 31 per cent. So your gross profit on customer-paid labour ratio is 31 per cent — not surprising when the effective door rate for this job was only $33 per hour!

Example 2: A trained installer — not a licensed technician — with a bonus does an oil change special. Labour is still charged out at $10, with the filter at $6.49, and oil at $13.59. The installer is paid 0.3. Your gross is $10 minus $3, which equals $7. Seven dollars divided by $10 gives you a 70 per cent gross profit to customer-paid labour ratio.

Example 3: The department offers a four-wheel alignment for the special price of $76. The department also has a seniors’ discount of 10 per cent. Now, that alignment is priced at $76 minus $7.60, or $68.40. The technician is paid 1.2 hours at $23 per hour, or $27.60, for $40.80. That amount, divided by $68.40 gives you a gross profit on customer-paid labour ratio of 60 per cent. (Note: the effective door rate on this job is $57).

The above examples point out what could be done. We should be matching the correct skill group to the job on the work order. The days are long gone when we realized the full door rate. To keep a reasonable gross profit percentage requires measurement and accountability. Ask yourself this question: Is our industry short of technicians or trained installers? The good news is that controlling margins on labour is relatively easy, providing we know what to manage.

James Jr. tip of the month
Variable door rates have been around for years but can be confusing. For example, on one work order you could have the following examples of three different rates. Complicate things even further by paying the technicians different rates and the payroll department will quit.
• Posted door rate $98;
• Line one: LOF based on an effective hourly rate of $32;
• Line two: Four wheel alignment effective hourly rate of $73;
• Line three: General repair effective hourly rate $98.

So here is one way to skin the cat, which is not new but can work well. Pay the technicians 30 per cent of the labour dollars, so for an oil change the technician gets 30 per cent of the labour and 70 per cent hits the statement.

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