He recalls, for example, the days of the 3M ARMS seminars when shop owners were taught the why’s and how’s of measuring and improving gross profit percentage.
“But today there’s a different thing to look at because of changes in our industry,” Nunn told students in a recent “Financial Performance” class. “Today you have to maximize your gross profit dollars per hour worked, your gross profit dollars per clock hour.”
Here are some of Nunn’s perspectives —and those of others—on what shops today should be measuring and working to improve.
Repair vs. replace
Nunn said the ARMS seminars focused on improving labor sales because labor did – and continues to – offer a shop the highest gross profit percentage.
But to see why labor sales may not be as valuable as some shops think, it’s important to first understand another common shop measurement: efficiency ratios, or the relationship between hours sold and actual clock hours worked. You can measure efficiency ratios by employee, by a team, or by a whole department on a daily, weekly, monthly or annual basis. To determine a technician’s monthly efficiency ratio, for example, just divide the total labor hours sold on that technician’s jobs in a given month by the number of clock hours worked by that technician in the month to produce those hours.
A technician, for example, that turns 120 labor hours in an 80-clock-hour pay period, for example, has a 150 percent efficiency ratio.
While it’s important to have a good idea of your technicians’ or teams’ efficiency ratios, Mike Anderson, a Virginia shop owner and another popular management and estimating instructor, said efficiency ratios are not a good measurement to compare with other shops or industry benchmarks. Anderson points out that those ratios are controlled not just by the tech but by the quality of the shop’s estimates. Nunn agrees.
“What if you send your estimator to a good damage analysis class, where he goes into the P-pages and finds out that masking interior jambs is an not-included refinish operation?” Nunn cites as one example. “What if we armed our estimators with the documentation that proves conclusively that feather prime and block is a not-included refinish operation? What if we arm them with the information that spotting and blending within a panel and cutting the base time in half and paying full clear is ridiculous and unsupported, and gave them the tools to negotiate that? The technician will do that same job using the same tools and products and time but his efficiency ratio goes up. It’s much easier to improve efficiency ratios by working the sales number on that formula.”
In any case, once you know your labor efficiencies, you can start to measure your gross profit dollars per clock hour. Nunn uses a basic example of a borderline fender: Should you repair it, or replace it?
In this example, repairing the fender yields a higher percentage of gross profit (48 percent vs. 36.2 percent).
“But you don’t buy groceries or a new car with percentages,” Nunn points out. “You buy those things with dollars. So are you really maximizing the amount of gross profit dollars your technicians generate for every hour they are out there working on the shop floor?”
To calculate gross profit dollars per hour, start with your technicians’ labor efficiency. For this example, let’s say it’s 150 percent. At that efficiency, the 7.6 labor hours (body and paint) needed to repair the fender will require 5.1 clock hours. The gross profit dollars repairing the fender produced ($196.02) divided by the 5.1 clock hours results in a gross profit of $38.44 per clock hour.
Now calculate the gross profit dollars per hour if you replaced the fender. At 150 percent efficiency, the 5.5 labor hours would take 3.7 clock hours to produce. The $200.64 gross profit dollars divided by 3.7 clock hours results in $54.23 gross profit per clock hour – significantly higher.
“So if you look at it that way, your make more money replacing the fender, and that’s a number you should be tracking,” Nunn said.
Nunn is careful to point out that he’s not suggesting replacing fenders that can be repaired. And shops on DRP programs are likely being measured on repair vs. replace decisions. But Nunn said on borderline repair vs. replace cases, shops are generally better off selling the part rather than the repair labor. They will move the job through more quickly (which is good if there’s another one waiting to fill that stall), and the job requires less skill and has less risk of warranty issues.
Paint and materials sales per labor hour
Bernie Blickenstaff offers another way of looking at the repair vs. replace decision. Blickenstaff is another former shop owner turned jobber turned industry consultant and trainer. Like Nunn, he said there’s no question that unless your techs are leaving early every day because of a lack of work, selling parts replacement is more profitable that selling repair labor.
One quick way to determine how well you’re doing at that, he said, is a parts-to-labor ratio. Just take all your parts sales (new, used and non-OEM) for a given period and divide it by your total labor sales (of all types) for that same period.
An industry benchmark for that ratio is 85 or 90 percent, Blickenstaff said, but he has client shops with ratios above 100 percent. No matter where your shop’s number is, he said, you’ll improve your financial performance if you work to nudge that number up.
“I’ve measured it way too long: If anyone gets their part to labor ratio to go up but their gross profit dollar per technician clock hour doesn’t go up, you call me,” Blickenstaff said. “Because I haven’t see it yet.”
Blickenstaff also said when he asks most shop owners what their paint and materials sales are per paint labor hour, they recite whatever number is on their sign of posted rates. But Blickenstaff said that’s probably not exactly what any shop’s exact paint and materials sales per labor hour is. To determine yours, take your total paint and materials sales for a month and divide it by the paint labor hours for that month
Every month it will likely be different, Blickenstaff said, but particularly if your actual number is lower than your posted paint and materials rate, you need to improve paint and materials sales. Rates haven’t kept pace with increasing paint costs (which have doubled) over the past decade, Blickenstaff said, and to counter this, shops have needed to find additional materials to charge for: flex additive, car cover, sound deadener, hazardous waste disposal, bonding kits, bumper repair kits, etc. Insurers would rather pay for such add-ons than higher rates, Blickenstaff said, because while most shops will charge the highest rate allowed, far fewer will think to charge for these reasonable add-ons.
Don’t fly blind
Blickenstaff and Nunn point out that more shops have scales and systems to measure paint down to the tenth or a gram than have the systems in place to measure their business performance to any degree. Without such measurements, they say, shops can’t see what they need to improve let alone have the ability to track whether they are making needed improvements. And such numbers are crucial in determining, for example, what work you are doing that is the most – and least – profitable for your business.
“Without those numbers, you don’t have a way to make a good decision,” Nunn said. “You’re making some huge decisions by the seat of your pants.”