By Ed Kovalchick, CEO & Founder, Net Profit Inc.
With expenses constantly rising in all categories, except the loaner and advertising credits, digging out some additional gross profit in all categories of fixed operations sales is getting more and more vital. If you are experienced, you know that in this world a shrewd financial adjustment here and there is a reality which can add up to an impactful amount. Seldom are there massive aggregates of secreted gross profit dollars there for the taking, like a fully stocked treasure chest from the sea. It’s more like a variety six-pack from 7-Eleven.
There are a bevy of sales accounts to consider for gross profit improvement in the fixed ops: multi-customer pay types; warranties of various categories; internal workings; sublets; materials use; wholesale considerations; retailing; GOGs (a little outdated); insurance discounting; tires (OK, just kidding); and the all-time gross profit nemesis, accessories. Picking up a buck or two or three in many or most of these accounts, at the volumes many stores generate, can be weighty and well as refreshing.
Some Service Thoughts
The cost of technician labor can be influenced in many ways. Decades ago, the standard was to pay techs hourly, which morphed into a percentage of what was produced. That initiated at some 50 percent after “The Big One,” which remained fairly stable until the upheaval early 60s (the birth of serious dealer competition), when that percent began dropping to 45, then 40, and eventually, the idea of flat-rate pay was hatched.
Flat-rate pay is now prevalent, except for “lube” techs (I hate that degrading designation, preferring “maintenance” techs as they are termed in Europe), who have changed over to hourly rates primarily because there are few solid scheduling controls for maintenance-only work these days. Now, people show up with excessive expectations, and then get pissed off sitting around; however, the good news is, no appointment needed, and there are doughnuts.
Smart management applies a variety of flat-rate dollars based on skill levels, experience, certifications, and how many times the tech ticked off the super. Of course, the really smart exec studies the true work mix to determine the amount of work skill he/she really requires regarding diagnostics and related repairs, heavy line drive components, light line components, and maintenance ops. Staffing to that result usually lowers the cost of sale nicely vs the overall effective labor rate, while providing an exciting vision of growth for the techs, something we are generally pathetic at providing, to say the least.
Speaking of labor rates, I find that studying them closely reveals underlying issues lowering them too often. Even the warranty rate is effective in reality, not the so-called actual warranty labor rate. Pay a few techs extra flat rate or fat-flag tickets before they are labor op finalized, and walla, a lower rate prevails. If your team has created discount junkie customers over the years – get on the Everyday Low-Price Chuck Wagon now, otherwise forgetaboutit. I could write an “If you…, then you might have a low ELR bit” – such as, “If your advisors make copies of coupons on your copy machine regularly, you might have a low ELR.” And there are so many more.
A wise test is to do an RO survey to check applied labor pricing versus the flat-rate paid every week – CP, warranty, internal – a sample of ten or so per author will do the trick. You won’t regret completing this petite study my friend.
Some Bodyshop Thoughts
Mining every last flat-rate hour floating around in the bodyshop is mandatory as all BS bosses well know. Amazingly, when I began in the repair business, the body rate was higher than the service labor rate – no poo. Since the 1980s that keeps changing for the worse, to the point that in some cases the service rates are some $100 per hour higher than what insurance will cough up.
Tech output is absolute king make no mistake, but capturing admin time, estimating total – no fix time, and performing scanning by estimators or managers at an hour a hit, before and after, is making a big difference for some aggressive estimators. Basically, stop giving it all away. In one shop we raised the labor rate about $3 an hour a year ago and kept the added gross to cover the ever-rising expenses and boat payment. All but a couple of insurances went along thankfully.
Another key area to help with labor cost of sale is to break out prep from actual painting time, which is about 60 to 75 percent of the total paint flat rate. An example is two lower-cost preppers team with the master painter dude, and by averaging the flat-rate pay rates that lowers the cost of sale, even after a nice FRH raise for the guy with the gun. Most painters want to paint anyway, not play sandman, and not doing the painting cycle is a waste of real talent.
Also, a clever clock hour tech pay plan can reap great benefits to the labor margin, while making the techs feel comfy. Adding production bonuses is the sweet motivator while keeping the cost of sale sane.
Parts Thoughts
Intriguingly, an independent shop can enjoy a more than 55 percent parts gross profit margin, after the end-of-month-volume and early-pay extras, while franchised dealer CP service parts are too often lower than the measly 40 percent margin, the standard resulting from a rounded off 1.67 typical manufacturer markup. Of course, independent shops are paying far less for OE equivalent or superior parts in many cases, which allows the typical “double the cost” most calculate – a 50% margin to start the show.
A profitable approach many parts gurus take is to apply a pricing matrix to non-competitive parts, which manipulates parts markup on a curve based on the cost. Family parts pricing on everyday items creates a better margin when applied properly, and of course, volume purchasing discounts can have GP benefits if one doesn’t get silly, such as buying a two-year supply of muffler bearings. I also find that counter people are quick to hand out discounts in the retail arena for no particular reason, rather than justifying the pricing structure if pressured, while wholesale discounting in some metropolises has reached an insane 40 percent (no kidding) from retail. Here, Sundays are spent at the altar praying that the factory will continue sending so-called “back money;” otherwise parts manager will begin fleeing to sanctuary cities in droves.
Calculate This
I was thinking that it would be beneficial for you to make a few easy calculations in various labor and parts accounts, just to see what gross profit growth opportunities may be available after some pointed tweaks. To that end, I created a simple-to-use Excel spreadsheet you can play with to examine the impact of margin adjustments in various parts and labor accounts. If you want a copy, email [email protected] with the subject line: “Calculating More Gross Profit-Why Not Nosy.” You may be quite surprised at what a few crafty adjustments can create in additional GP to cover those ever-increasing nasty disbursements.
As the late great comedian Nipsey Russell once noted, George Washington threw a silver dollar across the river and politicians have been throwing away money ever since – so don’t be a politician. Keep it for yourself instead!
About the Author
Ed Kovalchick has traveled the world training and consulting in fixed operations for manufacturers and dealers. His extensive background includes master technician status, independent shop owner, dealer with all Chrysler & Nissan franchises, and founder of Net Profit Inc., fixed operations consulting and training. He is a graduate of the University of Louisiana and has served as state president of the Automotive Service Councils, and the advisory boards of Wyo Tech and Virginia College. He has been a regular columnist and conference presenter with Dealer Magazine since 1995. EMAIL: [email protected].
