MYOB: Teaching the Installer the New Math

Many jobbers constantly have a problem with the installer always dwelling on the price issue of their parts. The reason for this is that most installers do not know how to measure their business properly; consequently, in their mind parts and hard goods are the main item to drive the profit of the invoice and their shop overall.

Installers have a tendency to always measure their business by average sales per work order. They assume that if the average sales per work order goes up, they will automatically make more money. It has been proven repeatedly that this is not necessarily so. It is very important to increase the productivity per work order to drive a strong bottom line in the shop.

To test your installer, simply ask these questions:

Do you know what your average labor hours billed per work order/invoice are?

Do you know what your average labor hours billed per month are?

Are your labor hours billed up from the same month last year?

The installer may reply “You mean sales?” If this is the reply, or the reply is “no,” then there exists an opportunity for you to bring some value to him and show him the importance of these very measurements.

First, show the installer that if he takes the total labor revenue billed for the last year and divides it by the shop’s labor rate, that number will equal the Total Labor Hours Billed/Sold.

Second, take the closing work order/invoice number and subtract the opening work order/invoice number, to obtain the Total Work Orders/Invoices Written.

Third, divide the total labor hours billed by the number of months being measured and to find the Average Labor Hours Billed/Sold Per Month.

Fourth, take the Total Labor Hours Billed/Sold and divide it by the number of work orders/invoices written, which gives you the Average Labor Hours Billed/Sold Per Work Order.

Example:

Joe Average Shop

Shop labor rate is $65

Total labor revenue last year was $360,000

$360,000 divided by $65 = 5,538.46 (labor hours sold)

5,538.46 divided by 12 months = 461.54 (average labor hours sold per month)

Total work orders/invoices written last year is 4,279

5,538.46 divided by 4,279 = 1.29 (average labor hours sold per work order)

Once these numbers are known, then the real profit issue can be focused upon.

The Average Labor Hours Billed/Sold Per Work Order/Invoice in an average automotive service shop should average a minimum of 2.0 hours or more. In a service shop that sells tires wholesale and retail, this number should average between a minimum of 1.0 and 1.10 or more.

When the number of labor hours are lower than these guidelines, it normally means the shop is too busy driving the volume through and not managing customers’ vehicles. They are missing a substantial amount of work on their customers’ cars or light trucks, and it is time to slow their processes down and examine their internal system for dealing with their customer base.

Consider what the manufacturer’s maintenance schedule is for an average vehicle in the $20,000 to $50,000 range.

If a customer sees the installer four times a year for service and the shop is averaging 1.29 labor hours per invoice, what they are saying is that it only takes 5.16 labor hours per year (1.29 X 4) to service and maintain these vehicles to 100% manufacturer’s specs. Is that all it takes to maximize the life of the vehicle? I have spoken to hundreds of competent technicians and they all agree it’s just not possible.

When labor hours are being missed or not billed out, then the profit of the shop is truly suffering and the installer will look to the jobber as the natural source for more income. The sad part is that this route, relying on the jobber’s parts prices for income, in no way comes close to the real income lost for not focusing on the right issue.

Consider that the Joe Average Shop used in our example, which sold $360,000 dollars in labor in one year, most likely sold about $360,000 in parts and “other stuff” (a 1:1 ratio). Consider that if the installer’s average gross profit on those parts and “other stuff,” came in at approximately 35%, it would mean he had a cost of $234,000.

If you gave that installer a whopping 10% more off on those parts (I know that is ridiculous because you’re at your limit now), that would only drive $23,400 to the installer’s business (and Joe would probably figure he’d won big).

But if Joe Average slowed down and increased his productivity by half an hour per vehicle on average per work order at a labor rate of $65, and 4,279 work orders were written for the year, it would drive $139,067.50 additional profit to the bottom line. (1/2 of $65 = $32.50 multiplied by 4,279 work orders = $139,067.50).

This is not rocket science. However, I find too many jobbers not willing to discuss the real issues with their customers, as they themselves just want to talk about “sales” and “deals.” That attitude could be the reason for your own problems. Consider that if productivity per invoice goes up, then hard good sales go up per invoice. Consider that if there is more productivity and sales per vehicle then, in essence, your store makes fewer deliveries, but drives more volume per delivery, which leads to efficiency and profit increase on your side. This is a win/win situation.

Prove it to the installer with the math, and in terms that the installer really understands, namely, his own shop numbers. If you don’t have the relationship of trust in place with the installer for him to reveal certain shop numbers, then consider giving him the formulas laid out on a sheet of paper, and asking him to do an overnight homework exercise. The next day, make an appointment to go over the numbers and review the productivity results, pointing out what could be accomplished with a half hour increase in productivity.

Consider the results even if only half of the objective was accomplished.

Parts and hard good commodities have their limits in driving profit in an automotive shop. Highly profitable shops are not in the volume game. They are in the service/quality game per customer. It’s the value game. For the installer to truly offer service and quality and value to his customer base he must learn to slow down and get focused on whom he is selling to. He needs to define the maintenance needs of the customer’s vehicle, based on the customer’s expectations with the vehicle and how it is being used.

As you can see, there is a great incentive for both parties to have an excellent working relationship in place so that real business and profit issues can be jointly discussed.

Both parties win when a business relationship is approached in a fashion where the intent is to help the other person first.