Shops aren't guaranteed profits on labor warranties

Jan. 1, 2020
Any repair work performed under warranty does not generate revenue.

The older I get, the more experience I amass, and the more years I spend under a car or at the service counter, the more convinced I am that few people on the distribution or manufacturing side of the industry understand anything about how revenue is generated in a contemporary automotive repair facility.

I know that may sound a bit harsh, but there isn’t a line forming outside my door to convince me otherwise.

Possibly the best illustration of this lack of knowledge or understanding is anything having to do with a warranty: warranty on parts, or even warranty on labor.

A warranty in a labor-intensive industry just isn’t the same thing as a warranty in a retail or wholesale commodity-based environment. It isn’t the same thing as a warranty in any other industry where the sum total of responsibility ends with pushing a part or a can or a bottle across the counter.

In a labor-intensive industry, you must first account for the inspection and testing required to isolate a failure, and then you must consider the labor required to remove that part and reinstall it.

When a labor-intensive component fails, especially if it fails prematurely, that failure brings with it a whole new universe of problems and challenges.

Customers have been inconvenienced twice, not once.

Communication can become strained, as disappointment and frustration begin to spiral out of control. The flow of work through the shop is disrupted, only this time without the profit and revenue stream associated with the initial repair.

And, everyone — shop owner, technician, motorist and parts professional — finds both trust and confidence put to the ultimate test.

It is at this critical juncture the battle is joined. Is the part warranted? Perhaps...it depends...well, maybe...and what about the labor? Warranty on labor? Don’t be ridiculous! Who wants to expose themselves to the liability associated with the diagnosis and installation of a failed or faulty part? Certainly not the people who built it.

If that sounds a bit cynical or sarcastic, I’m sorry (not about being cynical or sarcastic). After spending 40 years in the service industry, it is sometimes hard to rise above either.

After 40 years, I’m sorry there is little or no reason not to be sorry: It’s just hard to remain optimistic when it is obvious there is little or no appreciation or understanding for what it takes to keep the wheels turning in a shop like mine or the tens of thousands of other shops just like mine that make up the bulk of your constituencies.

Shop management 101

Rather than just whine about it, I’d like to offer you a few moments of “Automotive Shop Management 101: Where the Money Comes From,” in the hope that it will help you better understand why people like me go postal when the mere mention of warranty — any warranty: parts or labor — rears its ugly head.

First of all, the automotive repair shop is a factory bringing raw materials in the way of parts (that’s where you come in) and skilled labor (that’s where we come in) together in order to create a finished product: a motorist both confident and secure in the knowledge that they can go anywhere they may want to go and do anything they may want to do without having to worry about the machine that will transport them there or back.

Profit in the automotive service environment is the result of the sale of both those parts and that labor. It takes a certain amount of revenue to generate enough profit to “float the boat.”

Realistically, it doesn’t matter if that profit comes from the sale of your parts or from the sale of our technician’s time, or even what percentage of either exists so long as the profit is sufficient.

The current model for our industry suggests that labor should constitute as close to 60 percent of that mix as possible, with parts sales making up the balance.

Why 60 percent labor and 40 percent parts?

First, because the world in which we live has become exponentially more labor intensive with intermittent problems, multiple road tests, time for inspection, testing and diagnosis, and because there is generally a higher gross profit margin on labor, or at least there should be. But, frankly, if the numbers were reversed and 60 percent of the profit was to come from the parts and only 40 from the labor, and the total stayed the same, it would be hard to suggest the difference was meaningful.

In fact, all that really matters is that the profit generated per hour is sufficient. What impact does warranty have on the balance of parts, labor sales and profits? A significant one! When you remove one expression from the equation, you change the very nature of the equation. Remove the parts profit from the hour’s worth of work it takes to install a warranted part, and the profit per hour drops dramatically. Remove the labor profit from that same hour’s worth of work, and the loss is even more profound. When you are performing a repair under warranty, you are not generating revenue, you are consuming resources.

Reducing profit per hour

Even if you were to find yourself confident enough in your products to offer a warranty on labor in addition to a warranty on your parts, regardless of how generous or inadequate that warranty might be, the shop is still losing the revenue associated with the for-profit work it could have been doing during that same period of time.

In other words, any work performed under warranty, regardless of what might be covered, decimates profit per hour. I know because I’m going down that long, dark tunnel with an engine re-manufacturer even as I write this.

If your customers become a little restless when the subject of warranty comes up, it just might be because they actually understand the costs involved in executing warranty work, or because they have an innate, almost intuitive sense of what they are about to lose. Either way, they know what little profit they may have enjoyed installing the “widget” or the “whatsit” you supplied is gone — gone forever.

So I hope you won’t mind if I remain a bit skeptical when someone on your end of the telephone tells me not to worry because their parts, or even their labor, is guaranteed; because I know who the big loser is going to be if that guarantee has to be exercised on either.