Dealership Service Focus: Improve Gross Profit with Lower Costs
Maximize Labor Gross Profit % Without Pricing Yourself Out of the Customer Labor Market
In the first installment of our service articles, we discussed how to balance our labor rates to maximize gross profit but not at the expense of customer retention and vehicle resale rates. This article will help set up the issue and we will then follow up with next month’s discussion on strategies to achieve more.
Now, let’s talk about the other side of the gross profit percentage (GP%) equation: the cost of labor.
The simple answer is to hire lower cost technicians. But, in the current environment where the shortage of technicians is critical, the laws of supply and demand typically result in service departments having to pay more for technical staff and, therefore, more per Flat Rate Hour (FRH) produced.
So, how do we lower the cost per FRH produced? It depends on how you are currently paying your technicians. If you pay them per clock hour or salary or some other fixed cost pay plan, then technician proficiency is critical. Let’s look at some examples of how this would work:
Example #1:
Bob, an A tech, is paid $50 per clock hour, works 40 clock hours a week and is 75% proficient, meaning he produces 30 FRH’s per week. Therefore, the cost per FRH produced is $66.67 ($50 clock rate x 40 clock hours = $2,000. $2,000 / 30 FRHs produced = $66.67). Assuming an Effective Labor Rate (ELR) of $200, then your Gross Profit % on Bob’s labor FHRs is 67%.
Example #2:
What if we can increase Bob’s proficiency rate from 75% to, say, 90%? Then his cost per FRH is now $55.55. ($50 clock rate X 40 clock hours = $2,000. $2,000 / 36 FRHs produced = $55.55). Assuming the same ELR of $200 then your Gross Profit % on Bob’s labor FRHs is now 72%, a 5% point increase.
Example #3:
Bob is excelling and is now at 110% proficiency! Now his cost per FRH is $45.45! Therefore, Bob’s Gross Profit on Labor % is now 77%!
We will be discussing how to drive up proficiency in our next installment in September. Proficiency is highly powerful and, as evidenced here, a critical KPI and a major factor in maximizing profits in your service department. We will also address technicians that are paid on flat rate?
This is a deep and complex as we need to delve into teams, groups and lateral support units which are highly proficient. It also requires that you are effective in matching an experienced technician’s knowledge with younger apprentice/C techs.
This topic is highly powerful in increasing proficiency, technician training and technician retention, all which are extremely important.
Look for that next article in September as we continue our service series.
Questions?
Dealership Retail & Consulting
A Brady Ware consulting partner, Brett has over 40 years of retail dealership and consulting experience in all areas of dealership operations including fixed and variable operations.