Increased Service Absorption Rule #2

In our quest to achieve 100 percent service absorption we have determined that you must first have solid financial statements that enable you to effectively measure your current performance in fixed operations sales, gross profits and expenses. Next you must determine how many dollars in additional gross profit are needed to achieve 100 percent absorption. We agreed to call this dollar amount the “shortage.” Once you have determined what the amount of your shortage is, you must then prepare a business plan that will include all of the opportunities for improvement, which are: raising your profit margins on Customer Pay (C/P) parts and labor sales, increasing your sales per customer pay repair order and increasing your owner retention. I referred to these as the RULES.

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 Repair Order (RO) at a minimum of 2.5

RULE #3: Maintain a 6 to 1 ratio in C/P RO count to total vehicle sales.

Last month I explained how simple it is to maintain RULE #1, since it is basically a matter of discipline and as such it must become company policy to maintain that discipline. This discipline should be the same as it is on the showroom floor with your Sales Team. By that I mean it is the responsibility of the Salesperson (Service Advisor) to sell their products, while it is the responsibility of the Sales Manager (Service Manager) to control the gross profit. Now let’s move on to RULE #2.

Maintaining your C/P hours per RO at 2.5 is quite a leap forward for most of you reading this article since the average dealer in America is currently at about 1.5. This means that you would have to add one hour per Customer Pay repair order (your sales would have to increase 67 percent) to maintain RULE #2. Now, if your Service Director/Manager is reading this article, he or she is telling you this author is out of touch with reality and just plain NUTS! They might even say something like: “A 67 percent increase in C/P parts and labor sales is not possible in this dealership.” My humble response to them is simply this: “Continue to do what you’ve always done and you will continue to get what you’ve always got.” In other words, if you expect different results on your bottom line in fixed operations as well as your dealership as a whole you must do things differently or do different things. What you must understand if you want to prosper and grow is that your aftermarket competitors are doing things differently than you are and they are servicing more of your customers than you are, so I ask you this question: “What are you going to do about it?” May I suggest that you might want to step outside of your comfort zone and start conducting business on the same playing field as your aftermarket competitors?

Let me share with you an example of what I am talking about. In an effort to stay tuned (pardon the pun) with the market place we work in I take one of my family’s vehicle to the aftermarket quick lube type facility for an oil change and I take my other vehicle to the new car dealer where I leased the vehicle. Every single time I visit the quick lube center (No appointment necessary) I am offered additional services and products, I am shown my air filter, they tell me my tire pressure, they wash my windows, they vacuum my interior, they inspect all of my fluid levels and show them to me if they are dirty, they inspect my wiper blades, belts and hoses, they inspect the undercarriage for any visible signs of fluid leaks and they print all of this information on the repair with “NO CHARGE” printed next to every item they inspected. They offer me a savings of $5.00 on a tire rotation if I get it done while they are changing the oil. They review the repair order with me line by line with at least 5 items at “NO CHARGE”, explain to me what I need to have serviced on my next visit and I am out the door in about 30 minutes. If I only bought the oil change my total bill would be $28.95 plus tax; however, in reviewing my records I notice that my average expenditure is about $85.00.

Now, compare this to my visit to my new car dealer who happens to be the largest volume dealer in Columbus, Ohio for this make of vehicle. I must call and make an appointment first. When I arrive and meet with the Service Writer (No Advisors here), I am offered no additional service or products. I am asked to wait in the customer lounge and the cashier will call you when your vehicle is ready. About 45 minutes to an hour later the cashier calls out “Mr. Reed your vehicle is ready.” She hands me my copy of the RO and states “Your LOF is complete and your total is $28.95 plus tax. My windows are not cleaned, my interior is not vacuumed, I am shown nothing, I am given no results of any kind of any inspection of my vehicle, I am offered no “savings” today, there are no items listed at “NO CHARGE”, I am not advised of my other fluid levels and/or condition, have no idea if my tires were properly inflated, there is no Service Writer in sight to advise me on future service requirements and this nice young cashier hands me my receipt for my ONE ITEM REPAIR ORDER called a ‘LOF” (Pronounced – loaf). I say that jokingly since loafing is exactly what the Service Writer is doing!

Now, let’s compare the financial aspects of each of these scenarios. I spend about $85 at the aftermarket and about $29 at the new car dealer. The difference between these two repair orders amounts to $56.00. Look at your dealership and add $56.00 to each customer pay repair order and you decide whether or not that amount of money is significant to you. For example, if you write 500 customer pay repair orders per month you are missing out on $28,000.00 in sales per month or about $336,000.00 per year. Your combined gross profit in parts and labor as a percent of sales is going to average somewhere around 60% (Probably higher) which results in additional gross profits totaling $210,600.00. If your parts and service departments are already profitable then of course you realize that this $201,600.00 drops straight down to NET OPERATING PROFIT. Apply this $201,600.00 to your “shortage” in gross profit dollars needed to achieve 100% service absorption. A recalculation of your service absorption reveals that you have just taken one giant step towards recession proofing your dealership by increasing absorption. I reviewed this scenario with a dealer at the NADA convention who was writing about 1000 customer pay repair orders per month and I asked him if this made sense to him. His response was: “Sounds like a new boat to me!”