PDF What Is Your Shop's Effective Labor Rate? - Automotive Data

[Pages:4]MOTOR page- 11/8/04 3:29 PM Page 1

What Is Your Shop's

Effective Labor Rate?

There are a significant number of financial benchmarks to focus on when running a repair shop. One of the most critical is the

`effective labor rate.' Most shops operate on too low a rate, which contributes to a significant loss of revenue and profits.

BY BOB O'CONNOR

800-755-0988

T he auto repair industry has experienced many technical and business management challenges over the last several years. Overall, it appears as though the industry has stayed abreast of the technical changes reasonably well. However, there has been a sharp decline in both the number of independent repair shops and the profits earned by those remaining. There are several reasons for this.

Running a repair shop profitably today has become much more of an exacting science than in years past. Many of today's shop owners have either been resistant to educating themselves and/or their staff, or have not realized the importance of understanding what the benchmarks are and how they are achieved, and of immediate-

ly implementing changes to achieve them. Almost every aspect of shop manage-

ment--including training budgets and requirements, pricing and marketing techniques, among other things, as well as industry benchmarks for these areas--has changed.

One area that we regularly stress to our clients is management of the shop's labor inventory--specifically productivity and efficiency. It appears that the majority of independent shops have not significantly bought into and improved their ability to purchase 8 hours a day and bill out 8 or more hours, along with the goal of achieving our benchmark of years past of 9 hours per day for each technician. Our new benchmark is 11 hours per day per technician for every 8 hours worked.

With labor rates rapidly approaching, and

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in some instances exceeding, $100 per hour, repair shops are going to be required by the motoring public to become much more efficient. No longer will they be able to simply increase labor rates to meet ever-increasing costof-sales and operating expenses. Rather, they'll be required to significantly improve operating efficiencies. Improved efficiencies will enable these shops to bill out more hours by each technician without increasing the time they spend on the job.

For instance, instead of billing out 9 hours in an 8-hour day, increased efficiencies will enable 10 to 12 hours to be billed out in the same work day. Achieving this increase in efficiency will be a significant challenge for the industry, since it currently bills approximately 5.2 hours in an 8-hour day, on average.

Efficiencies will have to improve from 125% to 150% for a repair shop to remain viable in the foreseeable future. That will, in effect, require an increase in the number of hours billed in an 8-hour day to at least 11. Most shops not billing close to 11 hours per day per technician will probably fall by the wayside.

The goal of this increased efficiency includes achieving an overall effective labor rate of approximately 135%. A good mix of diagnosis, maintenance and repair work will make it easier to achieve this effective labor rate benchmark.

Elements Leading to Increased Productivity & Efficiency

There are six primary elements that must be acted upon to effect improved efficiencies leading to an effective labor rate percentage of 135%. They are systems, staff, training, facilities, equipment and products. Let's look at them individually.

Systems. Systems that have a direct

effect on effective labor rate include the actual tracking of all four types of time--available, actual, "E" (idle) and sold. If this tracking system is not in place, it will be very difficult to get to the number of billed hours required to reach the 135% effective labor rate. For more details on these time categories, please see the December 2000 Business Sense article, "Selling Diagnostic Time Profitably."

Another system that will have to be dialed in is scheduling. Scheduling is a science not easily learned; it takes a

great deal of self-discipline and practice to master it. Shop owners need to understand the concepts of capacity and cycle time as it pertains to their staff and billable hours. The toughest mind-set to overcome by most shop owners and their service advisors is to focus less on loading their shop by vehicle count and more on loading by billable hours. This process is covered thoroughly in our "Technician Time Management" workshop.

Estimating is another skill that has to be practiced because if it's not done

TABLE 1: EFFECTIVE HOURLY LABOR RATE PERFORMANCE

If you're paying your technicians an average hourly rate of $20 and desire to earn 70% gross profit, your hourly rate would have to be $66.67.

Tech Hourly Rate

Gross Profit Factor

$20.00

30%

Labor Rate $66.67

If your technicians were available 8 hours and produced 5 billable hours, you would calculate your effective labor rate as follows:

Hourly Labor Rate

$66.67

Hours Billed

5

Revenue $333.35

Revenue $333.35

Available Hours

Effective Labor Rate

8

$41.67

If a technician produced 10 billable hours, the calculation would be as follows:

Revenue

Billed Hours

Revenue

$66.67

10

$666.70

Revenue $666.70

Available Hours

Effective Labor Rate

8

$83.84

Remember, the more hours of billed time that exceed the number of hours of available time, the higher the effective labor rate.

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properly, the labor sales and profit leaks will continue. Most shops do not allocate time for the estimating process; estimates get done when "time permits," which really means many may not get done at all.

Improvements in communications could include intercoms, cell phones, two-way radios, etc., to reduce the amount of foot travel currently experienced in most of today's shops.

Staff. The service advisor should be a person who likes people and is able to handle all of the tasks related to the sales position only; management tasks do not fall under his purview. Technicians should embrace training and technical challenges, and be truly team-oriented. All in all, shop owners should make sure they select the right staff with the correct attitude. Hiring anyone who doesn't meet the high-end criteria should be avoided. If not, turnover could become twice as costly as it is now.

Training. Our experience has shown that most employers do not take an active role and/or assume responsibility for reviewing materials and notes employees bring back from training sessions. Nor do they follow up on the implementation of techniques learned.

A formal plan must be put into place that includes a budget and a specific outline of how the need for training is determined, what is expected of employees once they've attended training sessions and incentives attached to immediate implementation of knowledge gained. Anything short of this is a waste of time and money.

Facilities. Many auto repair shops are housed in facilities that were never designed for the use. In addition, they may never have been evaluated for remodeling to improve efficiencies. It's not uncommon for a technician to walk 50 to 100 feet to speak with an advisor,

TABLE 2: CALCULATING EFFECTIVE LABOR RATE

Asimple method of calculating your shop's effective labor rate includes determining the total available time of the technicians, then multiplying that total by your labor rate to determine the labor inventory. Take the labor inventory and divide it into the total actual labor sales for the month. The goal is at least 135%!

Example: A shop has three technicians who worked 20 days at 8 hours each, for a total available time of 480 hours. The shop labor rate is $60 per hour and the total labor sales for the month were $24,300. You would calculate the effective labor rate in this example as follows:

Available Hours

480

Labor Rate $60

Labor Inventory

@ 100%

$28,800

Actual Labor Sales

$24,300

Labor Inventory

@ 100%

$28,800

Effective Labor Rate

84%

Effective

Effective Shop

Labor Rate

Labor Rate %

Labor Rate

$60

84%

$50.40

obtain parts or use the technician business center. The facility should be evaluated to ensure that inefficiencies for all staff are reduced.

Equipment. We believe today's auto repair shop should purchase, train staff on and require the use of any piece of diagnostic or service equipment that can bill time while the technician attends to other tasks. Shops should develop an overall equipment plan, in writing, that provides for evaluation of existing equipment to determine its continued usefulness, disposal of the obsolete, purchase and implementation of new equipment, budgeting and a repair process. Too many shops have valuable floor and storage space occupied with obsolete and/or broken equipment.

Products. Quality is the key here. In the old days we sold rebuilt carburetors because they were so much cheaper than new. However, we often had to install at least three before we found one that worked. Labor for two of the three installations was absorbed by both the shop and the technician, since no one felt the customer should be charged. Today, we have a responsibility to both ourselves and our customers to use the best products available in an effort to avoid comebacks. Doing the job right the first time, using quality parts, will lead to increased efficiencies.

In addition to sourcing and using quality products, demanding outstanding delivery service and proper order filling will lead to your billing out more hours by not having to push the vehicle

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out or having technicians wait for parts. This effort, combined with proper scheduling, can work well for both the suppliers and the shop.

Your Effective Labor Rate Can Go Down or Up

We've identified nine factors that will decrease your effective labor rate:

1. Technicians working longer on a job than the hours quoted and the customer not being charged for all of the time invested. This occurs regularly in most shops today, for three reasons: First, the advisor may have inaccurately quoted the proper time for the job. Second, the technician may have run into some nonroutine tasks, like rusted or broken bolts. Third, the technician may have lost track of the elapsed time. All of these issues are easily correctable once everyone in the shop agrees they exist.

2. Labor discounts offered, such as dollars or a percentage off full price, when the same number of hours are allocated to sold time. An example may be a job that normally prices out for 10 hours of labor at the shop's labor rate, but then is discounted when a customer presents a coupon, with there being no adjustment to the sold hours.

3. Advisors underselling the labor times so the technicians can barely meet--let alone beat--those times.

4. Menu-priced items where the technician will put in more time than the menu price allows for. For example, the labor charge on LOF service may be $10, but if the time required for the technician was .5 hour, the job would generate a $20 per hour effective labor rate.

5. Freebies, if they consume a significant amount of a technician's time.

6. Lack of work due either to insufficient car count or insufficient hoursper-repair-order.

7. Technician inefficiency by his not performing tasks in the most efficient order.

8. Having technicians doing other things like ordering parts, shuttling customers, filling in for the advisor,

13 Changes You Can Make to Increase Your Effective Labor Rate

1. Revisit your estimating procedures to ensure that all jobs are charged out at full value.

2. Make sure technicians understand what nonroutine tasks are by building a list of those jobs and constantly updating it.

3. Implement a 10% to 30% labor multiplier to the estimating guides to allow for small, incidental items that run one to two tenths of an hour.

4. Build service packages at retail pricing and times so technicians can meet or beat those times.

5. Sell diagnostic time for at least twice the normal labor rate.

6. Make sure technicians are punched in to "E" time when not working on a vehicle performing income-producing work. This will allow you to identify labor profit leaks.

7. Make sure technicians work efficiently, by performing diagnostics first, inspections second, sold work third and upsold work last.

8. Limit the number of low-grossprofit jobs your techs handle, such as oil changes, tire rotations, etc.

9. Improve scheduling to provide a constant, even workflow to your technicians.

10. Take in only the kinds of vehicles and jobs you can perform profitably.

11. Give your technicians work they're qualified to do.

12. Purchase and use efficiencybuilding equipment, such as flushing machines, tire changers, etc.

13. Consider increasing hours per repair order (HPRO) to at least 3.0, requiring your techs to work on fewer vehicles, producing more hours.

etc., instead of performing only vehicle repair and maintenance work.

9. Waiting for customer authorization, parts delivery or an answer to a question from an advisor.

Factors that will increase your effective labor rate include:

1. Billing of diagnostic times at over 100%. We advocate that diagnosis and testing be billed at an efficiency rate of 200% of actual time invested. This concept is covered thoroughly in our "`Technician Time Management" workshop.

2. Advisors consistently billing sold hours in excess of available tech hours.

3. Selling so-called menu service wraps and preventive maintenance services that have a great deal of technician efficiency in them.

Table 1 on page 60 will help you determine your shop's hourly labor rate performance. Table 2 on page 61 shows how to calculate your shop's effective labor rate.

The important thing to know is that "effective labor rate" is the selling score of a shop after all transactions have been completed. The service advisor is the individual most responsible for achieving the desired results. Use the information contained in this article to calculate your shop's effective labor rate, and implement the necessary processes to improve your results.

Robert "Bob" O'Connor is President of R. L. O'Connor & Associates, Inc., a Seattle-based automotive operations and management training and consulting firm. He is best known globally for his highly effective automotive business management and sales training workshops, continuous improvement Bottom-Line Impact Groups, as well as his new division, The Service Advisor Academy. Bob is an Automotive Management Institute (AMI) approved instructor and AMI EXCEL "Guarantor."

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