What You Treasure, You Measure: Tracking Key Performance Indicators
Even when you donít think there is room to grow your profit, there is.
The New Year will be here soon and I want to challenge you to closely monitor your numbers in 2012.
As you put the finishing touches on your 2012 business plan, be sure it includes keeping track of three key performance indicators: gross profit, parts to labor ratio, and work mix (see graphic for mathematical formulas).
Labor sales (retail price paid by the customer) minus technician pay equals labor gross profit. Parts sales (retail price) minus cost of goods equals parts gross profit. Gross profit is defined as “money to pay the bills” (such as utilities, rent, advertising, etc.) The benchmark for labor gross is 70 percent and parts gross is 35 percent.
At the risk of sounding simplistic, there are only two ways to increase your gross labor percentage: charge the customer more or pay the tech less. Don’t shutter at the cost of raising your prices; as long as you don’t go crazy, an extra $5 to $10 on a maintenance service won’t scare customers off — and it will have a dramatic impact on your bottom line. The issue isn’t about having the lowest price; it’s about having the highest quality and the highest value. Quality and value always trump price.
That said, you may want to try a different approach to increasing your gross. Why don’t you use a lesser-paid, lesser-skilled tech to do your less-technical maintenance services such as tire rotations, wipers, belts, hoses and fluid exchange services?
For example, calculate your gross profit using your current labor rate for a fuel injector cleaning service if you pay a top tech $25, for example, to perform the service. (Example: Labor rate minus $25 equals X. Then, divide X by your labor rate.) Now, calculate your gross profit using the same labor rate, but paying a lesser skilled tech $15 to do the same service. Without compromising the safety of the repair, these differences can significantly impact your bottom line over time.
Parts to Labor Ratio
Let’s begin this discussion with an example: I recently ran the numbers for a shop that had a total annual income of $770,000. Parts sales totaled $485,000, and labor sales totaled $285,000. Therefore, their parts-to-labor ratio was 1.7:1.0 ($485,000 ÷ $285,000 = 1.7). In other words, for every dollar of labor they sold, they were selling $1.70 parts.
What’s the problem? The problem is their shop made a whole lot more gross profit on labor than it did on parts. Their parts sales of $485,000 produced 35 percent gross ($169,750), while their labor sales of $285,000 produced 70 percent gross ($199,500). Therefore, their total gross profit was $369,250.
The benchmark is 0.8:1, meaning for every dollar of labor sales, you should have $.80 in parts sales.
The lower the parts-to-labor ratio is, the more money you’ll make!
A high parts-to-labor ratio shows a shop is doing a high volume of repair work and very little maintenance. Maintenance service is always more profitable than repair. As an example, if you sell a power steering fluid exchange for $100 ($45 parts and $55 labor hypothetically), then your parts to labor ratio is 0.8:1.
So, how do you lower your parts-to-labor ratio, and hence, make more gross profit? You do it by selling more maintenance services! I’ll say it again: labor sales drive parts sales. The more maintenance service work you do, the more highly profitable labor you’ll sell.
Let’s go back to my example above. This service center is located in a fairly depressed area with a stagnant economy and pretty high unemployment. The owner didn’t really think he could increase his revenue more than the $770,000 annual amount. He felt like that was all the revenue his community could produce.
Okay, fine. So how could he take more money to the bank? One solution would be sell more maintenance services and perform less repair work. Here’s an example: If his labor revenue was $485,000, then his gross profit would be $339,500 (70 percent gross). If his parts revenue was $285,000, his parts gross would be $99,750 (35 percent gross). Therefore, his total gross profit would have been $439,250. In other words, his revenue ($770,000) would be the same, but his gross profit would go up an extra $70,000.
By the way, his parts to labor ratio would be 0.58:1. When the top line (total revenue) stays the same, and the bottom line goes up by $70,000, well, that’s a beautiful thing.
Your service center only performs three types of service: oil changes, repairs or maintenance services. That’s it. Every service (line item) goes into one of these three “buckets.”
You can’t control how often someone needs an oil change. The 3,000- to 5,000- mile window only comes around so often, and you can’t speed it up. You can’t control when something on a customer’s car will break. It is fate. Repair happens after something breaks, and the timing of when that occurs is out of your control.
Yet, you have complete control of the maintenance services you recommend. Maintenance is the most noble thing you sell in your shop. Maintenance is always cheaper than repair because when a car is properly maintained, the odds are it won’t break.
Refer to the graphic, and run the numbers on your work mix. The benchmark is to have maintenance service work produce over 50 percent of your shop revenue.
In conclusion, let me encourage you to evaluate 2011 using these key performance indicators. Then set your own benchmarks for 2012, track them monthly, and reward your employees when they hit the target. Call or email me if you need any help.
Editor's Note: This article is one of several management articles that will be contributed to AutoInc. this year by Automotive Management Institute (AMI) instructors. In 2011, AMI's knowledgeable instructors will continue covering a variety of topics designed to educate and train today's service and repair professional in AutoInc. To learn more about AMI, its courses and instructors, visit www.AMIonline.org. AMI administers the distinguished Accredited Automotive Manager (AAM) program.
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