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Is your service department operating at peak efficiency?

Mark Martincic April 11, 2013

Many dealers think their service department is running okay, but they are comparing current results to history. A quick review of three profit benchmarks and a few easy calculations can allow you to compare your performance to some of the best-run shops.

There is more to running a service department than profits.  All attempts to improve performance should also be focused on your level of service to your customers.

While that may seem contradictory, at KEA Advisors, we believe the same best practices and processes that produce long-term profits also will encourage development of enthusiastic, loyal customers.  If you think about it, when you answer a customer’s call in a quick and courteous manner, when you provide an appointment that is convenient, when you write the customer up quickly and efficiently on your service drive, quote competitive prices, fix the vehicle right the first time and deliver the truck back to customer when promised, you are ‘average’ in the customer’s eyes.  You did what the customer expected when they chose to do business at your shop.

Solid customer driven processes, consistently delivered by your employees, will allow you to exceed customer’s expectations.  Exceeding expectations will build loyal, enthusiastic customers.  Enthusiastic customers ensure peak profitability.

First, let’s review the three service efficiency benchmarks:

•   Overall technician proficiency at or above 95 percent
•   Labor gross profit at or above 75 percent
•   Customer effective labor rate at or above your warranty labor rate

When measuring performance the following information will be helpful.

1. Overall technician proficiency is calculated by dividing total sold or flat-rate hours (FRH) produced by the total clock hours worked. If you are below the benchmark you might want to examine two areas for possible opportunities.

First, although it is tough to measure, observe the amount of time your technicians spend in their bay working on trucks. Do they often wait for customer’s authorizations, parts, and repair instructions? Do they take timely breaks? How much time is spent on the tool truck or the lunch wagon when they arrive?

Managing the time the technician is in the bay working on trucks is most often, the biggest opportunity for improvement.

2. Labor Gross Profit is available on most financial statements. Be sure to calculate total labor only gross profit. If your financial statement includes an account for unapplied time or an adjustment to the labor gross profit accounts, it will be necessary to subtract this cost from the total labor gross profit before you calculate your performance.

If your performance is low, there are only two areas to address to resolve this issue. The first is managing your effective labor rate, which we will discuss in item three below. The second is managing your cost per FRH produced. While the biggest gains in gross profit are usually achieved by managing the effective labor rate there are significant gains possible in managing your cost.

Start by reviewing your technician pay rates. If you pay hourly or offer a guarantee to some or all of your technicians you may want to measure individual proficiency. Low proficiency with these types of pay plans can drastically affect your cost per hour produced. If this is the case, you don’t have to change the pay plan. But, you need to spend time managing proficiency (see above). If you pay per FRH, review your technician’s skill levels and rates of pay. Often we find that shops pay all their technicians a standard or uniform rate.

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Mark Martincic is a professional advisor for KEA Advisors. He has more than 20 years of dealership advisory experience. He can be reached at mark@keaadvisors.com.

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