Know what to measure and how to improve your business

Jan. 1, 2020
The type of things that shops are measuring and how they are measuring them has changed in several ways from common past practices.
GETTY IMAGE / COLORBLIND IMAGES

Erick Bickett says many of the top shops in the country have shifted from a relentless internal business measurement to more of an external perspective.

"In the past, shops were predominantly focused on the effective return on their investment based on gross profit," said Bickett, a multi-shop operator in California and also CEO of the Fix Auto USA network of franchises and shops. "It was a focus on the top line, and we felt we had a healthy business if we were producing industry-leading gross profit numbers."

Erick Bickett, CEO, Fix Auto USA

Today, Bickett said, many shops understand that business relationships, particularly with insurers, have grown in importance and require more focus.

"Gross profit remains important, but it's also about becoming THE shop to do business with, from the insurance company point-of-view," Bickett said. "It's about what measurements will better define us as better, faster and cheaper." 

Not everyone in the industry will necessarily agree with Bickett's perspective on insurance company relations. But many shop owners, trainers and consultants agree on his general point: that what shops are measuring – and how – has changed in various ways from what it has been in the past.

Here are some of Bickett's perspectives – and those of others – on what shops today should be measuring and working to improve.

Looking externally

Bernie Blickenstaff, consultant and trainer

Bickett said the change he recommends can require almost a culture change within a shop.

"What we're trying to do is try to get all our people to recognize that we win when the insurance company wins," Bickett said. "The insurance company wins when we deliver a product that is better, when we do it more efficiently, and when we do it at the most economical cost. So when we go out and write an estimate on a car, now we need to look at the estimate as if we are a shareholder of that insurance company. We want to do a quality job, but at the same time, we want to deliver a low-cost solution. So maybe we'll use paintless dent repair on the edge of the door so we don't have to blend into the quarter panel. In other words, we're not going to have a home run on every car. But we're going to get a home run by providing value within the business relationship."

As insurers increasingly focus their direct repair programs on the shops providing performance from their perspective, Bickett said shops have to shift to more of an external measurement perspective.

"They have to compete and hit the number, or they're not going to get the work," Bickett said. "I would rather be at 90 percent capacity with 40 percent gross profit than at 50 percent capacity with 50 percent gross profit."

New measurements and concerns

Ron Kuehn, consultant and trainer

Shop consultant and trainer Ron Kuehn said there are several numbers he measures as he works with shops today that he never would have looked at years ago. One example: Number of OEM parts invoices per repair order.

"I look at that, rather than supplement ratio, to determine how thorough a shop is being in pre-production," he said.

Like Bickett, Kuehn said cycle time, customer satisfaction and severity (or "affordability") are the key numbers shops need to be monitoring to ensure they are winning in their market. A shift away from "repair" to "replace" can make such measurements tougher on shops than it was in the past.

"In the past measurements of affordability were less effected by differences in labor rates from one part of the country to another because 'judgment time' was adjusted more based on rates," Kuehn said. "As repair time has been increasingly replaced by 'book time,' comparisons and benchmarks are less consistent between markets. That creates problems when insurers, for example, are comparing performance among markets where there are large differences in rates."

Kuehn said that's why more than ever shops need to understand how they stand competitively within their market, and ultimately focus on continuous improvement of their own metrics.

Fewer insurer measures

Stacy Bartnik, vice president of field operations, CARSTAR

Stacy Bartnik, vice president of field operations for the CARSTAR chain in the United States, agrees that shops today are doing more external-focused measuring than they did in the past. For example, shops for years have measured what percentage of their work is repeat business or referred by previous customers. In the past, this has been viewed as part of measuring your marketing effectiveness, by tracking where customers come from. Now, Bartnik said, individual shops and multi-shop operations like CARSTAR are using those numbers more externally, taking them to insurers, for example, as evidence of a shop's ability to satisfy and help retain customers for that insurer.

Bartnik said the good news for shops is that many insurers are increasingly using fewer key performance indicators, focusing on three or four primary numbers rather than judging a shop's performance using a dozen or more measurements.

"Some are setting overall severity as a key metric, rather than (type of) parts usage," she said. "They might be okay with the higher-ticket price of the OEM part rather than (used) if it reduces the number and cost of rental days."

The challenge that remains for shops, however, is that each insurer still has different KPIs.

"One insurer may have no desire to measure CSI, whereas for another it's very important," Bartnik said. "It can be a tracking nightmare. Ultimately, I think it will get easier, but for now shops have to be sure they clearly understand what each insurer is looking for."

Internal measures changes

But these external measures aside, are there changes to what numbers shops are tracking internally?

Hank Nunn, collision director Western region, AutoNation.

Long-time industry trainer and consultant Hank Nunn, who also is collision director of the Western region for AutoNation, says there is. Like Bickett, Nunn sees shops looking at gross profit differently. Twenty years ago, it was all about improving labor sales because it had a higher 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.

How ‘parts usage’ is measured will change

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.

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?

Chart A on this page shows a basic comparison with some sample rates and gross profit percentages.

In this example, repairing the fender yields a higher percentage of gross profit (48 percent) than replacing the fender (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, you make more money replacing the fender, and that's a number you should be tracking," Nunn said.

Nunn said that he's not suggesting replacing fenders that can be repaired. But on borderline repair vs. replace cases, he said, shops with a steady flow of work are generally better off selling the part rather than the repair labor.

Parts-to-labor ratio

Bernie Blickenstaff, another former shop owner turned consultant and trainer, 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 than 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 percent or 90 percent, but he has client shops with ratios above 100 percent. But no matter what your shop's number is, you'll improve financial performance if you work to nudge that number up, he said.

"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 seen it yet."

Blickenstaff and Nunn say without such measurements, 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 what work you are doing that is the most – and least – profitable.

"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."

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