Too many jobbers always approach the installer focusing on the parts pricing issue of the installer’s business, then wonder why the installer is only thinking about his discount on parts.
Many installers do not really understand the benefit to their business of a productivity increase in the bays, and how it does not require them to attract any more vehicles. When the jobber helps the installer understand this issue, it is amazing how the focus of conversations can change, and for the better of both parties.
One number the installer should know about his/her business is the average number of labor hours produced per work order (invoice). To calculate this number it is recommended that the installer take at least six months worth of activity. The longer the interval used, the more accurate the number.
First, take the closing number of the work orders and subtract the opening number. For example, the closing number of the work orders on March 31 is 22152 and the opening number of the work orders on the previous October 1 was 20804. The difference is 1,348, which means that 1,348 work orders have been written in the shop since October 1.
Second, add up the total dollar labor revenue billed in the shop from October 1 to March 31. For example, let us assume the total labor dollars billed is $97,056 for the six month period.
Third, divide the total labor dollars billed by the labor rate of the shop. For example, if the shop is charging $60 per hour, then $97,056 divided by $60 = 1,617.6 labor hours billed for the six-month period.
Fourth, labor hours billed divided by the number of work orders written equals the average number of labor hours per work order. In our example we would take the 1,617.6 hours billed and divide by the 1,348 work orders written, which equals an average of 1.2 labor hours billed per work order.
The typical shop in the marketplace is currently averaging between 1.2 and 1.5 hours per work order. We must get productivity of a garage to an average level of 2 hours per work order. That is the goal to be achieved.
The obvious question to be asked is “What is the effect on the shop’s net profit if we can get a shop to increase its productivity by 10%?” In our example, this shop is averaging 224.6 work orders per month (1,348 work orders written divided by six months) and averaging 1.2 hours of labor per work order at $60 per hour.
Without increasing the volume of work orders written and keeping the labor rate at the same charge-out rate, if we increased productivity by 10% from 1.2 hours to 1.32 hours per work order, the results to additional gross profit (and net profit) would be as follows:
The difference between the new productivity level and old productivity level is $1,620 per month. This will create an additional $19,440 gross profit and net profit from labor revenue alone for the shop in one year.
These figures are significant to the shop owner, and certainly represent substantially more monies earned than any discount on parts could ever contribute to the profitability of the shop. And this is before accounting for any gross profit earned from the added parts sales that would result from the increase in labor productivity.
Math is a very precise science. The numbers do not lie. Talk about how to slow the shop down and increase productivity per vehicle rather than spinning everyone’s wheels trying to bring in more volume of vehicles into the bays and take a further parts discount from the supplier. Let’s teach the industry to work smarter, not harder.
This is only the tip of the iceberg when it comes to understanding the effect of professional business management on an independent automotive maintenance and repair shop. The effect on true bottom line profitability is incredible, to the point where one can find an additional $30,000 to $60,000 of additional net profit in an average shop currently grossing between $400,000 to $450,000 in annual sales.
Imagine if each of your customers had an additional $30,000 to $60,000 net income to run their business with, and how that additional net income in their shop could change your business, the shop’s business and the independent sector of the automotive aftermarket industry as a whole.