Are You Making What You Should in Fixed Ops?
Written by Don Reed, DealerPro
How did your dealership's Profit and Loss Statement turn out for you in fixed operations? Did you have a banner year or do you think you could have done better? The best way to answer this question is to prepare a performance analysis of both your parts and service operations to identify your opportunities for improvement.
Introducing the 75/25 Rule
I recommend you use the 80/20 Rule in service and the 70/30 Rule in parts which combined will be the 75/25 Rule. Simply put, your total parts and service expenses should not exceed 75% of your total parts and service gross profit. This leaves you with 25% net profit to gross profit. Using the above rules, make the calculation for each of these departments to see how you measure up.
Once you have completed your calculation, you must decide if your expenses are too high, your gross profit too low or a combination of both. In reviewing and analyzing hundreds of dealerships, I have found that most dealers are doing a very credible job of controlling expenses in order to survive. Consequently, I have found that most dealers have a gross profit shortage and not an excessive expense problem. In other words, the real opportunity for increasing net profit comes primarily from increasing gross profit and not trying to save your way into profitability!
So, let’s build a performance plan that will provide you with a template for building your profit going forward. The five key elements of your plan are as follows:
- Control Expenses
- Increase Profit Margins
- Increase Technician Productivity
- Increase Sales per Repair Order
- Increase Retail Customer Traffic
Even when you're doing a good job controlling expenses, there may be some opportunities for savings that you have missed. One of the most significant expenses in every dealership is people. To ensure you don’t overpay your employees for the work they perform, you should try to compensate as many as possible with a performance-based plan. This simply means that the higher the performance, the higher the compensation. You are likely already doing this for your sales people, so strive to also include your Parts Manager, Parts Counter Personnel, Service Manager, Service Advisor, Warranty Clerk and Technicians. The final benefit here is that performance based compensation will be tied to either hours, sales or gross profits, so when your business cycle declines, so does your employee cost.
Increase Profit Margins
To begin with, set yourself some goals for your margins on retail sales. Those goals should be 40% gross profit margin on retail parts and 75% gross profit margin on retail labor. If you happen to be exceeding these goals already, I congratulate you for a job well done. If you are performing below these goals then you have some work to do. My guess is most of you are below the 40% on parts and very close to the 75% on labor. In order to raise the margin, you simply must raise your markup. When it comes to labor pricing, you can simply divide the cost of your highest paid technician by .25 and that should equal your retail labor rate. Additionally, your technicians should be paid based on how many billable hours they produce versus how many clock hours they are at work.
Increase Technician Productivity
To begin with, you must focus on minimizing non-collectible time. This starts with scheduling appointments in a timely manner. When your customers call, offer an appointment for today or tomorrow. Once the customer drops off their RV, you must strive to inspect the RV for needed repairs and/or service and diagnose the customer’s concerns. Now you can prepare an accurate estimate—call the customer for approval—order the parts and then make the repair at a later date when you have all the parts. Unfortunately, some advisors will try to schedule the appointment for when they believe they can complete the repair. This allows the customer to shop around to your competition and you end up losing work.
Increase Sales per Repair Order
When appointments show up, your advisors must go to the RV with the customer to conduct an interactive walk-around, look for obvious signs of needed services, make recommendations for completing those services inspect the customer’s primary concern. Based on the mileage of the motorhome and/or the time between services for the motorhome or towable, the Service Advisor should also review maintenance with each customer and recommend services to keep the RV in a safe and reliable condition. Your technician should perform a thorough inspection in addition to diagnosing the customer’s primary concern. These three processes will produce an additional one to two collectible labor hours per repair order. It takes very little effort to do this and your customers will thank you for it.
Increase Retail Customer Count
This is the benefit or results of all of the above processes that your customers will relate to in a positive manner. It will enable your service and parts operations to complete more effectively with your competition. It will improve your owner retention and keep those customers loyal to your dealership for future sales and service.
Now, you're on your way to making this year your best ever in fixed operations.