Are You Trying to Save Your Way to Profitability?
Getting profitable, wow, how cool would that be?
You come into the store the first day of the month, open the door to your office, turn on the lights, sit at your desk and open the drawer that you keep your last months financial statement in and read through it until you come to the page that has the final numbers….and you smile a little self satisfied smile….when you realize “we paid all of our bills before we even opened the door this morning.”
Sounds like a science fiction novel, or a fairy tale?
Maybe…especially if you are trying to save your way into Profitability.
It can be done…no doubt…that first month or two after you have made the cuts in Personnel, and wages (a favorite of all the employees by the way), and supplies, and vendors (they love that thing you do…you know..”Hey dude, I’m not paying $75.00 a car anymore for ding repair, it’s $50.00 now.”), and weekend meals for the Sales Dept…..you know what I’m talking about…and at the end of the second month…Wala…Profit. Right there on the statement, just like you thought.
Then….the unthinkable happens…even less Traffic…. which you guessed it…. leads to less Sales and that of course takes us to less Profit because there is less Revenue and less of….well…EVERYTHING!
Now what do you cut? More importantly, how can you remain Profitable?
Maybe the question is not “Are my Expenses too High?”….maybe it’s “Are my Profits too Low?”
If this is you, then you need to start looking at Profit Generation and not Expense Cuts. Let me elaborate.
There is an area in your Dealership that has been known to generate Profit….consistently…if it’s being done correctly….it’s called the Fixed Operations or Service and Parts Department. I know….you can’t believe it either….it’s been there all along. Just waiting to be capitalized on.
Let’s present some facts. Now, I’m not picking on anyone, just discussing. Don’t get offended…I’m just the messenger and the alarm sounder.
The average hardworking Salesperson in the average Dealer selling an average New Vehicle will generate an average of $1450.00 in Gross PUS. If the New Vehicle has a $30000.00 sale price, that equates to .048333 or almost .05% average Gross Profit PUS.
Lets look at the Service Numbers. The average hardworking Advisor writing an average of 12 ROs a day will generate an average of $2754.00 in Sales with an average overall Gross of $1636.00 or 59% Gross Profit, per day.
Compared that to the average hardworking Salesperson overall average monthly Sales of 11 Units generating a total average monthly Gross of $15950.00, the average Advisor, well, has the bigger potential!
The average Advisor will generate $32,720.00 in average Gross Profit for the month!
Ok, what’s your point?
Since Saving our way to Profitability is a short term fix (and one sure to demoralize and in some cases, scare the employees), why not invest and allocate available resources into the Fixed Operations? One thing is for sure, the Sales to Gross ratio is a lot better, and the potential for getting even more is a lot greater.
So, which seems the better course of action?
Saving your way to Profitability or Generating More Profit?
Increasing Sales and Gross Profits
is all in the Plan.
“Your plan for achieving 100% Service Absorption should focus on what you are going to do differently to increase sales and gross profits. It’s not just about advertising and marketing, it’s about processes” says Don Reed, CEO of DealerPro Training Solutions.
Increasing Sales is the one of the core functions of the Management Team (read Service Manager). And quite frankly, is one area that most Service Managers have difficulty doing.
Why?
It’s not that they are incompetent or incapable, it’s that they have so many other duties piled on to them, that the time they allocate to increasing Sales is never enough or is sandwiched between everything else that happens in a Dealership every day. From light bulbs out in the showroom to sprinklers not working to counseling the Service Advisor who has “personal issues” there never seems to be time to do it properly.
If that describes you, you need a plan. And all plans are built on measurements.
1st step, measure how your Advisors are performing.
What do we measure?
Every Service Manager looks at different things because that’s how they learned. You might be a SM that focuses more on Profit Margins and your buddy down the street might look at HPRO. (Hours per Repair Order)
When you are looking to increase Sales though, your view must be very narrow and specific. The focus needs to be on how many ROs did the Advisor write and how many hours did the Advisor produce on those ROs. In other words, how effective is the Advisor in making Sales with the ROs he/she wrote?
If your Advisor wrote 11 ROs and sold 9 hours on those ROs, that would be something that would get your attention as a Service Manager. And, yes, there are ALWAYS extenuating circumstances…. “This Customer never buys anything” or “All I had was LOFs today” or “I don’t know what happened, I just had on off day.”
If you are the SM, you gotta dig into what is going on with your Advisor (and ignore the excuses) because if you don’t know WHY they are not Selling you sure as heck won’t be able to Coach them to Sell more. That’s why it is so important to measure, and when trying to diagnose why Sales are not happening, to measure the Advisors effectiveness by comparing Hours sold per RO vs how many ROs did the Advisor write.
Now that you have dug into the numbers, you can see what Processes are not being followed. Finding out what is wrong is only half the battle.
2nd step, install a Process that the Advisor can follow and will follow (even when the SM is not there).
Here are 5 Common Reasons Advisors have difficulty Selling more.
1.The Advisor does not do a pre-write history check and is unaware of previous recommendations.
2.The Advisor does not conduct a walk-a-round of the vehicle during the writeup.
3.The Advisor does not present a menu to the Customer offering maintenance and services.
4.The Advisor does not make recommendations to the Customer based on observations, the Customers description of concerns or from the vehicles prior history.
5.The Advisor is uncomfortable (in some cases incapable) of making a Sales presentation to the Customer.
These 5 are responsible for more Lost Sales than any other reason in most Dealerships. Did you see any Processes not being followed in the above common reasons Advisors do not Sell?
So, now that you have measured AND you know WHY they are not selling, you can make a plan to address those discrepancies. Before you start, there is one question that you must answer first.
How effective is the Service Manager in teaching the Advisor to Sell?
If the SM cannot teach or coach the Advisor to sell, then part of the Action Plan will be to bring in someone who can.
There is no shame in admitting this if you are the SM. There is shame in allowing poor performance and low Sales through not admitting that you need to have some help in that area. Not every SM has the ability to Coach or Teach someone to Sell. They may have expertise and ability in a completely different area that makes them a strong Manager and it’s this reason they are the Manager.
Different people have different strengths. You need to know what yours are. If you are not good at Coaching or Teaching Sales, then don’t. “If you fail to get the proper kind of instruction, no matter how much you practice, you’re going to get better at making yourself worse.” Bobby Jones, Golfer
Basically, if you need help, get help.
Once you have a plan, you need to set aside a specific amount of time everyday for Training and Followup.
What do you Train on?
Processes, processes and more processes. It needs to be an automatic thought for the Advisor and not one he/she needs to think about.
Do you see the difference? If they have to think about it, it will not get done.
If they automatically do the Process and there are no questions, no “This Customers does not need a walk-a-round ’cause they were in last week”, no do it differently this writeup from the last writeup, and your Advisors have received the proper instruction and coaching, then you will have an increase in Sales.
Why? As Don Reed, CEO of DealerPro Training Solutions likes to say “Processes lead to Consistency. Consistency leads to Results.”
Missed Profit Opportunities
In the pursuit of additional profit opportunities in your service department, you must focus on maintenance of your customers’ vehicles. This is a missed opportunity for many dealers who do not perform complete, thorough inspections of their customers’ vehicles and do not make recommendations for preventative maintenance based on time, mileage, local conditions, etc. The value of these missed profit opportunities might surprise you.
To begin with, let me ask you this question: What percentage of your customers take delivery of their new or used vehicle and then, once they get home, remove that maintenance manual so they can review and study their required and recommended maintenance services? I don’t know the exact answer but I’m pretty confident the answer is, not very many. I’m talking about the transmission services, coolant flushes, air filters, pollen filters (which very few customers know they need), alignments, tire rotations, and the list goes on, and on. Everyone knows when to change the engine oil, but how many do you really think know when to perform all of those other maintenance services?
Next question: Are all of your customers mechanically inclined and can they perform all maintenance services on their vehicles themselves? Most customers rely upon someone with knowledge of their vehicle to provide recommendations for the proper maintenance and service on their vehicle.
It’s kind of like going to the dentist; the dentist performs an inspection of your teeth on each and every visit and makes recommendations to you based on the time since your last visit and the condition of your teeth. You know that you have to brush after every meal and floss, but there are other things your teeth need that you may not be aware of.
You rely upon a professional to help you maintain healthy teeth. An automobile customer is no different. They rely upon a professional, your technician or your service advisor, to properly advise them on how to maintain a reliable and safe vehicle which, in the long run, provides a much more enjoyable driving experience. There’s nothing worse than going on a trip with the family and having a problem occur with your vehicle, right?
Okay, so let’s look at the profit potential regarding this process of inspecting every vehicle and making recommendations to your customers for additional maintenance. In working with dealers all over the country, I have found that a complete and thorough inspection will produce, on average, an additional 0.7 hour of labor per retail work order. Let’s use the following assumptions when calculating the profit opportunity in our model dealership/service facility:
•Retail labor rate of $85 per hour
•Retail labor profit margin of 75% (Techs are paid $21.25 per hour)
•Parts-to-labor sales ratio of 0.8-to-1 ($0.80 in parts sales = $1.00 in labor sales)
•Retail parts profit margin of 45%
•Average 500 retail work orders per month
By performing complete and thorough inspections of all 500 vehicles we find, on average, 0.7 additional hours to sell at $85 per hour equals $59.50 in labor sales. At a profit margin of 75 percent, this produces additional gross profit of $44.63. At a 0.8-to-1 ratio our parts sales would be $68 per hour with a profit margin of 45 percent, which produces additional gross profit of $30.60 per repair order. Add the two together, and our total additional gross profit equals $75.23 per work order. Multiply that by our 500 work orders and the result is an additional gross profit of $37,615 per month. That comes to $451,380 for the year, based on 500 work orders each month.
Now ask yourself this question: “How many additional vehicles would I need to sell throughout the year to produce another $451,380 in gross profit?” If your average gross profit per unit is $1,500, this equates to approximately 301 additional vehicles. Does that get your attention? The point is, you need to start looking at your service and parts departments as true profit centers that can not only stand on their own, but also actually generate enough profit to cover all of your dealership’s fixed expenses. That’s service absorption! This means you have less dependency on new and used vehicle sales to make a net profit, which becomes a huge benefit during a soft market, high interest rates, expensive fuel, bad weather and a whole lot of other ills.
In far too many dealerships, the service and parts departments are simply there to provide support for the sale and delivery of new and used vehicles. Their secondary role is to take care of all the warranty repairs, and last of all, if time permits, they will write a retail work order for cash business. I’ve actually been in a service department that told customers that if they didn’t buy their vehicle from the dealership, they were low priority.
If this philosophy makes sense to you, then welcome to the dark ages! As you can imagine, this dealer was losing money in his service and parts department in numbers that would take your breath away. Would you want to be a service advisor or service manager in that store? It’s worth noting that the turnover in those two positions was quite high.
Why would you want to operate any department in your dealership at a loss to support another department? I believe it makes a lot more sense to operate every department as a standalone enterprise that works with the other departments to maximize overall performance and profits. It’s called return on investment.
Don Reed
CEO, Fixed Ops Solutions
DealerPro Training Solutions
Maximum Accountability Creates 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.
Article by:
Don Reed
CEO-DealerPro Training Solutions
NADA University Partner
