Last week we focused on the metric of Total Absorption. This week I’ll zoom in on the Fixed Ops Gross Profit portion of the metric. Focusing on the Fixed Ops Gross Profit metric means you are building a strong foundation and solidifying daily routines in your parts and service departments, which lead to increased profitability and higher total absorption.
Formula Refresher:
Total Absorption Percentage Rate (guide of 130%+)
(Used Truck Gross Profit + Fixed Ops Gross Profit) / (Total Dealership Expenses – Total New Truck Selling Expenses))
PARTS
Within the Parts Department, KEA’s Gross Margin benchmark is 29% and is influenced by two areas: Inventory Management and Pricing Management.
Inventory Management is about having the right part on the shelf at the right time in the right quantity. Pricing Management is about selling it for the right price
(market-based pricing
).
Accurate Inventory provides higher first-time fill rate (sales) and lower cost in obtaining the correct part. Focus your daily routines to address the following inventory defects:
- Inventory integrity – are the parts located on the correct shelf with the correct quantity per the DMS and are the inventory exceptions (i.e. negative on-hand, quantity on-hand with no bin, etc.) corrected on a daily basis?
- Stocking Criteria (Does it fit the way your department operates today?)
- Stock Outs (Parts that have met stocking criteria but have 0 on-hand and 0 on-order)
- Accurate Demand Recording (You know what you sell. You must also know what you’re not selling.)
With Accurate Inventory Management, you can increase the first-time fill rate upwards of 90%+ and potentially decrease the Months’ Supply of Inventory to 1.5 months – decreasing frozen capital.
While your Inventory becomes more accurate and precise (which can be measured by True Turns), it is equally important to understand your pricing model. When assessing pricing, look to understand the method and the “whys” behind each step before adjusting to meet the gross margin goal. This will ensure sustainability and clarity in your price model.
To evaluate your pricing model, start with assessing the validity behind these three areas:
- Source Escalators
- Price Break Escalators
- Customer Price Codes
SERVICE
Within the Service Department, the Gross Margin Benchmark (including unapplied time and sublet repairs) is 70%. There are 4 focus areas that affect this metric: Hours Management, Cycle Time, Effective Labor Rate (ELR) and Cost per Billed Hour.
1.)
Start with Hours Management and establish daily routines to assess the previous days hours by category. Understand, engage, and remove obstacles that prevent technicians from punching on and working Repair Orders.
Daily routines should be focused on outliers among these categories:
- Payroll Hours; attended hours
- Worked Hours; punched on the Repair Order
- Indirect Hours; minus shop Repair Orders
- Available Hours; hours attended but not punched on to anything
2.)
Focus on Cycle Time broken out into the following three areas: Open to first punch, Dwell Time and Lag Time. Understand where gaps in cycle time occur and build daily routines to check in with your team on Open Repair Orders and understand how you can remove obstacles to meet Cycle Time goals and in turn, increase bay capacity.
- Daily routines should be focused on outliers among these Cycle Time (Open Time Stamp to Close Time Stamp) categories –
- Open to first punch – 2 hours or less
- Dwell Time – Open to last punch compared to billed time
- Lag Time – last punch to close, 2 days or less
3.)
Now that Repair Orders are closing in less time, how does your door rate compare to your Effective Labor Rate (Labor Dollars divided by Sold Hours)?
Assess the following rate management events:
- Understand and minimize customer discounts
- Manage your work mix of competitive, discounted work to general repairs
- Review customer contracted negotiated labor rates and ask the question “why do they deserve the discount?”
4.)
Gross Profit is the result of subtracting Labor Cost from Labor Sales. Managing hours and rate have a positive impact on Labor Sales. The formula is simple: technician pay divided by hours billed. Managing technician cost per billed hour is controlled by the hours management steps mentioned previously.
The foundation in the Service Department boils down to keeping the technician in their bay, working on vehicles and billing a fair market price for all they produce. Returning the customers’ vehicle sooner by managing dwell time will make clients want to return to you.
As you strengthen the foundation within the Parts and Service departments, you will be able to positively influence Gross Profit and in turn, the Total Absorption Metric.
