MYOB: Playing the Percentages How Productivity Outstrips Price In Profit Potential

Many jobbers and their sales representatives run into a brick wall with their installer customers when it comes to the topic of productivity.

If the jobber asked his customers, “What would you prefer, another 10% discount on your parts or a 10% increase in productivity?” 90% or more of the installer customers would want a further 10% discount on their parts. The reason for this is simple. No one ever taught the installer what the bottom line benefits are to increasing productivity. It is time for you to help the installer understand the merits of productivity gains, and understand what kind of real money can be made by focusing on the right issue.

The following is an example of the gross profit and net profit that can be made through increased productivity.

Let’s look at a shop with the following assumptions:

The shop has three full time class “A” (S & T) technicians

The current shop labor rate is $60 per hour

The shop operates 5 days per week (Monday to Friday)

The shop’s efficiency rate is 60%

Technicians are available for work 44 hours per week

Technicians work 50 weeks per year

Technicians are paid based on a guaranteed hourly wage

What would happen to the gross profit and net profit of the operation if management got focused and was able to get each technician to bill one more hour of labor per day over their current average?

Answer:

$60 per hour labor rate x 3 technicians = $180 per day

$180 per day x 5 days per week = $900 per week

$900 per week x 50 weeks a year = $45,000 per year more gross profit.

Since there is no additional cost for getting the technician to bill one more hour per day, the $45,000 also becomes additional net profit.

This simple exercise points out the need for the repair business owner to slow down and see what his people are doing today. What is the installer’s system for inspecting a vehicle when it comes into the bay to ensure all available work on that vehicle is found and sold? It would obviously take one heck of a lot of work to make an additional $45,000 in gross profit by selling parts. I think it makes more sense to work smarter, not harder. Even if the installer only accomplished half of this objective, the bottom line results cannot be ignored.

2. What would the results be to the gross profit/net profit of the shop if the shop raised its labor rate by $5 per hour? In other words, it went from $60 per hour to $65 per hour in its labor rate?

Answer:

In the example, we said the shop is operating at 60% efficiency, which in essence means, a technician who is available for 44 hours per week is billing out 26.40 hours per week (44 x 60%).

26.4 hours billed per week x $5 per hour increase = $132 per week additional labor per tech.

$132 per week x 3 technicians = $396 per week in total additional labor income

$396 per week x 50 weeks per year = $19,800 additional gross profit/net profit to the shop.

There is no additional cost to raising the labor rate by $5, yet again, the results for the bottom line can be significant.

It is important to discuss such matters with the installer because by doing these exercises the focus shifts away from the parts issue, where the additional profitability opportunity can really be limited, to the productivity issue of the shop’s people, where the opportunity for significant gains can be very real.

Consider that, according to our June 30, 2000 Ontario survey, the average installer was working at 60% efficiency. Consider that the average shop’s labor rate was $62.17 per hour. Consider that the average shop had 2.85 full time technicians. Consider that more than 80% of the independent shops pay their technicians a guaranteed hourly wage based on 44 hours per week.

Now consider that the average shop should be working at 75% efficiency minimum, and the average Ontario labor rate at June 30, 2000, should be $72 per hour.

As you can see, the numbers above are not fictitious; they are very real. Based on these numbers alone, the average installer could turn his shop’s profitability around if he got focused on the real issue of our industry.

Help your installers move forward: show them the benefits of increasing productivity using their numbers, instead of complaining about margins on parts using your numbers.

Robert (Bob) Greenwood is president & C.E.O. of E. K. Williams & Co. (Ontario) Ltd., which has six offices across Ontario specializing in business consulting and training in the independent installer sector of the automotive aftermarket. Bob also works with jobbers to understand the installer side of the industry and address what is required from both parties to set up a relationship that grows future business. E. K. Williams (Ontario) Ltd. is on the Internet at www.ekw.ca. Questions and inquiries can be made in full confidence via fax c/o Jobber News (416) 442-2213 or via e-mail to aross@southam.ca.