In part one of this article series that appeared in the March issue of ABRN, we began to dig into how overproduction can potentially harm your business. We explored the collision repair process, comparing it to a relay race in many ways. We also touched on the human cost of overproduction in your shop. In part two, we’ll take an in-depth look at the financial cost of overproduction in your collision repair shop.
The financial cost of overproduction and inventory overallocation is often underestimated and misunderstood, yet it’s one of the biggest examples of waste and inefficiency in our industry. Let’s dig in and see if we can shed some light on this silent efficiency killer.
Inventory
We start with inventory because it is at the very heart of the financial cost of overproduction. Instead of looking at inventory as items on a shelf or in a warehouse, for the purposes of this article, it’s important to acknowledge that inventory is a lot more than that. In a collision repair shop, inventory represents parts, paint, tools, and such, but — more importantly — it represents money invested in the repair of a vehicle.
Investment
In any business you invest capital — so for collision repair shop owners, you invest in parts, paint and human capital, also known as labor. As you’re investing in that capital, it is with the desire that the money returns to you in a relatively short period of time — with more money. In other words, you want a return on your investment (ROI). Sometimes we forget about that aspect — the “getting your money back and then some” part. And part of the reason this concept is hard to identify, is that it can initially be very subtle; it’s a cumulative effect. The initial steps in “key to key” cycle time are not as much of a concern. These are the steps in which you receive a car and open a new repair order. At this point, you’re investing very little in the repair. But as that car travels through the repair process and gets closer to the point where the repair is complete, you end up investing more and more money into that job. And any time the car needs to stop or pause, or become delayed for any reason closer to the end of the process, you are extending the amount of time it takes to get that money back — in the form of payment — upon returning the repaired car to the owner. In other words, when inventory accumulates, you have a bottleneck and all the money invested up to this point on those repairs just sits. It’s a classic Theory of Constraints situation.
Delayed ROI
Picture a timeline on a sheet of paper that shows a shop receiving a car at the far left. From there it moves through the repair process from left to right until you give the car back to the owner on the far right, completing the key-to-key cycle. Now above that timeline, picture money. At the very left, there is a penny. And as the car moves across the timeline, you see more pennies above the car. Then it turns to dollars and several dollars and so on. This represents how much money you are investing in a repair.
Just in time inventory
Now let’s look at our process or production flow again. When you overproduce in the paint department, for example, and that excess inventory begins to build, now all of that money is stuck waiting for that next department to utilize it. It’s the concept of “just in time” inventory. From a business perspective, that backed up inventory means I, the business owner, need to invest more money out of my pocket to put more money into play with the repair, and it’s going to take longer to get it back. “Just in time” inventory is not about humans; it’s about the cost of carrying inventory. And a paint shop that just churns out work, unaware of the impact on the downstream operation, that overproduction can have a severe impact on your business.
As I said in the beginning of this article, it’s one of the most misunderstood, invisible examples of waste in our industry. Join us next month for the third and final article in this series, where will discuss ways to avoid overproduction and delayed ROI.
