Increasing Shop Profitability Series (Part II): Mathematics and money

 Second article in a series

 By Jim Yount

More than three decades ago, one of my mentors made the following statement: “Jim, the only way you keep score in business is to count the money.”

We’ll begin part two of this series on “Increasing Shop Profitability” with numbers relating to money, taken from my company’s consulting files representing actual case history. As we progress, you’ll discover the mathematical formulas are relatively easy to understand. To follow this article in detail, I recommend making a copy of the Service Department Efficiency Analysis Ratio (SDEAR) chart above and use it as a reference tool.

Allow me a few words to describe the SDEAR chart. We will read the chart from left to right, beginning with YEAR at the top of the first of 10 columns. The second column’s heading is abbreviated for TOTAL DEPARTMENT EMPLOYEES. The second line in the first column is “My Company,” which is the place to enter your service department’s numbers.

The next item in column one is LOWEST, meaning the numbers represent the lowest EFFICIENCY RATIO we have in our files; you’ll see this column title above 15.31 in the last column of the chart. I trust I’ve made it a little easier for you to read the SDEAR chart. Let’s take a closer look at the numbers in the SDEAR chart.

As I mentioned, the LOWEST line item numbers represent the lowest efficiency ratio percent we’ve seen.

TOTAL DEPARTMENT EMPLOYEES was 5 technicians, full time and part time.

TOTAL PAYROLL HOURS purchased from these technicians was 7,176.

No allowance for TECH HOURS COMPANY was made. This allowance was for the hours spent working on company-owned equipment such as assembling the equipment for the sales department.

TECH HOURS AVAILABLE for billing to the customer was 7,176.

ACTUAL HOURS BILLED was 1,099.

HOURLY LABOR RATE was $50.00. (Please note that this hourly labor rate is several years old.)

LABOR INCOME DOLLARS. Math: Multiply 1,099 hours by $50.00 per hour = $54,950.

NON-REVENUE HOURS was 6,077. Math: Subtract 1,099 hours billed from 7,176 payroll hours = 6,077.

EFFECIENCY RATIO PERCENT was 15.31. Math: Enter hours billed (1,099) and divide by payroll hours (7,176), and the efficiency ratio for the department was 15.31 percent.

A ratio of 15.31 percent means, of the 8 hours the company purchased, the technicians were billing 1.22 hours, or 1 hour and 13 minutes. Math: Multiply 8 hours by .1531, the answer was approximately 1.22 hours. To determine .22 of an hour, enter 60 minutes and multiply by .22. The answer was approximately 13 minutes. Technicians were billing 1 hour and 13 minutes for every 8 hours on the clock.

Poor performance can be a reflection of a technician’s poor attitude toward the job or a lack of experience. In this case, poor performance was due to the lack of leadership. If the department was performing poorly, the responsibility belonged to the owner. Remember, the owner believed the service department was necessary, but it was not earning a profit. So, this service department was allowed to become a heavy cost and loss center. There’s no doubt that lack of profitability was the source of the owner’s lack of interest and concern.

If a dealership owner is not interested in service department efficiency, technicians begin to ask themselves, “Why should I be interested in department efficiency if the owner does not care?” Simply put, this owner was not taking care of his business. He believed the report and reacted accordingly.

Let’s look at column one, line item AVERAGE. The dealer showed an allowance of 526 hours was assigned to the company to assemble equipment for the sales department and perhaps other duties. Service department efficiency ratio was 52.90 percent. The 3.5 technicians earned $148,720 in labor income dollars. When comparing the AVERAGE team with the LOWEST team’s efficiency, the AVERAGE team purchased 1,539 fewer payroll hours, billed 1,605 more tech hours for a total of 2,704 actual hours billed, and earned $93,770 more total income. 

Why was the AVERAGE team 345-percent more efficient? It’s easy to see the impact of neglectful management in the company with the LOWEST efficiency category. Could it be the neglectful manager listened to the mantra of the industry, “No one can make money with a service department?”

The HIGHEST efficiency we’ve seen was 86.82 percent. Wow! That’s equal to billing 6.95 hours of an 8-hour shift. We were excited to see efficiency numbers this high. Why was the team’s efficiency ratio at 86.82 percent? Did you see the labor income dollars was $574,515? How did they do it? I believe it began with having 8 technicians dedicated to working on customer equipment during their 8-hour shift. No other duties were assigned. They were not called on to unload and load trucks. They were not called to the front counter to sell equipment/parts when a crowd rushed through the doors. Techs did not pull their own parts. They worked on customer equipment. We’ve seen individual technicians with efficiency ratings as high as 96 percent.

Take a minute and view the adjusted labor rate located in the middle of the chart under the HIGHEST category. Notice: If this dealer increased his hourly labor rate by $10.00 from $45.00 to $55.00 per hour, department earnings would increase by $127,670 from $574,515 to $702,185. Can a dealer make this kind of adjustment? Of course, it’s his/her call. Is it easy? Perhaps. For $127,670, I would suggest it’s possible to raise customer service to a premium level. At the technician premium level, it means zero defects and no returns. How long has it been since you increased your hourly labor rate? I am suggesting your hourly labor rate must be equitable to your business needs without gouging customers.

As a reminder, focus on the SDEAR chart for a moment. I call your attention to “My Company,” which is located near the top left corner of the chart. It could be a rewarding exercise to research your files, do the math, and fill in the blanks with your numbers. Should you not be satisfied with labor income dollars and overall efficiency, take time to determine what must be done to turn your service department into a profit center. Need some help? Give us a call. We would be delighted to hear from you.

In the third article in this “Increasing Shop Profitability” series, we will discuss “Creating a profit-centered mindset.”

 Jim Yount is the founder and chief executive officer of Jim Yount Success Dynamics LLC. For more than 30 years, he has hired, trained, managed, sold, marketed, and motivated. Extensive real-world experience in retailing, distribution and working with manufacturers, both domestic and international, has earned Jim the reputation as a trustworthy and knowledgeable professional in his field. As a results-oriented speaker, he is dedicated to inspiring groups of 30 to 3,000 to develop their talents and realize their full potential. As a business consultant, teacher and coach, Jim is experienced at challenging leaders to explore their operational procedures and change unacceptable practices that are producing poor results. For more information, contact Jim at jimyount@hughes.net or (903) 796-3094 or visit his website at www.jimyountsuccessdynamics.com.