IN THE FIRST OF A SPECIAL SERIES, JIM BELL LOOKS AT KEY PERFORMANCE INDICATORS THAT CAN MAKE OR BREAK YOUR SERVICE DEPARTMENT WHEN IT COMES TO PROFITABILITY
Today, more than any time in the history of the automotive industry, it is important to have a service manager who understands the financial Key Performance Indicators (KPIs) and how to keep them on target.
Information technology has made it easier to monitor many of these accounts, but it is still amazing how many managers appear to lack a full understanding of how they impact profits and can chew up the bottom line.
In visiting dealerships, we constantly hear comments like this, “our sales are only down slightly over last year but financially it appears we are hemorrhaging, why is our bottom line so weak?” The problem is often caused by several accounts being out of line resulting in small amounts of bleeding rather than one account losing so much blood it looks like a murder scene.
We have spent several decades on the road working with the best of the best, those managers who seem to be able to do no wrong when it comes to running a profitable service department. We have also worked with those managers who don’t know where they are going or how to get there, but they can tell you a number of reasons why things can’t be done to improve their own operation.
PROVIDING FEEDBACK
So why is it, with financial information so easily available to today’s service managers, via computerized accounting systems, that few managers fully utilize this resource? You should be driving your business by measuring critical areas of the service operation on a daily basis and putting processes in place, making all the staff accountable for producing the numbers. We believe that the number one job of a service manager is to give daily feedback on how the department is performing.
If you want poor service department performance, here are six KPI indicators guaranteed to lose money in the service department.
1. Gross Profit to Customer-Paid Labour under 70%;
2. Customer-Paid Parts to Labour ratio under 60%;
3. Personnel Expense over 45% of Gross Profit;
4. Other Supplies above 2% of Gross Profit;
5. Policy Work (or comebacks) over 2% of Gross Profit;
6. Average Hours per customer-paid work order under 1.6 hours.
At the end of the day, remember this: The only thing you have to sell in the service business is time or hours — you either sell it or you eat it! If you don’t measure it, you can’t manage it! When you sell the time, how many dollars fall to the bottom line depends on how well you manage and control expenses.
In defense of your hard working service managers, I must say if we trained airline pilots the same way we trained service managers I would be staying home and not living under a flight path.
EDUCATION IS KEY
When was the last time your service manager attended a bottom-line-driven seminar on being proactive in today’s marketplace? There are times when we work with hard working managers who want to get the job done, but are still not sure of what makes up a good or bad industry number.
Over the next few issues, we’ll take a closer look at each of those six KPI indicators and ways to lose money. We’ll start with gross profit margins on customer paid labour.
Final thought: Customer traffic was slow again in some market areas last year — but this should not be used as a crutch, or reason for having a poor month! How did your service department perform on those six accounts? These numbers are directly controlled by management. If you’ve got low gross profit margins on labour, the parts and labour ratios are out of whack, and low hours per work order, etc., all you’re doing is screwing up the little traffic you do have.
Here is a classic mistake — the service department increases the door rate and pays an hourly rate increase to the technicians, only to find out that the gross profit percentage on customer paid labour decreased. The question is what caused the problem? Did someone forget to increase the menu pricing which can account for 70 per cent of the business?
JAMES JR. TIP OF THE MONTH:
Review and update the service department’s pay plans if they do not currently reflect the challenges of today’s business environment. As an example, we frequently find service advisors being paid for parts sales which are mostly captive, but nothing based on hours per work order which is often the biggest money maker.
Have you looked at your customer paid labour gross profit margin lately:
• $85,000 CP labour with 66% gross profit = $56,100
• $85,000 CP labour with 71% gross profit = $60,350
That is $4,250 more dollars per month or $51,000 per year to help pay the expenses for running the department. We will be discussing this important measurement in the next issue.
