Productivity boost offers more value than price alone

Too many shop owners rely on their parts suppliers for merely good pricing, but there is much more a supplier can do to helps shops increase productivity in their bays.

Our industry has always spoken about top-line activity, rather than bottom-line focus. When a parts supplier brings additional value and helps shop management to understand the benefits to their business, it is amazing how the focus of the conversation can change for the better of both parties. Does your parts supplier bring shop business management courses to your area?

It is critical to understand that the shop is not in the commodity business like a parts supplier; they are in the knowledge business. A shop must diagnose vehicle problems, maintain the client relationship, obtain proper labor hours billed to ensure vehicles are repaired safely and in accordance with manufacturer recommendations, and have service levels exceed client expectations.

One important figure each service shop should know about its business is the average number of labor hours billed per repair order, which helps measure whether the shop is achieving the right vehicle maintenance service levels with each client.

To calculate this number, it is recommended that you take at least six months’ worth of labor sales. The longer the time frame measured, 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 Dec. 31 is 23,474 and the opening number of the invoice on June 1 was 21,872. The difference is 1,602, meaning this many ROs have been written in the shop since June 1.

Second, add up the total dollar labor revenue billed in the shop from June 1 to Dec. 31. For example, let’s assume the total labor dollars billed was $227,056 for the six-month period.

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Third, divide the total labor dollars billed by the labor rate of the shop. For example, if the shop is charging $90 per hour, then $227,056 divided by $90 = 2,522.8 labor hours billed for the six-month period.

Fourth, labor hours billed divided by the number of invoices written equals the average number of labor hours per invoice. In our example, we would take 2,522.8 billed divided by 1,602 invoices written, which equals an average of 1.57 labor hours billed per invoice.

The average shop in the marketplace is currently averaging 1.4 to 1.6 hours per invoice. The industry must achieve a productivity level average of 2.5 hours per invoice to provide professional vehicle maintenance to the client. That is the goal to be achieved.

So what is the impact on a shop’s gross profit and potential net profit if a shop can increase their productivity by only 10 percent to start? In our example, the shop is averaging 267 invoices per month (1,602 ROs written divided by 6 months) and averaging 1.57 hours of labor per RO at $90 per hour.

Without increasing the volume of ROs written and keeping the labor rate at the same charge-out rate, if we increased productivity by 10 percent from 1.57 hours to 1.73 hours per invoice, the results to additional gross profit (and net profit) would be as follows:

The difference between the new productivity and old productivity is $3,843 per month! This will create an additional $46,116 gross profit and net profit from labor revenue alone for the shop in one year.

These figures can become very significant as the internal processes to build billed hours moves forward. They represent a substantial additional amount of money earned compared to what any discount on parts could ever contribute to the shop bottom-line profitability. In addition to that, we haven’t even accounted for any gross profit earned from the parts sales that would be made with the increase in labor productivity.

Math is a very precise science. The numbers do not lie. Consider talking to your team about how to slow the shop processes down and increase productivity per vehicle rather than spinning everyone’s wheels by trying to bring in more vehicle volume or land a bigger parts discounts from the supplier. Let’s teach the industry to work smarter, not harder.