Too many HD parts suppliers always approach the HD service shop owner discussing the parts price issue of what they offer, and then they wonder why the shop owner is only thinking about price and possible further discounts on parts.
Many HD service shops do not really understand the benefit to their business of a productivity increase in the bays. Our HD industry has always spoken about top line activity rather than bottom line focus. When the HD parts supplier brings additional value and helps shop management to understand this issue, it is amazing how the focus of the conversation can change, and for the better of both parties. Does your HD parts supplier bring HD shop Business Management courses to your area?
It is critical to understand that the HD shop is not in the commodity business like a parts supplier but rather they are in the knowledge business. The shop must diagnose the HD vehicle problem and set up the relationship with each client in order to obtain the proper labor hours billed to the client ensuring the vehicle is maintained in accordance with the manufacturer recommendations, is safe and reliable for the client and have the shop service levels exceed the client’s expectations.
One important number the HD service shop should know about their business which measures whether the shop is achieving the right HD vehicle maintenance service levels with each client is the average number of labor hours billed per repair order.
To calculate this number it is recommended that you take at least six months’ worth of labor sales. The longer the time frame measured, the more accurate the number.
First… take the closing number of the invoice and subtract the opening number. For example the closing number of the invoice at December 31 is 22474 and the opening number of the invoice on June 1 was 21872. The difference is 602 meaning that 602 RO’s have been written in the shop since June 1.
Second… add up the total dollar labor revenue billed in the shop from June 1 to December 31. For example, let’s assume the total labor dollars billed was $227,056 for the six month period.
Third… divide the total labor dollars billed by the labor rate of the shop. For example if the shop is charging $90 per hour, then $227,056 divided by $90 = 2,522.8 labor hours billed for the six month period.
Fourth…labor hours billed divided by the number of invoices written equals the average number of labor hours per invoice. In our example we would take 2,522.8 billed divided by 602 invoices written, equals an average of 4.2 labor hours billed per invoice.
The average HD shop in the marketplace is currently averaging 5.3 to 5.6 hours per invoice. The industry must achieve a productivity level average of 8 to 10 hours per invoice to provide the professional HD vehicle maintenance to the commercial client. That is the goal to be achieved.
The obvious question to be asked is “What is the affect on the shop’s gross profit and potential net profit if we can get a shop to increase their productivity by only ten percent to start?” In our example, this shop is averaging 100.3 invoices per month (602 RO’s written divided by 6 months) and averaging 4.2 hours of labor per RO at $90 per hour.
Without increasing the volume of RO’s written and keeping the labor rate at the same charge-out rate, if we increased productivity by 10 percent from 4.2 hours to 4.6 hours per invoice, the results to additional gross profit (and net profit) would be as follows:
Average number of invoices written per month 100.3 100.3
Times average number of labor hours per invoice 4.6 4.2
Equals total labor hours billed per month 461.4 421.3
Times the current hourly labor rate $90 $90
Equals total labor revenue produced per month $41,526 $37,917
The difference between the new productivity and old productivity is $3,609 PER MONTH!!!
This will create an additional $43,308 gross profit and net profit from labor revenue alone for the shop in one year.
These figures can become very significant as the internal processes to build billed hours moves forward. They represent a substantial additional amount of monies earned compared to any discount on parts could ever contribute to the shop bottom-line profitability. In addition to that we haven’t even accounted for any gross profit earned from the part sales that would be made as well with the increase in labor productivity.
Math is a very precise science. The numbers do not lie. Consider talking to your team about how to slow the shop processes down and increase productivity per vehicle rather than spinning everyone’s wheels trying to bring in more volume of HD vehicles into the bays and take a further parts discount from the supplier. Let’s teach the industry to work smarter, not harder.
This is only the tip of the ice-burg when it comes to understanding the affect of professional business management on an independent heavy duty maintenance and repair shop. The affect on true bottom line profitability is incredible. By adjusting the shops business measurements and the front counter processes, one can find a minimum of $160,000 to $250,000 in net profit with the current business coming through the door in an average 8 bay HD shop. How would that additional net income in your shop or everyone’s shop, change their business, their lifestyle, everyone’s stress levels and the independent sector of the heavy duty aftermarket industry?
Perhaps it is time for you to examine exactly what do you talk about with your team when they are looking at their routine with all heavy duty vehicles entering the bays?