SERVICE WORK is the most profitable activity a trailer dealer offers, according to consultant Frank Guerin, a 35-year veteran of the trailer industry. The question is: How can trailer dealers gain more profits from their most profitable department?
Speaking at the annual National Trailer Dealers Association Convention in Reno, Guerin said that service work typically is substantially ahead of parts (the second-most profitable department for the typical trailer dealer), followed by used-trailer sales and then new trailers.
“If you look at the revenue the departments generate, it's probably just the opposite,” Guerin said. “But regardless of revenue or profits, each of these departments needs to be managed as if they are the only business you are in.”
According to Guerin, the service department is the most profitable — and the most difficult to manage.
“It's tough because you are selling time,” he said. “Time is precious, and it evaporates. The big challenge for trailer dealers is selling as much of that available time as possible.”
To maximize shop profits, dealers must maximize two factors: efficiency and productivity. Guerin defined efficiency as “the time it takes to do a job compared with the time that was quoted to the customer.” To measure efficiency, simply compare the amount of time the job required with the amount of hours included in the quote.
Guerin listed the following as factors that affect shop efficiency:
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Pre-planning each day's activities.
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Having the right mechanic on the right job.
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Accessibility and availability of shop parts. Guerin considers this factor to have one of the biggest impacts on shop efficiency.
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Proper time management. Guerin said he likes to get to a trailer dealership early in the morning to analyze the effectiveness of the shop's time management. “Do people get started right off the bat?” Guerin asked. “A lot of times, I see a pileup at the back counter. Breaks need to start and stop on time.”
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Accuracy of quoting.
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Shop layout.
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Training. “Is it better to train mechanics and run the risk of losing them, or to not train them and risk having them stay?” he asked.
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Proper tools and equipment.
Measuring productivity
Productivity compares the amount of time actually sold to the inventory of hours that the shop has available. The inventory of hours is the number of mechanics the shop employs times eight hours per day.
Assuming the shop has eight mechanics, they work eight hours per day, and 21.3 days per month. The shop would have:
8 mechanics × 8 hours per day × 21.3 days = 1,363.2 hours per month.
Multiply that figure by the shop labor rate to determine the amount of labor sales that the shop can expect to sell in a month. In Guerin's example, the shop would generate $81,792 per month if the dealership sold all 1,363.2 hours of available labor at $60 per hour.
The goal of every shop should be to sell every hour in its inventory, Guerin said. While that may not always be possible, he believes it is reasonable to expect shops to routinely sell 90-95% of its mechanics' time.
“I came up with that figure by looking at a lot of statements,” said Guerin. “But is it possible to get 110%? Absolutely.”
Mind the gap
Guerin compared shop management to the London subway system. Because the trains do not always line up with the platform, the British warn passengers to “mind the gap.”
Likewise, trailer dealers need to “mind the gap.”
“The gap between jobs can be a silent killer of profitability for any shop,” Guerin said. “This gap is often hidden in your statements under expenses such as maintenance and applied labor. And when you have a gap between jobs, your expenses are still there — but without any revenue to offset them.”
Guerin said that when trailer dealers calculate the costs of labor, they must include idle time, maintenance, unapplied labor, and similar costs.
Because of costs such as these, Guerin suggested setting a target of 90% of full capacity. In his example, eight mechanics working fulltime would generate $81,792 per month in labor sales. Setting the objective at 90%, management would expect the shop to generate $73,612.80 per month.
Crunching the numbers
Guerin demonstrated how significantly the productivity of the shop impacts profitability. (See Profits and productivity” example). His central point: productivity may go down, but shop expenses remain the same. The result: the shop becomes less profitable.
In his example, a 10% decline in shop productivity results in a decline of more than $8,000 per month in profits — or almost $100,000 annually.
“That would be like paying between one and two mechanics per year to just sit there and not produce anything,” Guerin said.
The cost of inefficiency
The “gap” between jobs can be costly, but so can being inefficient, Guerin said.
“The problem with inefficiency is that your revenue doesn't change,” he said. “You can't go back to a customer and say that you made a mistake and quoted the job wrong. In the case of inefficiency, your revenue remains the same, but your costs go up. And because your shop is tied up on this job, you can't sell additional service work.”
Compounding the problem is the fact that the shop (typically the most profitable area the trailer dealer has) also determines the amount of service parts sold — the second-most profitable area.
“The typical trailer dealership will sell 50 cents in service parts for every dollar of service sales,” Guerin said, “and many times I see much higher than that. I just got back from a trailer dealership that sold $77,000 in labor during one month and $67,000 in service parts — or 80 cents for every dollar of service sales.”
Guerin offered a series of suggestions for improving shop efficiency and productivity. The first: do something.
“Que será, será is not a recommended management style,” he said. “A lot of people manage their shops this way, waiting to see what took place. You don't want to see the bad numbers and then have to bring in the service manager and ask what happened. If you are the owner, get actively and aggressively involved in the management of your shop. There is no better place to spend your time and managerial expertise. Too often dealers hire parts managers and service managers and turn them entirely responsible for the two biggest profit centers in the business.”
Guerin offered the following suggestions:
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Recognize that “que será, sera” is a failure as a management style.
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Determine the inventory of available labor for your shop.
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Multiply that inventory by the desired labor rate.
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Determine what your gross revenues should be.
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Determine what your gross profit margin should be. Guerin used 71.6% in his example.
Improving productivity
Guerin suggested improving shop productivity by making improvements in the following areas:
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Backlogs. “This is the biggest way to mind that gap — to have one job ready to start as soon as one is finished,” Guerin said. “If you don't have a backlog at the end of the day, you really will impact your productivity. You need to always have fill-in work ready to move into the shop. It could be work that needs to be done to your used trailers — a job that you know you will have to do before you sell that trailer. Use that to avoid any gaps.”
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Retention of good customers. Make sure you keep them happy to keep those jobs coming in.
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A good service manager. “A good service manager is worth his weight in gold,” Guerin said. “Good ones are always hard to find, and they usually are on the grouchy side. They have the toughest job in the dealership, and a lot of times they don't feel appreciated. You should spend time with your service manager, preferably at the beginning of the month. Listen to his needs, and help him refine his department.”
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Promote your shop and parts department.
What one mechanic can do
What is the value of a single technician? Guerin went through this exercise:
Shop rate=$60 per hour
At 90% efficiency=$54 per hour
At 8 hours per day=$432 per day
At 21.3 days per month=$9,201.60
Revenue per year=$110,419
To get a more complete picture, calculate the value of the service parts that are sold in junction with the jobs that the service department completes. If the rule of thumb is that a dealer sells 50 cents in service parts for every dollar of service work, that mechanic would be responsible for selling $55,209 in service parts per year. That means one mechanic generates $165,629 in total sales annually.
Competing with smaller shops
Guerin offered advice for competing with smaller shops.
“People always tell me that I don't understand that they have to compete against smaller shops that can charge a much lower labor rate.
“Don't turn down any job if you are going to have a gap in your shop,” Guerin said. “When you quote a customer, and he throws a competitive quote in your face, you better tell him to give you that job if you don't have a big backlog.”
Guerin advised to subtract from that bid the full price of the service parts in order to determine the cost of the labor to do that job. Divide the desired labor rate into the labor cost to calculate how many hours that will be available to do the job.”
Managing parts
Guerin also spoke about the role of the parts manager. He said the parts manager should concentrate on increasing the sale of over-the-counter parts.
“His focus has to be there,” Guerin said. “This is the only area that he has the ability to increase. He has no control over the shop, the sale of service parts, or the sale of warranty parts.”
Guerin suggested a simple graph to help parts managers gauge their progress. Plot where sales are now and where the parts manager would like them to be in the future. Draw a line between the two points. By plotting the sales manager's progress, it will be easy to see if he is above or below expectations.