Article

Maximum Accountability Creates Maximum Profitability

September 2009, Auto Dealer Today - WebXclusive

by Don Reed - Also by this author

Maximum Profitability


After spending the last nine years working with hundreds of dealerships all across our country, I have discovered an amazing phenomenon permeating fixed operations. One could compare this phenomenon to cancer. The good news is this cancer is 100 percent curable for every single dealer who really wants to be cancer-free! The cancer is called “Lack of Accountability.” I find maximum accountability for everyone’s performance in the sales department, but when I cross over the demarcation line into the service and parts departments, I find a total absence of accountability with the exception of technicians, who are usually held accountable for their performance due to their flat rate compensation plan. Let’s look at some examples.

Most dealers would fire a used car manager who had $50,000 in used inventory over 12 months old, yet their parts manager can have $50,000 in 12 month old obsolete inventory  and the dealer says, “He’s been a good employee and he will sell it someday.” Really? Most dealers would not tolerate salespeople with a 10 percent closing ratio, yet they continue to employ service advisors averaging 1.0 customer pay hours per repair order and say “I can’t find anyone who can do any better.” Most dealers would not tolerate a finance manager who averages $250 PRU, but a service director averaging 60 percent one-item retail repair orders has a job for life because “the customers like him.” If you have the misfortune of being one of these dealers whose business has  this cancer, then I ask you to consider the following mathematical exercise.

This exercise begins with the following formula:
3 x 5 x 500 = 20,812

Now, if you are using conventional mathematics, you are most likely going to try and convince me the actual answer should be 7500 versus 20,812; however, I’m not using conventional math, I’m using accountability math.

The 3 represents three of the most important controllable areas of profitably when managing a Service and Parts department:

1. Hours per repair order

2. Labor Gross Profit margin

3. Parts Gross Profit margin

The 5 represents the improvement in these three controllable areas that most of you can realize starting today if you decide you want to get cured:

1. Add 0.5 hours per retail repair order

2. Add 5 percentage points to your Labor Gross profit margin

3. Add 5 percentage points to your Parts Gross profit margin

The 500 equals the number of Retail Repair Orders written in a given month, which is probably very close to what many of you are currently producing.

The 20,812 is the total additional gross profit dollars produced by increasing the three controllable areas on 500 repair orders as outlined above. Do I have your attention yet? This doesn’t require advertising, or fixed or semi-fixed expenses, just accountability for one’s performance.

Hours per repair order (HPRO) nationally are going down for far too many dealers. I see most dealers averaging between 1.0 and 1.3 HPRO. I see more and more averaging 0.6 to 0.9. What’s up with that? The answer is quite simple; there’s no selling going on. Why do you allow your service advisors, writers and assistant service managers (or whatever you call them) to become clerks? Most of you reading this article have the opportunity to raise your sales by 0.5 HPRO starting today if you’re ready to start your cancer treatments. It’s called process change with accountability for performance. Do you expect your finance producers to make a menu presentation to 100 percent of your sales customers? If so, then require your service advisors to make a maintenance menu presentation to 100 percent of your service customers.

In reviewing thousands of financial statements in our workshops, I find that most dealers’ retail labor gross profit as a percentage of sales revenue is averaging around 70 percent or less. Your benchmark needs to be 75 percent, so there’s your additional 5 percent in labor gross. It amazes me how many dealers have a higher margin on internal and warranty labor sales than they do on retail. Now think about that for a moment; your used car manager and your manufacturer are paying a higher price than your retail customer. Does this make any sense to you? Please, get out there and get that extra 5 points in margin. All you need to do is hold your service director/manager and advisors accountable for “unauthorized discounts” and your margin will go up starting today. I bet your used car manager is on my side with this one!

Additionally, I see these same “unauthorized discounts” with parts sales, and that’s why your retail parts gross profit as a percentage of sales is averaging around 35 percent. If you simply follow your factory pricing guides, you will most likely average closer to 40 percent. With a good parts pricing matrix, you can take it up to 45 percent, and now you have your additional 5 percent in parts gross. This, of course, would not apply to items like tires and accessories, but chances are those two items do not account for the majority of your sales. This is a very simple fix if you’re willing to hold everyone accountable for maintaining the 45 percent margin.

Finally, the assumptions I used in my accountability math are as follows:
1. An Effective Labor Rate of $75.00 @ 75% margin

2. A Parts to Labor sales ratio of 80% @ 45% margin

3. Add .5 HPRO to 500 repair orders

For every 500 repair orders that equals over $20,812 in gross profit or almost $250,000 per year. Do you like that math? If so, then you are ready to start the cure.

Vol. 6 Issue 8
 

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