Service Absorption
Clayton asked my opinion on Service Absorption and I will give my opinion as a Comptroller and call upon an expert to contribute to the topic. My good friend JIm Washam who is in our group has agreed to respond as well.
Monitoring the service absorption rate and designing a business plan which includes setting goals to reach or maintain 100% absorption rate or better is crucial while optimizing a plan to achieve maximum profitability and growth in all departments.
You will find that during the times in history when sales were good, service absorption was ignored and certainly opportunity for increased sales and gross in fixed operations was lost. Historically, dealers came from sales backgrounds, and concentration on improving the service, parts and body shop sales and gross was lacking. For the past couple of years, experiencing the decline in retail sales, many dealers were forced to take a harder look at their fixed operations and hence the “Service Absorption” was reborn and played a significant role in the viability of the dealership.
Service Absorption, (the gross generated from the fixed departments divided by the total overhead expenses), should be between 65 and 110% depending on the dynamics of the store. The two main ways to improve that is to either increase fixed gross profit or reduce total overhead expenses, (total expenses, all departments). In this discussion we will talk about increasing gross profit as there will be another discussion started on expense control today. We can increase gross profit by increasing sales, or increasing gross profit retention, (the % of gross profit to the sales). In the service department this would be accomplished by delegating the proper grade tech to the appropriate job based on level of expertise and pay grade. Ex.) You don’t want to pay a $30.00 per hour “A” level tech to perform a competitive pricing maintenance item which is billed at $35.00 per hour. To increase sales in service, the director or manager should concentrate on customer labor sales, by closely watching HPR, hours per RO, effective labor rate, (total customer labor sales divided by total billable hours), customer retention, (it costs less to maintain YOUR own customer than marketing new customers), and more.
Now let’s hear from Jim Washam…. Please feel free to add more to this discussion everyone and ask any questions you may have!
Enjoy your weekend and Happy Selling!!!!
Replies to This Discussion
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Permalink Reply by Clayton R Perry, Sr on
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Nancy,
Thank you
Clayton -
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Permalink Reply by A. J. Maida on
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My question would be does anyone out there have any more expenses that can be cut? I think the conversation has to be about increasing sales and retention. From the internet side of things. Are you finance guys and girls directing your internet people to focus on moving your parts and service pages up on Google page one? Have you had them do local market research on competing dealers and independent service center. Then have you and your fixed ops managers used this data to establish your pricing and marketing message. There are so many ways to do this. We have just entered into an agreement with Brian Pasch and his group to do fixed ops SEO. I don't think anyone is focused on this in the country. I know your competitors aren't. Type into Google, "Oil Change" Brake Service" Transmission Service" and your major metro city. Let me know if a Dealer shows up on page one. I have a feeling this is going to be great. It is still too early on for results but based on what Pasch Consulting Group is doing for us on the sales side I can only imagine what going to happen here. I'll let you know.
By the way; you accounting people say we internet peeps use funny words? What the heck does absortion and hpr have to do with selling cars? ;-) -
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Permalink Reply by NANCY SIMMONS on
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Awesome points AJ! I love internet Geek talk by the way.... You are really thinking (even if you are laying down)...I would love to hear more about this...especially promoting service, parts and body shops on the internet...another huge missed opportunity for most... We are starting another discussion today regarding Expense Control structure.... Keep an eye open for it...
A. J. Maida said:My question would be does anyone out there have any more expenses that can be cut? I think the conversation has to be about increasing sales and retention. From the internet side of things. Are you finance guys and girls directing your internet people to focus on moving your parts and service pages up on Google page one? Have you had them do local market research on competing dealers and independent service center. Then have you and your fixed ops managers used this data to establish your pricing and marketing message. There are so many ways to do this. We have just entered into an agreement with Brian Pasch and his group to do fixed ops SEO. I don't think anyone is focused on this in the country. I know your competitors aren't. Type into Google, "Oil Change" Brake Service" Transmission Service" and your major metro city. Let me know if a Dealer shows up on page one. I have a feeling this is going to be great. It is still too early on for results but based on what Pasch Consulting Group is doing for us on the sales side I can only imagine what going to happen here. I'll let you know.
By the way; you accounting people say we internet peeps use funny words? What the heck does absortion and hpr have to do with selling cars? ;-) -
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Clayton, I mentioned customer retention...Can you tell us about ways to market service and get more people in the door...Jim's last statement was that we must first have the traffic. How can we do this in an affordable fashion???
Clayton R Perry, Sr said:Nancy,
Thank you
Clayton -
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Nancy,
The first job is to know who your customers are and where they are coming from and then determine how many that live in your 80% Market Area.
Our function is " market analysis" where 3-2-1 Automotive Consultants provide in-depth market analysis for your service department. We evaluate your service sales and "clean-up" your dealerships' customer service records so that you can better identify your current market potential. This helps us to better identify and recommend specific marketing opportunities for your dealerships' customer retention and profitability.
This market evaluation of your service sales helps us to achieve the following objectives for you:
· Identify the current market area of your dealership as determined by your dealerships' customer base. This evaluation uses both sales and service customers to delineate the market area.
· Indentify the Potential market area of vehicle owners for the make of vehicle sold by your dealership. Potential rate is the number of your dealerships' sales and service customers that are among Potential owners for the designated market area.
· Recommend specific marketing opportunities avaliable for your dealership to improve customer retention and profitability
Clayton Perry
3-2-1 Mailing And Consulting Services
www.abcmailingservices.com -
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Permalink Reply by Mark Ragsdale on -
I think you meant to say "sales mix" instead of ELR. ELR (effective labor rate) is calculated by taking total labor sales dollars divided by the total number of hours paid to technicians. Not every hour paid is billed out to customers and not every hour billed out to customers is at the same rate.
If anyone wishes to get me their total labor sales and total hours paid (from payroll records, rather than from dividing average tech wages against cost of sales) I will calculate it for you and provide some tips on how to raise your ELR.
I like that you are talking about this subject and you do so eloquently. This puts you and others that read you way ahead of most others in the induxstry!
Blessings,
Mark -
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You are correct, Mark. However, in a 100% flat rate shop, the technician hours = the billable hours and technicians are paid directly from the billable hours reports. I understand what you are saying though... This is an awesome subject to discuss, and as we discuss it, explain it, as many dealers, (unlike yourself) are not familar with the fixed operations side of retail and don't really care to be, just out of lack of knowledge. I appreciate your expertise here on "Nothing but Net" and welcome you to continue contributing... This is what DealerELITE is all about and everyone can find something here in which to benefit!
Mark Ragsdale said:I think you meant to say "sales mix" instead of ELR. ELR (effective labor rate) is calculated by taking total labor sales dollars divided by the total number of hours paid to technicians. Not every hour paid is billed out to customers and not every hour billed out to customers is at the same rate.
If anyone wishes to get me their total labor sales and total hours paid (from payroll records, rather than from dividing average tech wages against cost of sales) I will calculate it for you and provide some tips on how to raise your ELR.
I like that you are talking about this subject and you do so eloquently. This puts you and others that read you way ahead of most others in the induxstry!
Blessings,
Mark -
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Permalink Reply by Mark Ragsdale on
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Presuming that there is no unapplied time (which still occurs in a 100% flat-rate shop) or funky shop tickets paid for shop cleanups etc., you are absolutely correct.
However, I have never seen a bulletproof chargeback system in place that ever puts the ELR equal to the "posted" rate even in full flat-rate shops. And in any event, ALL shops practice variable pricing in some form or another. ie. Oil Changes and the like.
Interesting topic!
NANCY SIMMONS said:You are correct, Mark. However, in a 100% flat rate shop, the technician hours = the billable hours and technicians are paid directly from the billable hours reports. I understand what you are saying though... This is an awesome subject to discuss, and as we discuss it, explain it, as many dealers, (unlike yourself) are not familar with the fixed operations side of retail and don't really care to be, just out of lack of knowledge. I appreciate your expertise here on "Nothing but Net" and welcome you to continue contributing... This is what DealerELITE is all about and everyone can find something here in which to benefit!
Mark Ragsdale said:I think you meant to say "sales mix" instead of ELR. ELR (effective labor rate) is calculated by taking total labor sales dollars divided by the total number of hours paid to technicians. Not every hour paid is billed out to customers and not every hour billed out to customers is at the same rate.
If anyone wishes to get me their total labor sales and total hours paid (from payroll records, rather than from dividing average tech wages against cost of sales) I will calculate it for you and provide some tips on how to raise your ELR.
I like that you are talking about this subject and you do so eloquently. This puts you and others that read you way ahead of most others in the induxstry!
Blessings,
Mark -
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Permalink Reply by Tom Wiegand on
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Since 1976 I have been known as a Service Absorption Junkie! I have a performance-based training & consulting background, earning income from gross profit improvement in Variable and Fixed Ops. So, my mind is always centered on the 3 gross profit generating engines that power business; margins, $ per transaction, and # of customers. History revealed the ease of growing $ per transaction thru "Process Training". The problem with this is so evident today in the fact that moving a dealersship from, say 1.5 HPRO to 2.5 made everyone lots of money --- initially. But, over time, customers left, retention tanked; all because we didn't place leadership focus on keeping and building retention. Today, my efforts are centered on PROVING a dealership can DOUBLE the number of customers they do business with (and continue growing from there) within a "Training to Leadership to Coaching to Synergy to Retention" environment. Go through an exercise with me Nancy. Call me on my cell: 443-910-7702. It will take about 30 minutes to gather from last months financial statement and computer system reports a few dozen figures on your dealership. From these figures I will drill down to assess your dealerships physical ability within current hours of operation and current personnel production performance what your business will look like with a systematic improvement of more customers doing business with you, what your "Retention-Proof" numbers are, what your "Recession-Proof" abilities are, and give you an honest idea of when, and how your business can attain its "Best Example". I do not know your dealership at all. I will be surprised if 100% SA is not attainable. If, for some odd reason it isn't, I will detail exactly why it can't and what is necessary to achieve it. I do not want to minimize ELR here, yet all here already know that ELR can be calculated by total business, by advisor, by job, by group, by APS, by day, by the hour, etc. ELR management is a matter of attitude and discipline, and the easiest to improve, agree? Doubling the # of customers will require a minor culture adjustment, converting from a WIIFM world to a WIIFT (Them), and when they win, we will win! I will share a simple secret here: my VIP (Vehicle Inspection Process) alone can DOUBLE customer count! Is it different than what is done now? Obviously! Is it 100% customer-centric? Obviously! Will all of Fixed Ops welcome it? Obviously --- so long as they experience proof that when we serve customers "Best Experience" with our "Best Example" and they can see, touch and taste how good this new culture is for everyone! I look forward to your call! Tom Wiegand
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