Key Highlights
- Prioritize employee respect to foster a happier, more productive workforce that benefits customer satisfaction and business success.
- Use RPE and PAPE as key KPIs to measure and improve employee efficiency and profitability in auto body shops.
- Shift Problem-Creators into Problem-Preventers and Problem-Solvers to reduce waste, firefighting, and increase net profit margins.
- Higher RPE and PAPE ratios correlate with more profitable shops, as they indicate better resource utilization and employee development.
- Leadership should focus on observing, asking questions, and tracking these KPIs to continually improve shop performance and employee engagement.
Last month, we discussed three different types of employees: Problem-Creators, Problem-Preventers, and Problem-Solvers. We then discussed ways to help move the Problem-Creators into at least the Problem-Preventor category or better yet, into the elite Problem-Solver club.
What shop owners and managers often forget is this: The more we respect our employees, the happier they will be working for us. In turn, our employees will take better care of our customers. Here is the order: First, employees, second, customers, and third equals a thriving business. It MUST stay in this order. Honda Motor Co. even has this order posted in many of their factories.
There is a business key performance indicator that every body shop on the planet should be monitoring IF they want to achieve an annual 20%+ net profit. Unfortunately, I must live on a small island, as most of the body shop industry totally misses this! It’s called RPE: Revenue Per Employee. It’s a meaningful KPI, because it measures how efficiently each shop utilizes its employees. Ideally, a shop wants the highest ratio of RPE possible, because the higher the ratio, the greater the productivity per employee. RPE also suggests that a shop is using its most valuable resource — in this case, its investment in human capital — wisely by developing/training employees to become VERY productive. Thus, shops with high RPE ratios are more profitable than shops with a low RPE.
Now let’s look at some actual numbers.
Low RPE, AL’s Auto Body: Gross sales of $5,000,000. Employee head count: 20. Revenue Per Employee $5 mil / 20 = $250,000 per employee
Middle of the road RPE, Bob’s Auto Body: Gross sales of $5,000,000. Employee head count: 16. Revenue Per Employee $5 mil / 16 = $312,500
High RPE, Charlie’s Auto Body: Gross sales of $5,000,000. Employees head count: 12. Revenue Per Employee $5 mil / 12 = $416,667
So, why should one care whether we have 20, 16 or 12 employees if each shop has a 20% net profit, you’re wondering? The reality is this: most of the Al’s shops across the nation are making more like a 10% or less net profit (in a good year), compared to the Charlie’s shops that are more likely making a 20% net (in most years). Why, you ask? Al has more Problem-Creators and Charlie has more Problem-Solvers. Al’s fewer elite Problem-Solving employees’ time is being taken up by putting out the fires their fellow Problem-Creator employees are starting. It’s just a vicious cycle of wasteful activity at Al’s shop. Meanwhile at Charlie’s shop, Problem-Solvers are spending more of their time solving new complex problems, such as dealing with insurers that won’t pay for “X” or an OEM now has a new safety inspection needed, etc.
Food for thought: I would trade two Problem-Creator employees at $75k each in payroll per year for one rockstar Problem-Solving employee at $150k, all day long!!!
An additional KPI that the industry total misses is Payroll Available Per Employee (PAPE). Take the example Charlie’s shop from above, at $5,000,000 in gross sales. To maintain a 20% net profit, Charlie’s technician’s payroll would need to be around 15% of gross sales, plus admin payroll of around 11%, for a total of 15% + 11% = 26%. Therefore, total payroll available for Charlie’s $5,000,000 shop would be $1,300,000.
So, what is the available PAPE between the three above example shops?
Al’s Body Shop: $1,300,000 / 20 employees = $65,000 avg. wages per employee
Bob’s Body Shop: $1,300,000 / 16 employees = $81,250 avg. wages per employee
Charlie’s Body Shop: $1,300,000 / 12 employees = $108,333 avg. wages per employee
If a new hire was trying to decide for long term employment between all three shops, which one do you think they would choose: Al’s, Bob’s or Charlie’s? It doesn’t take Einstein to figure out Charlie’s is the place to be, as this shop pays between $27K to $43K more in average wages per employee per year. Along with that, Charlie’s shop has less firefighting, less stress and each employee have more satisfaction driving home knowing they had a very productive day! Disclaimer: Al’s shop may have a $2,000,000 payroll, thus have a PAPE of $100K. The catch is Al is broke, and Charlie is not!
The reality is this: everyone in the shop is busy, but the more important question is whether everyone is doing something that would be of value to the customer! Leadership’s primary role should not be giving answers but instead observing and asking more questions. For the leaders reading this two-part series, I would run your RPE & PAPE #’s to see where you fit into these three comparison shops. Then track them going forward to drive them both up. It’s time to work with Problem-Creators to help move them into at least the Problem-Preventer, or better yet, the Problem-Solver category!!