Auto Service World
Feature   April 1, 2000   by Robert Greenwood

Management inertia hurts financial performance

Not charging what's economically sustainable undermines businesses, which means cut-rate pricing -- or not charging what's fair -- is a sure-fire business killer.; There's a pervasive and deep-rooted resistance among independent auto service professionals to charge what's fair. No one goes broke by charging the right price to deliver high level vehicle service, yet undercharging can be a killer, according to our latest business performance survey and analysis.


Things aren’t always as they appear. Take a close look at the following business performance results and analysis of the key elements.

Business performance results in the auto service industry look positive for the latter half of 1999.

According to SSGM’s exclusive survey from E.K. Williams & Co., some very interesting facts were revealed about the Ontario marketplace. A review of the latest results coupled with results from the first half of 1999 look quite positive when compared to the 1998 reports.

One could definitely get the impression that it’s time to celebrate with cocktails, and let the party begin, because 1999 could be perceived as a great year for the independent sector.

Here are some facts about certain categories that jump out and could have you draw the wrong conclusions:

The average shop has grown from 3.8 hoists to 4.1 hoists.

Sales per hoist have increased from $9,904 in 1998 to $12,440 in 1999, a 25% increase.

The owner has realized the value of getting out of the bays and being up front with the client base, as the boss’s bay time has dropped from a provincial average of 30% in 1998 to 25% in 1999.

Technician productivity grew strongly from an average of 53% in 1998 to 60% in 1999.

The metamorphosis, however, of the independent sector is happening very rapidly right before our eyes, and it is a shame this segment does not display a strong enough confidence to work together to really make a difference to the business.

Too many owners call themselves entrepreneurs, yet when the numbers are studied year over year in more detail, the industry has a huge problem of management inertia.

Independents, as a sector of the industry, seemingly, just do not want to change when change is necessary. We simply refuse to, yet everyone expects different results.

The numbers don’t lie; different results are not going to happen until we accept the surgery that is required, and then throw away the Band-Aids we have been using to keep the business going.

The costs of running this type of business keep mounting every year as technology keeps moving forward. Office technology, coupled with automotive technology, creates a challenge for any entrepreneur to master, in management skill and ability. Yet master it we must.

The average shop in Ontario is watching the total gross profit earned in the bays slide slowly each year, dropping from 58.9% in 1998 down to 58.2 % in 1999.

A minimum of 65% bay gross profit is needed to properly run this type of business and realize a professional-level return on investment in relation to the investment, liability exposure and industry risk that a typical shop is exposed to.

Technician productivity is frozen at 60% during the entire year of 1999. While it’s a good improvement over 1998, it needs further improvement. The technician productivity issue has become a serious management problem because it’s not growing fast enough to the required level of 70% to 75%. It’s not the technician’s problem. Consider the following:

Labor rates have increased only 2.1% over 1998 to an average of $61.78, yet based on technician wage costs in this province, it should have reached $68 to $73 for basic mechanical labor. The actual labor charged out to the customer/client is, once again, the root of the problem.

Management has acknowledged increasingly complex vehicle technology, the rising cost and proliferation of equipment, and a tremendous shortage of competent technicians with no sign of relief in the foreseeable future.

The depth of staff must grow to ensure vehicles are diagnosed and fixed right the first time.

Management also acknowledges that it must get focused on customer/client relationships and offer enhanced value services, including the personalization of a vehicle maintenance schedule, allowing to properly manage the customer/client’s vehicle.

Despite agreement to all these issues by the majority in the industry, we dramatically fail to solve the major problem. That is, to charge the customer adequately.

Independents must have greater belief and self-esteem. Management is not charging the right labor component, yet some shops post what is perceived as a higher labor rate.

It seems owners feel guilty about charging the right labor component to a customer/ client. They know they should be at $68 to $72 (3.75 times the technician’s hourly wage) for basic mechanical work, but have a tough time with those numbers, as it has risen too fast behind the shop owner’s back.

Overall, the industry has done a poor job educating the consumer on the facts and issues about rapidly rising costs for professional automotive maintenance. As a result, management has allowed the client “off the hook this time”, and thinks, somehow, he will get by at $62 per hour.

Management must charge the customer/ client the right labor component required to do the job right and create gross profit and net profit for the shop. Otherwise, why be in business?

By not raising rates and getting all the client’s business, technician productivity will seem to stand still, as it is, causing cash flow to remain tight and preventing the acquisition of new equipment and facility upgrades. A further result of not raising labor rates is that the total gross profit percentage of the shop continues to drop because parts gross profit (as predicted) is continuing to drop.

Yet as expensive as some components are, they are being sold, creating an overall increase in sales per hoist. However, the labor component is not growing proportionately to those types of sales requiring technical expertise.

Management, in the end, still comes out swinging that it is everyone else’s fault the shop is not producing and realizing the correct total gross profit percentage. Yet if management is not going to charge the customer/client an adequate amount, then it is time for management to face itself in the mirror to find the answer and resolve this issue.

Higher cost justification may require educating the customer/client as to the value of the work performed on their vehicle.

So much of the time spent resolving automotive repair and maintenance issues revolves around a technical knowledge-based service. It may be a good time to channel some marketing funds into producing professional communications literature for the purpose of educating customers so management will gain the confidence to charge for knowledge-based expertise services that are rendered.

INDEPENDENT GENERAL AUTOMOTIVE REPAIR SHOP
1999 STATISTICAL REPORT
Location Oil Tires Battery Parts Total Ave # of Avg Total Avg # of Avg Mnthly % of Time Avg Labor Hourly Parts Sales Dealer Avg % of
GP% GP% GP% Acc. Bay Hoists Monthly Full Time Labour $ Per Owners Productivity Mechanical Aftermarket Parts Parts Purch.
GP% GP% Per Shop $Sales Per Technicians Technician Working in % per Tech Labor % % From Main
Hoist (Lift) Bays Rates Supplier
Southern 47.1 19.6 30.2 29.5 58.0 4.1 $10,102 3.09 $5,906 29 59% $58.60 84.9% 15.1% 66.7%
On
tario
Central 45.0 22.5 28.0 32.0 57.1 4.0 $12,743 3.56 $6,241 25 55% $66.24 78.2% 21.8% 64.1%
Ontario
Eastern 50.5 23.8 33.3 33.9 59.5 4.2 $14,475 3.91 $6,839 22 66% $60.52 80.5% 19.5% 69.5%
Ontario
Province 47.5 21.9 30.5 31.9 58.2 4.1 $12,440 3.28 $6,328 25 60% $61.78 81.2% 18.8% 66.7%
Averages

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