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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?
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