Articles

You’ll be shocked to learn how much more your dealership could be making on labor The one area in which equipment dealerships can differentiate themselves in the marketplace is through service. Unfortunately, we have not been alone in the service market-and are getting more challenges every day. From customer mechanics to independent mechanics to specialty repair shops to independent maintenance companies, we face a host of competitors. The one thing that sets us apart is the OEM brand.

However, that distinction alone will not protect us. We must be very good at what we do: consistent in turnaround time, extremely high in quality of repairs, strong on our ability to meet quoted prices. But we also have to make a buck. Managing a repair facility where there is no one to bail you out if the job gets too difficult is not easy. It’s even harder to make money at it.

So let me ask you a question. How efficient is the labor in your dealership? How efficient are your mechanics? Do you know? What percentage of that labor is profit? Keep that percentage in your mind as we go through the rest of this column.

Consider the product you’re selling and on which you must make money: labor hours. You pay for these hours for 52 weeks at eight hours a day. How much of that time is actually billable? Yes, you have to give your mechanics an annual vacation: two weeks or more depending on seniority and your dealership’s vacation policy. There are statutory holidays to consider as well, which could mean another 10 days. Then there’s sickness, jury duty, bereavement, etc., which could add another week.

And does your dealership provide training? The AED Foundation’s goal of 40 hours per employee per year is pretty low when it comes to technical training for mechanics. Most dealers provide another two weeks of training time to keep their mechanics current (and this will become more of an issue over the next five years with the increasing proliferation of new models of equipment).

That adds up to seven weeks a year that you pay for but get no income at all-and that’s a conservative estimate if your staff is young. More typically, you’ll see three to four weeks of vacation and increasing absenteeism. So let’s say that eight weeks of the year are nonbillable and 44 are billable. This means that before we turn even one wrench, no more than 85 percent of the hours paid are billable. So now we have billable hours.

Did your labor efficiency number take this into consideration? How much of the mechanical labor that you pay for is billable?

Now let’s move on to labor efficiency.

There’s a very simple way to calculate labor efficiency. It’s not precise, but it’s close enough for our purposes. Determine the average wage that you pay your mechanics by adding up the hourly rates and dividing that number by the number of mechanics. Do the same thing for your service prices. If you have different rates, you’ll have to determine what portions of the business are done at which rate.

To determine gross profit, subtract the average cost from the average selling price. Then divide the gross profit by the average selling price and determine the gross profit percentage. This is your gross profit potential.

Check your monthly operating statements to see what the actual gross profit was last month. Divide the actual gross profit by the gross profit potential and you’ll have a labor efficiency figure.

What do you think of the number you’ve come up with? How does it compare to the one you came up with at the beginning of this column?

Now let’s apply this principle to the concept of profitably managing a service department. Multiply the labor efficiency number by billable labor hours. The result probably is not pretty, because it shows you how little of the work that you do is work on which your dealership makes money. It also gives you an idea of how many more mechanics you have on the payroll that you could use if the shop were managed as effectively as possible.

Am I starting to get through? Your service department represents a terrific opportunity to make money. Shouldn’t you be taking advantage of this opportunity?