The shop can be the most profitable part of a dealership—and the most challenging to manage. A two-day workshop sponsored by the National Trailer Dealers Association offered ways to increase profits and reduce the challenges.
THE shop is loaded with managerial challenges: cut-throat pricing, nearby competitors who are good at what they do, and an inventory (labor hours) that expires when the day is over.
Even so, there are ways to make shops more profitable, and the National Trailer Dealers Association recently pointed them out at a two-day workshop held at the airport Hyatt in Dallas, Texas.
A group of trailer dealers attended (along with their laptop computers) to pick up ideas from Allen Phibbs, a former general manager for a large Mid-Atlantic commercial truck and trailer dealer group who now works with KEA Advisors, a consulting firm based in Lawrence, Kansas.
Complicating the challenge that dealers face is that they are in a mature industry where little organic growth is to be expected. Those who really grow will have to set themselves apart from their competitors.
“Buyers are experienced,” he said. “Pricing is competitive. Products are not differentiated in the big picture. So what is it you have to do to differentiate your dealership from competitors? It's really about your cost structure and ability to serve your market.”
In his expansive and enlightening seminar for the National Trailer Dealers Association, “Unlocking Commercial Dealership Profit,” he said KEA uses the Profit Scorecard approach — a strategic, proactive method that focuses on activities that drive performance, particularly in service departments, and not necessarily on financial results.
It involves: developing a dealership strategy and group/branch/department profile, identifying objectives, developing measures, preparing a strategy map to clarify logic, developing goals and action plans to achieve objectives, and developing measurement reporting.
The service department is measured by productivity, efficiency, net income, quality, absorption, goal hours, cleanliness organization, safety, morale, and team effort.
“Typically and traditionally, what gets measured is results,” he said. “We'd challenge you to measure what drives the results, like hours and those types of things. Hours in your shop that you have to sell are like a block of ice. When you turn the key and turn on the lights, you put that block of ice in the middle of the shop. The objective is to chip away that ice and sell as much as you can in whatever size it is without it melting away. Once it's gone, it's gone. I don't know of any shop that if it didn't sell its hours, it can sell them tomorrow. Your shop is like that block of ice.”
Phibbs said shops need to measure performance on an hourly/daily/weekly basis. Gathering data once a month and then reporting it isn't good enough. He believes that what gets measured is typically what gets done. A corollary may be that what gets measured better gets done better.
“If it's important to you, it'll be important to everyone else,” he said. “Traditionally, most organizations have a mission, vision, and values, or some combination of those. Mission being, ‘This is what we do.’ Vision is, ‘This is what we want to look like when we've arrived.’ Values are what's important or non-negotiable. The strategy is typically missing.
A group of trailer dealers brought their laptops to compare their own shop performance data with benchmarks presented during the workshop.
“The key word is how — how you take what you do to turn it into what you want it to look like, without straying away from what's important to the organization. The other key word is long-term. Because of the way society drives us, we get really caught up in short-term financial results. Not that they are not important, because they are, but we lose sight of long-term success. We're talking survival versus success. You can survive and tread water, but if you tread water long enough, you eventually drown. We're not talking about treading water day in and day out. We're talking about treading when you need to but then move on past that to where you can be successful long-term.”
Look in the mirror
Phibbs said the dealer principal and/or shop manager should take a close look at how the shop is performing, measuring performance in terms of four basic competencies that form the acronym SWOT (Strengths, Weaknesses, Opportunities, and Threats):
“These are internal. What is that your service department is uniquely or exceptionally good at, and what your customers value?”
“These are also internal. That doesn't mean that you are uniquely or exceptionally bad at these things. What is it that we could improve that our customers would value?”
What circumstances exist for strengthening the operation?
Like opportunities, threats typically are external: Competitors, customers who leave or go out of business, the economy, regulations, and many others.
Such an analysis should help define your Unique Selling Proposition (USP). This is what sets you apart from the competition. Why will customers come to you? What is your USP?
“Your USP is not based on price,” he said.
Phibbs said strategy is about doing the right things, while operations efficiencies are about doing things right.
He said that ultimately dealers should identify and pursue a strategy that will give the dealership a defensible and profitable hold on the market.
“Avoid the commodity trap,” he said. “Who or what does your dealership want to be? Is that who your dealership is now? Who or what do your customers expect you to be? Does this match who or what you are?”
Need an alignment?
Phibbs gave these examples of strategic (long-term) positioning: Lexus' strategy to build a perfect car, offer retail experience, and pamper the customer; Wal-Mart's achieving operational efficiency; Airborne Express' construction of an integrated, customized logistics and package-delivery system than would improve the productivity of a select set of high-volume customers; and McDonald's consistency, dependability, price, and speedy service.
Dealership alignment means that every employee at every level understands the strategy and their role in achieving the strategy; the company has the right people and the right resources; all activities are linked to and support the higher goal; and everyone's communicating.
Allen Phibbs, a former general manager for a truck and trailer dealership group, discusses market segmentation.
“With businesses that have strategies, there's only a 10% success rate because the strategy is not shared with employees,” he said. “Seventy-five percent of managers' compensation is not tied to success. Employees are not lined up with the strategy. Adequate time and resources must be committed to strategy execution — more than the day-to-day operation and problem-solving. Strategy must be pushed down to all stakeholders: employees, owner, customers, vendors, community.
“Develop a strategy that all stakeholders understand. That means you shouldn't have a strategy involving price. There should be focus and accountability from top to bottom. Monitor the success of the strategy. Focus on leading indicators of success, not so much on financial indicators, because they are lagging indicators. It doesn't matter how good your accounting office is. At absolute best, you are a month behind. You can't wait for that financial information. If you measure real time, you will know what your financial information will be.”
He said the beauty of the Profit Scorecard is that it defines, articulates, and communicates strategy, drives focus and accountability, monitors success of the strategy, focuses on leading indicators of success, and delivers superior performance.
The Profit Scorecard focuses on four areas: financial, market, process, and capabilities and capacity. We'll take a look at the last two areas in the October issue.
How do we measure success?
Protect the existing business.
Reduce cost and increase efficiency. Phibbs urged his audience to figure out ways to sell more to existing customers. “Manage your line in terms of customer retention. You can be 15 times more profitable by selling more to existing customers.”
Rethink product mix and pricing strategies.
How much of the company's expenses can the parts and service departments absorb? He said it's key that parts, service, and the shop produce sufficient gross profit to cover the total overhead expenses of the entire dealership.
Absorption is driven by gross-profit dollars and dealership expenses. The benchmark is 115%, but even dealerships with parts and service departments covering overhead can go bankrupt. That's because absorption doesn't measure everything because of a shortage of cash.
Absorption should be at the forefront of management thinking, he said, but it does not tell you anything about receivables, warranty receivables, assets, inventory (parts, service, and equipment), and cash position.
“We believe there should be some blending of income statement and balance sheet,” he said.
Phibbs believes service managers have the most difficult inventory in the dealership to manage — labor hours.
“The department manager is the asset manager. You manage labor inventory, tools and equipment, shop space, etc. Your role is to manage the assets to achieve the best return. It's not much different than the person who manages a 401(k) account for the owner of the business.
“You also have the most profitable inventory in the dealership — if you can sell it. I would never make that statement at a parts workshop, but it's true. But it is the most challenging to manage,” he said. “I believe in pay-for-performance. If you pay them hourly, their motivation is to show up. Yet flat rate can be a difficult system to operate.”
Phibbs asked: How effectively are you using the assets of the dealership to maximize financial performance?
“This is important because it provides a dealership with flexibility on pricing,” he said. “You can be aggressive on pricing or the luxury of holding margin. The more profitable you are, the greater your flexibility in operating your dealership — including the ability to invest in equipment and facilities and personnel. If you are not turning your assets, the less ability you have for buying what you need.”
Profit factors to focus on:
Asset turnover. With the advent of the Federal Motor Carrier Administrations Compliance, Safety, Accountability (CSA) requirements now in place, fleets need maintenance and parts.
Dealer management system. Are you using what you are paying for?
Processes. How do you do business?
“Service profit, not net income, measures the department's ability to generate enough net income to cover the cost of the dealers' investment in the assets of the service department. Profit can also be viewed as how well the service department's assets are utilized.”
Phibbs said service profit is driven by labor hours, effective labor rate, and assets, receivables, inventory, and work in process (how much and how old).
“The cost of assets hidden comes directly from equity,” he said. “Managing assets better will drive both gross profit up and expenses down. Start with customer receivables. The quicker you can turn labor hours into receivables and those receivables into cash, the more profitable you will be.
“With receivables, how much and how old? That's what you must focus on. What you should look at daily: Hours available to sell — the most important thing for a service manager to manage — equals the number of technicians times the number of hours worked. What is the percentage of appointments versus drive-in business? What is the goal? 100% of hours of technician. With a working foreman, you might only be able to be 60%, or higher for a night-shift foreman. Eight techs times 10 hours equals 80 hours per day. Carryover may be 50 hours per day. Therefore, you have 30 hours per day to sell.
“The cost of labor includes lost and idle time. A-six minute improvement per day per technician results in a $1672 improvement per month. Cash gap is the time between when you paid the tech versus when you get paid. The greater the cash gap, the greater the impact on the owner's pocket.”
Phibbs said service profit is driven by: assets (receivables and inventory WIP); gross dollars (maximize labor hours, market-based pricing strategy; and cost of technician performance; and expenses (personnel, controllable expenses such as unapplied/lost/idle time, shop supplies, and uniforms).
Get what's due you
Phibbs stressed the vital role that receivables play in the profitability of a dealership.
“The older the receivable, the less likely it is to be 100% collected,” Phibbs said. “If current is higher than 90%, it may indicate credit terms are too stringent. On the other hand, greater than 15% over 60 days (or older) may indicate credit terms are not stringent enough or possibly overridden. In either case, established credit processes should be evaluated. Over-aged receivables deteriorates dealership profit.”
A work-in-process month's supply measures how many days of unbilled service labor dollars are on hand — that is, how long it takes to sell service labor dollars. A high month's of supply indicates it is taking too long to close ROs (service-labor dollars), thus tying up excess capital that could/should be reinvested into more productive, revenue-producing service or products — technicians, parts or other inventory, capital improvements, etc. Excess inventory is typically a result of absent or poor service processes, including scheduling/loading, labor pricing, job assignment; technology utilization (DMS/OEM) etc, all of which should be evaluated. Excess inventory deteriorates profit.
Phibbs said work-in-process aging further evaluates technician labor-inventory management. Work-in-process aging indicates absent or poor service processes or processes not being followed. Established shop management and processes should be evaluated. Over-aged work-in-process deteriorates dealership profit.
Cash gap measures the number of days of investment in a product or service, parts inventory, new/used vehicle inventory, and labor inventory, from the time it is paid for by the dealership until the time the sale is collected from the customer. If cash gap days are lowered, it will never be zero, which facilitates growth without additional outside investment either from the dealer or incurring debt.
Phibbs said gross profit can be increased by selling more hours, decreasing inefficiencies, and raising the labor rate.
“Two things customers want to know: how much and how soon,” he said. “Give the customer a total job cost. DOT repair costs are $80. But a repair shop down the street charges $50. The challenge is to remove the perception that dealers are overpriced and hard to get along with.”
Show the value
There are three types of service in the commercial service market:
- Competitive/quick service
“Those labor operations that are highly visible and advertised in your market with the most frequency.”
“Those services which are generally recommended by the manufacturer, such as scheduled mileage or time maintenance intervals as defined by the owner's manual or OEM.”
“Broken vehicle. Don't assume that other companies do not compete for this type of business.”
He said business-to-business decision-makers do not value price the most. A recent Accenture survey of 1000 decision-makers found that, contrary to popular belief, they value a strong brand over any other factor.
“When a customer buys a trailer or parts, they leave with something tangible,” he said. “When a customer leaves your shop, they leave with an invoice. You need to show value to the customer. The only way to do that is to show the customer the work that was done. You can manage your service department better.
“The first line item should be ‘diagnose.’ The second line should be ‘repair.’ Separate lines for each work done. Put yourself in the customer's shoes and ask if your work orders show value.
“In installing market-based pricing, there may be objections in terms of perceived customer pushback. If it's a 40-hour job and you increase the labor rate $2 per hour, this is an increase of $80 for the entire RO. Will the customer object? Install increments or one at a time. Train people to quote customers by selling the total job. Educate service advisors on selling service. Survey your competitors. Document who you spoke to and when.”
Pricing what the job is worth
Phibbs recommends charging a labor rate commensurate with the complexity of the job and to remove yourself from hours and rate.
“If a guy calls, and asks what your rate is, don't answer, ‘$120 per hour.’ He says, ‘You are going to charge me $120 per hour to change my oil?’ You say, ‘No,’ but by then you have put up a barrier between you and him.
“Truck dealers have multiple levels of diagnosis. Consider a flat fee for diagnostics. Commit for ‘X’ hours. Contact them if you haven't diagnosed after that time to see if they want to continue. The best way to exceed customer standards is to stay in communication with the customer. Then get it done faster than expected.”
Phibbs said there is plenty of opportunity in maintenance now because of CSA (Compliance, Safety, Accountability).
“Customers don't generally maintain trailers,” he said. “With CSA, they will have to. A market-based (tiered) pricing strategy will help you.”
Phibbs said some dealers may want to consider offering complimentary CSA inspections. But this is effective only when the trailer dealer communicates well with the customer.
“Communicate ASAP,” he said. “If you do a complimentary CSA inspection, don't tell the customer when he picks up the truck that there are more things that need repair. Don't wait until the end. Competitive pricing gets the trailer in the door. Proprietary pricing gets an extra buck because you are the expert.”
Phibbs views market-based pricing as low-hanging fruit. Example: At a door rate of $85 per hour, effective labor rate of $78 per hour and 1750 customer-pay hours sold, if the door rate per hours is achieved, that's an additional $12,096 per month, with no increase in hours sold.
Phibbs recommended focusing only on customer-pay effective labor rate (ELR). Gross ELR equals the customer labor sales dollars divided by customer labor hours billed. The net ELR equals the customer labor sales dollars divided by technician labor hours applied. He said not to focus on warranty rate because it is outside of the control of management.
Phibbs listed some expenses that management can easily control and offered ideas for reducing them.
Controllable expenses include tools and equipment, shop supplies, rework, overtime, pick-up and delivery costs, training, housekeeping, vendor pricing, fuel/mobile expense, advertising/website (a dealer website that allows customers to schedule service work), telephone, and uniforms.
“Most dealers' uniform contracts are for 52 weeks,” he said. “If you give employees five paid holidays per year and two weeks' vacation, you are only using 49 weeks. Can't you negotiate a 49-week contract so that you only pay for the service that is used?”
Another suggestion is to get the uniform supplier not to charge a setup fee for each new employee.
“Your uniform supplier rep may say they can't do it,” Phibbs said, “but someone in his company can. Also, they may say they must bill weekly, not for 48 weeks. You say great, they'll get paid for 52 weeks but on a bill for 48. Maybe buy a uniform and wash them yourself.”
Cost of doing business
The costs are in assets and people. The people part of service is throughput — the quantity in dollars and hours of completed repairs performed in a given period in a given space by given inputs.
“How much time in a bay versus the amount of time they are present for work. Example: Six hours working on vehicles versus eight hours on the clock equals 75%, with 87.5% being the industry guide. Problem: What about ‘moving time?’ There's a gray area on the amount of time a tech actually spends working in the stall.”
“The amount of billed hours compared with the amount of time spent working in the stall. Problem: It doesn't measure when you're not working. Industry guide: 110%.”
“Billed hours versus the amount of time they are present for work or on the clock. Industry guide: 100%. It's a good metric. I want to sell every hour I pay people to be at the dealership.”
Do the math
Phibbs gave this example of throughput:
Technician “A” is paid $25 per clock hour. If he works 40 hours, the cost is $1000. If he produces 30 billable hours during the week, the cost per billable (flat rate) hour is $33.33. If you bill 30 hours at $85/hour ($2550 labor sales) to your customer, you made $46.67 per billable hour or 54.9% gross profit ($1400).
Technician “B” is paid $25 per clock hour. If he works 40 hours, the cost is $1000. If he produces 50 billable hours during the week, the cost per billable (flat rate) hour is $20. If you bill 50 hours at $85/hour ($4250 labor sales) to your customer, you made $65 per billable hour or 76.5% GP ($3251).
“Suggestion: Put good guys on repetitious work,” he said.
Measuring labor inventory
Phibbs said Return on Technician Investment (RTI) is the best measure to measure labor inventory. It reveals the gross profit returned on labor inventory. RTI equals labor's gross profit divided by hours available.
“Measure this monthly,” he said. “Measure proficiency daily. Measure hours sold every day.”
Phibbs said the customer image of a dealership is largely the result of contact with the service advisor. That's because the service advisor has personal contact with 12 customers per day (10 customer-paid ROs and two warranty ROs) and 240 per month.
“Sales guys may contact 20-30 customers and prospects per month,” he said. “Therefore, when compared with customer contact, one service advisor equals 10 new/used sales people. Bar none, he is the largest influence on the public's image of your dealership.”
What customers want
Customers want empathy, energy, efficiency, expertise, and ethics, Phibbs said. The standards for a professional service advisor include product and warranty knowledge, problem analysis and identification, communication skills, and estimating skills.
“Women tend to listen better than men,” he said. “They make a good service advisor.”
Phibbs outlined the qualities of a good-listener. Among them:
Let the other person finish speaking
Insulate against distractions
Exhibit positive body language
Focus on the message
Exercise emotional control
Never assume you understand — ask questions
Give feedback — paraphrase and summarize.
Seven deadly sins
Phibbs emphasized how important it is to treat the customer right. When a company loses a customer, 68% of the time, it is because employees showed an attitude of indifference. By contrast, customers stop doing business with a company for lower prices only 10% of the time.
Why do customers leave? The answer may be found in Phibbs' list of the seven sins of customer disservice:
Adhering strictly by the rule book
Giving customers the runaround.
Service departments should have specific customer-handling policies and procedures. These policies and procedures should eliminate barriers between the company and customer. Phibbs suggested spending five to eight uninterrupted minutes with each customer. Listen; write the repair order properly. Follow up progress of each RO and delivery of vehicle.
For companies, he said it boils down to this: How does the market — customers and competitors — see you?
Most important is how your operation compares with your competitors.
Phibbs said information about a customer's fleet can be obtained online at FleetSeek's website at http://www.fleetseek.com/.
“It's the most accurate and up to date,” he said. “Get it on a subscription basis. Polk is OK, but their data is a month old or older.”
A company's marketing scorecard includes: What could be your marketing objective? Get all of a customer's service? Increase gross profit?
“Focus on existing customers and how you can get more business from them,” he said.
There are three metrics: Operational excellence driven by price and convenience; product innovation; and customer confidence.
“You can't be all of them,” he said.
Phibbs suggested writing down who your customers are in your service department. Then he asked a question: Is there any opportunity to do work on trucks?
“If you aren't doing it, someone is,” he said. “The best way to get the business is to look at their trucks and say that you noticed ‘X’ is wrong with the truck. ‘I know you came in for trailer repair, but we can fix it.’”
He said customer service is any interaction where the customer and the dealership meet: “That means anywhere your uniform goes. Remember where your employees are when they wear your uniform.”
The elements of customer service:
- Make serving others your top priority
“What is the special thing that you do to make people feel special? Find out what the customer wants and make sure they get it.”
“What do you think about the customer? One employee having a bad day with a bad attitude can cause major problems. You are in show business, so play the part.”
“People come back because they liked what happened last time. When they come back, they need to get it. Set high standards and make them non-negotiable. Ordinary people doing ordinary things extraordinarily well.”
“A group of people who go out of their way to make one another look good. The best teams have good leaders and good coaches. As leaders, you should coach people, not just criticize. If you manage as a hammer, everything looks like a nail. Instead, encourage.”
“Your business is not what you sell — it's who you serve.
What's in it for you? Taking care of your current service customers so they will: come back more often; tell others; and do more business with you.
“Do your employees know what the expectations are and how to do it? In a lot of organizations, a new guy shows up, is given some equipment, and told, ‘Happy selling.’”
He said complaints are important because only 4% of customers who leave tell you why. They don't tell you; they just tell everyone else.
“When you have customers like that, do you do what it takes to make it right?” he said. “If the complaint is handled in the customer's favor, there's a 60% chance he comes back. If it is handled immediately, it goes up into the 90% range.
“You don't want the owner to get the phone call. By that time, it will cost you a lot of money, and it probably will be too late. Service is having the courage to make things right for the customer.”
There are five ways to communicate with the customer:
Face-to-face; phone; voice mail; email; and text.
81% of all customer pay labor is initiated from a phone call.
98% of all incoming calls to service departments are handled in a substandard way.
37% of all service employees do not ask for the business by setting an appointment.
95% of all service employees quote higher prices than independent repair facilities on common maintenance, forcing customer to go elsewhere.
Coming in the October issue: The final two pieces of the Profit Scorecard: process, and capabilities and capacity.