For the past two months we have been reviewing what it takes to put together a “business plan” to achieve 100 percent service absorption. We start this process by determining how many dollars in additional customer pay parts and labor gross profit is needed each month in order to reach our goal. We called this the “shortage.” In preparing your business plan, I gave you three rules to follow that will enable you to generate additional gross profits to cover this shortage: RULE # 1: Maintain your profit margins at 45 percent on C/P parts and 75 percent on C/P labor.
RULE #2: Maintain your hours per C/P RO at a minimum of 2.5.
RULE #3: Maintain a 6 to 1 ratio in C/P RO count to total vehicle sales.
In past articles, I’ve explained how simple it is to maintain RULE #1, since it is basically a matter of discipline. However, maintaining 2.5 hours per customer pay RO is quite a leap for most since 1.5 hours per RO seems to be about average. In last month’s article, I stated that you must start doing different things or do things differently if you expect to achieve different results. I also pointed out you should do what your aftermarket competition is doing, so you can build owner retention. In doing so, I showed you how to add about $56 to every customer pay repair order, which equates to about $210,000 in additional gross profit per year on 500 repair orders.
Note: this additional money goes straight toward reducing shortage, which puts you that much closer to 100 percent service absorption. So, what else can you do to increase your customer pay hours per RO to 2.5?
Let’s switch departments for a moment and go to your Used Car Department. Do you have a policy that all used vehicles get inspected for needed maintenance and/or mechanical repairs before the vehicle is offered for sale to the retail customer? Most dealers would answer, “Yes.” Why do you have this policy? Most dealers would answer, “I want to maximize gross profit per retail unit while ensuring that my customers are driving away in a safe, reliable vehicle.”
I agree wholeheartedly with these responses. Of course, this policy also has a positive impact on CSI and promotes a positive image of the dealer in their community since the dealer is selling safe and reliable vehicles. It’s not uncommon to find a dealer spending $500 per retail unit PRU. Let’s say that $100 of the $500 is for detailing, which leaves $400 PRU in mechanical repairs. If half of the $400 (or $200) is for parts, then that leaves $200 in labor. With the average dealer in America averaging $75 per hour in labor, that means the average hours per internal RO in used vehicle reconditioning equals 2.7 ($200 divided by $75). Do this exercise by evaluating about 50 used vehicle internal repair orders and determine what your hours per RO actually are. Now, ask yourself, “Who owned this used vehicle before I did?” The answer of course is “a retail customer.” So, whether the vehicle was a trade-in at your store, purchased at the auction or bought off the street or from a wholesaler, it belonged to a customer.
Now, how does this bring us back to the service department and to achieving 100 percent service absorption? If, you performed the exact same inspection on that used car belonging to a retail customer, would you not find the exact same repairs and/or services necessary? Of course you would! So, have your service shop offer these services so you can maximize gross profit while insuring that your customers are driving away in a safe, reliable vehicle – the same reason the used car department performs them on cars brought in.
Additionally, this process will have a positive impact on CSI, owner loyalty and net profits. So, if you are currently writing 1.5 HPRO and you establish a policy of inspecting 100 percent of your customers’ vehicles every day, you will then increase your HPRO by a minimum of .5. What does that mean to a dealer writing 500 repair orders per month?
Some quick math shows us that 500 RO’s at .5 additional hours per RO equals 250 hours. So, 250 hours at $75 per hour equals $18,750 in additional sales at 75 percent (RULE #1) gross profit margin equals $14,062 in additional gross profit. We know that we average a parts to labor ratio of at least 80 percent which means we also have additional parts sales of $15,000 ($18,750 x 80 percent). With a parts gross profit margin of 45 percent (RULE #1), we also generate $6,750 in additional parts gross profit.
Combine the additional labor gross of $14,062 with the additional parts gross of $6,750. You come up with $20,812 in additional customer pay gross profit per month. Annualize this and you put an additional $249,744 in your bank account. Do I hear, “cash, check or credit card?” Don’t forget to add this $249,744 to the additional gross profit of $201,600 from last month, and now we have a total of $451,344 in additional gross profit for the year, or $37,612 per month, which takes us another big step closer to 100 percent service absorption. Why not make this inspection process a RULE?
If any of you have Service Managers/Directors telling you that this is not possible in your dealership, I will be happy to introduce you to some dealers who have already successfully implemented RULE # 1 and Rule #2. These dealers are experiencing an increase in customer pay gross profits in the 60 to 70 percent range over the same period last year. They did so by doing things differently than they did before and are well on their way to making their dealerships recession-proof. Why don’t you do the same?
