Increasing Shop Profitability Series (Part III): Creating a profit-centered mindset

By Jim Yount


At the end of the previous article in this series (“Mathematics and money,” May 2012 OPE), I recommended that you take the time to enter your numbers at the top of the Service Department Efficiency Analysis Ratio (SDEAR) chart on the line identified as “My Company.” I trust you are still thinking about your efficiency. From the past article, I also want to remind you of the following words spoken to me by one of my mentors: “Jim, the only way you keep score in business is to count the money.” And counting the money is at the core of this article, titled “Creating a profit-centered mindset,” as I continue this series on taking a service department from a cost center to a profit center.


Truths and their negative impact on efficiency


Assuming your service department’s hourly labor rate is $70 and you ask a technician to do the following:

Stop working on customers’ equipment and unload trucks. Fact: It’s costing you $70 per hour to unload trucks.
Stop working on customers’ equipment and make a delivery. Fact: It’s costing you $70 per hour to make a delivery.
Stop working on customers’ equipment and assemble equipment for the sales department. Fact: It’s costing you $70 per hour to assemble equipment.

I realize these tasks must be done, but there are other ways to get them accomplished. With a little planning and training, a part-time employee can do the same tasks for perhaps $15 per hour.


Other truths impacting the bottom line

When technicians are asked to stop working on customers’ equipment to perform other tasks, they lose their efficiency and concentration, and become demoralized.
When technicians are not held accountable for working at a measured level of  efficiency, hours billed to customers, or a company work order, most work at their own pace.
Low take-home wages and lack of benefits are a major factor impacting billing efficiency.

As long as these truths exist, the service department’s profits will not be sufficient to do the following:

Hire additional people and stop interrupting technicians
Pay better wages
Provide better benefits
Pay its fair share of operating expenses

The best practice for producing high levels of department efficiency is to hold each technician accountable for personal billing efficiency.


The best practice for producing happier technicians is to allow them to do what they were trained and hired to do: work on equipment. And if possible, assign no other duties to them. A technician’s major responsibility is to earn money for the company.


I have learned from experience, self-talk reinforces my courage and determination. Tell yourself, “If other dealers can learn how to change their shop’s efficiency and take it from a cost center to a profit center, I can and I will.”


Because you are willing to invest time and money informing yourself and learning new management skills, as we proceed, it is important to remember there are no shortcuts to success. However, at the core of reinventing your service department, there are certain principles and methods that must be practiced.


Principle #1


The service department is responsible for its fair share of company operating expenses such as rent/lease, electricity, telephone, property maintenance and income taxes. We will refer to these expense items as hard cost. Additional costs are incurred in properly equipping the department: benches for work stations, lifts, grinders, welders, steam-cleaning station, and tools of all kinds. All of these costs must be considered before it is possible to establish a relative hourly shop labor rate. Wages and benefits are not included at this time.


Principle #2


After determining an effective hourly labor rate, service department efficiency must be managed to a level that enables it to pay its fair share of business operating expenses while earning a healthy profit.


Principle #3


Hard work alone is not enough to take your service department from a cost center to a stand-alone profit center. It takes business skills, talent, and a proven process linked to the profit principle to earn an equitable return on invested dollars.


Developing a profit-centered mindset is essential as we begin the process of reviewing mathematical formulas designed to track department efficiencies. Let’s begin by considering the answers to the following three questions:


1) How much profit do you need?


* More than enough to break even and pay expenses


2) How much profit do you want?


* Sufficient to paying better wages and benefits


* Grow, expand, and pay for equipment


* Earn a meaningful pre-tax net profit


3) What is the service department’s potential?


* To become an exceptional profit center


* What is the math for producing an exceptional stream of revenue? Formula: Payroll hours billing efficiency x Hourly labor rate = Revenue


It’s also essential to possess a clear understanding and definition of two keywords, which are defined by Webster’s New World Dictionary as follows:


Efficiency: Ability to produce a desired effect, produce with minimum of effort, expense: quality of being efficient.


Ratio: The ratio of effective work to the energy, expense of producing divided by input of energy, money, etc. A fixed relation between two similar things, proportion.


For the following exercise of determining efficiency ratios, we will assume there are three qualified and experienced technicians working in the service department. “Allocated hours per technician” will be 280, covering time spent on vacation, sick leave, holidays, and working on company-owned equipment. A standard 40-hour workweek applies. Forty hours multiplied by 52 weeks equals 2,080 annual hours.


Following is the formula for measuring service department efficiency ratio:


Service Department Efficiency
 

Three technicians combined payroll hours for year:                                      

6,240 hours

Allocated hours per technician (280) x 3 technicians:  

– 840 hours

Hours available for billing to customers:                   
5,400 hours

Hours billed to customers at 75-percent efficiency rate (x .75):
4,050 hours

Multiply by established hourly labor rate:

x $70

Annual department revenue generated by three technicians:

 $283,500


Assuming technicians bill 4,050 hours to customers, to determine the billing efficiency, enter 4,050 into your calculator and divide by 5,400 available hours. When you press the equal button, the answer on display is 0.75, which represents the efficiency ratio of 75 percent.


Be sure to develop the habit of computing percentages with at least two decimal points. Decimal points represent dollars. For example, enter $1,000,000 into your calculator and multiply by .01 (1 percent). The answer is $10,000. Do the same math using .011 (1.1 percent). The answer is $11,000.


Using the same mathematical formula, let’s measure the efficiency of one technician (see box below). Never forget: Technician payroll hours were purchased by the company, through the hiring process, for the sole purpose of selling those hours to customers for a profit.


Service Technician’s Efficiency
 

One technician’s annual payroll hours for standard 40-hour workweek: 

 2,080 hours

Subtract time off for 2 weeks of vacation:  
– 80 hours

Subtract time off for 1 week of sick leave: 
– 40 hours

Subtract time off for 6 holidays:
– 48 hours

Subtract hours allocated to company (equipment setup):  
– 112 hours

Subtract total allocated hours from 2,080 payroll hours:
– 280 hours

Technician annual hours available for billing to customers:  
1,800 hours

Multiply by technician operating efficiency ratio of 75 percent:  
x .75

Number of hours billed to customers by one technician: 
1,350 hours

Multiply by established hourly labor rate: 
x $70

Annual department revenue generated by one technician:  

 $94,500

                                                                                                                                                                                                                                                                                           How do these numbers stack up when compared to the lowest, average and highest performance in the example Service Department Efficiency (SDEAR) chart featured in the second article in this series? Using 1,800 available hours for billings to customers, the efficiency ratios from the SDEAR chart are as follows:


LOWEST service department, working at 15.31-percent efficiency, billed 276 hours at $70 per hour and generated $19,320 in annual revenue. These earnings would not pay the technician’s wages and mandatory benefits or address an equal share of department operating expenses. As a stand-alone cost center, the department is deeply indebted to the rest of the company.


AVERAGE service department, working at 52.90-percent efficiency, billed 952 hours at $70 per hour and generated $66,640 in annual revenue. A 52.90-percent efficiency rating usually is about breakeven, perhaps a point or two above payroll and expenses. It’s better than losing money, yet not sufficient to sustain healthy department and company growth.


HIGHEST service department, working at 86.82-percent efficiency, billed 1,563 hours at $70 per hour and generated $109,410 in annual revenue. An 86.82-percent efficiency rating represents outstanding performance. It’s sure to provide a healthy financial return to owners when all other factors are managed equally.


Do we believe the department manager of the highest-efficiency shop had a profit-centered mindset? Of course, we do. I’m sure department process and policy was mandated by the president of the company.


Carry this thought forward, service department revenue is directly related to the process and policy used to manage department assets and people. No exception. In the fourth article in this “Increasing Shop Profitability” series, we will discuss “Determining service department’s share of applied hard cost of doing business.”


 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.

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