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Productivity boost offers more value than price alone

Monday, May 7, 2018 - 07:00
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The average shop in the marketplace is currently averaging 1.4 to 1.6 hours per invoice. The industry must achieve a productivity level average of 2.5 hours per invoice to provide professional vehicle maintenance to the client. That is the goal to be achieved.

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So what is the impact on a shop’s gross profit and potential net profit if a shop can increase their productivity by only 10 percent to start? In our example, the shop is averaging 267 invoices per month (1,602 ROs written divided by 6 months) and averaging 1.57 hours of labor per RO at $90 per hour.

Without increasing the volume of ROs written and keeping the labor rate at the same charge-out rate, if we increased productivity by 10 percent from 1.57 hours to 1.73 hours per invoice, the results to additional gross profit (and net profit) would be as follows:

  OLD NEW
Average number of invoices written per month 267 267
Times average number of labor hours per invoice 1.73 1.57
Equals total labor hours billed per month 419.2 461.9
Times the current hourly labor rate $90 $90
Equals total labor revenue produced per month $37,728 $41,571

The difference between the new productivity and old productivity is $3,843 per month! This will create an additional $46,116 gross profit and net profit from labor revenue alone for the shop in one year.

These figures can become very significant as the internal processes to build billed hours moves forward. They represent a substantial additional amount of money earned compared to what any discount on parts could ever contribute to the shop bottom-line profitability. In addition to that, we haven’t even accounted for any gross profit earned from the parts sales that would be made with the increase in labor productivity.

Math is a very precise science. The numbers do not lie. Consider talking to your team about how to slow the shop processes down and increase productivity per vehicle rather than spinning everyone’s wheels by trying to bring in more vehicle volume or land a bigger parts discounts from the supplier. Let’s teach the industry to work smarter, not harder. 

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