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What Key Performance Indicators are key?

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I'm a former shop owner (only 4 years) and now I am a service writer. There is an internal discussion within our shop what we should be gunning for precisely.


From my own perspective, I think the endgame is always Gross Profit. All I cared about was whether I was making money, not how I was making it, as long as the car is fixed right.


In my mind, tracking ARO, labor:parts, profit percentage, and other indicators are all means to meet that end.


However, there is disagreement about this in the shop. What do you guys think?

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Truly understanding the numbers and how they relate to the bottom line is the only way to insure your success. Many hidden problems can be identified by evaluating the numbers. While I do agree that gross profit dollars are what we should be most concerned about, the right mix of KPIs will get you to where you need to be.


One example: You are posting an $84.00 labor rate, you have two techs working 40 hours each and you pay those techs 20per hour. With payroll expenses and other benefits the techs cost you $25.00 per hour. The $84.00 labor rate is needed to attain your 70% gross profit on labor. In a perfect world you would expect 2 techs billing 80 hours per week, at your $84.00 rate should produce $6720 in labor, right?


Well, what if the two techs produced only 50 hours of labor (which is typical of many shops)? That would lower your labor dollars to $4200.


Now, when you look at the labor produced vs. the hours the techs worked, there is a shortfall, and the actual labor per hour generated was only $52.50 per hour, not enough gross profit to support the two tech's payroll.


So, what you need to do is to see where the issues are: Is it the tech's efficiency? Is there too much down time between jobs? Are we not billing enough labor? Are we giving away too much unbilled labor? Are the techs doing other tasks around the shop that do not produce income for the shop? Finding the reasons will cure the labor problem.


Sorry to be long-winded, but that is one example of truly understanding the numbers.

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The above example is good for us to know what we need to do to beat our costs, but it does not take into account that we don't want to merely bill enough to hit an imaginary number. For example, we never want to be consistently cheaper than competition. In fact, when possible, we want to sell the value of a repair. There should always be a maximum of return on a repair, regardless of whether we already hit the numbers we deem necessary to pay the bills.


Another random thought: How do most shops realistically track technician efficiency? We use Mitchell , so we use a time clock and my own head, and I input these numbers into the computer. It is an imperfect system, as in the real world time is lost to unbilled time all the time (putting air in tires, helping a lost parts guy, digging snow when its the season, etc.) It would seem to me a more logical financial metric would be total labor sold divided by labor cost per technician. I have heard the number for B techs of them producing at least three times their own cost. Because, in the end, we don't necessarily care how slow or fast a technician gets the work done. We care how much work we can sell out of that bay and how much selling that work costs us.


Last random thought: I have found that for certain jobs, you don't want to bill the labor out so high, so you compensate on the part when possible. Good examples are tires and brakes. Customers actually get offended if they see a high mount and balance charge, or 2.5 hours to do a brake job. While some customers will spend time shopping around parts prices, most understand everyone makes some money on them and they are less likely to fight about that. It is in these situations where I find the labor:parts ratio to be counter-productive, because you actually penalize yourself when you bump up the parts side.

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Pattersonautobody, regarding your first random thought:

The whole point of KPIs are that they are industry standards that have been forged by people who have done many hours of math to break down the numbers in auto repair.

They aren't just imaginary numbers that someone pulled out of mid air, there are actually quite complicated calculations used as proofs that these numbers are required for a shop to make a good profit margin at the end of the year (20+% should be your target, most shops make 3-5% or less).

As a side note to this, I agree that selling on value is very important, and you should get your maximum return on each repair, but most shops problem isn't return on repair, it's low productivity, efficiency and hours/RO. Productivity is profit, plain and simple.


On the second point,


This article explains the industry standard of how to track time and calculate efficiency, productivity, parts:labour ratio, and explains how to correctly bill diagnostic time, which is a major profit weakness in most shops.

You need to be calculating your lost time, because once it is lost, it can never be gotten back. And time is the most important item you're selling, not labour or parts.

As for your statement, "we don't care how slow or fast a tech gets the work done", you SHOULD care! This is directly related to your tech's efficiency, and it is arguably one of the most important KPIs for a shop to track correctly.


Regarding your last topic,

Does your shop quote out parts & labour (or even worse, parts & hours) on your estimates, or do you quote how much a JOB is worth?

It shouldn't matter whether a brake job is $125 parts and $75 labour, or $150 labour and $50 parts. In the end, the job costs $200, and this is the number that customers mainly use to price shop (except when calling local part stores).

No other professional industry uses the "parts and labour" mentality, and neither should the auto repair industry.

I understand that some customers will fight about these issues anyways, but in many cases you can try to explain the value of the job to these customers. If it gets bad, let them go give grief to a shop owner who likes dealing with problem customers.

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Good comments. By NY state law, as far as I know, we have to show our labor rate and show what we charge for labor on an invoice. Further, we have to show each part, its number, and the price we are selling the part at. So, a picky customer can look at the labor line and complain that back in the 70s when he was a tire chucker, he could have got the whole job done in half an hour, etc. etc. So, oftentimes I find it easier to put profit onto the parts side when putting it on the labor side can be tricky. But again, I already named which situations. FUrther, maybe this is only relevant in NY because we have to show these items.


I will read the Motor article.

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That does make sense that you would change things on the invoice a little, to make the values to be a bit more easy to swallow for the customer.


I'm certainly not advocating hiding your parts and labour on your invoices, even if the law doesn't say that you have to. Transparency and openness is always better for customer relations.

I was just saying that when doing estimates, they should be quoted by the total job price, not parts & labour, and definitely not parts & hours.

It's true that some people will always complain, but for most people, if they approved a job that is X amount of dollars, it won't matter what portion of X is labour and what portion is parts.

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  • Have you checked out Joe's Latest Blog?

      Most shop owners would agree that the independent auto repair industry has been too cheap for too long regarding its pricing and labor rates. However, can we keep raising our labor rates and prices until we achieve the profit we desire and need? Is it that simple?
      The first step in achieving your required gross and net profit is understanding your numbers and establishing the correct labor and part margins. The next step is to find your business's inefficiencies that impact high production levels.
      Here are a few things to consider. First, do you have the workflow processes in place that is conducive to high production? What about your shop layout? Do you have all the right tools and equipment? Do you have a continuous training program in place? Are technicians waiting to use a particular scanner or waiting to access information from the shop's workstation computer?
      And lastly, are all the estimates written correctly? Is the labor correct for each job? Are you allowing extra time for rust, older vehicles, labor jobs with no parts included, and the fact that many published labor times are wrong? Let's not forget that perhaps the most significant labor loss is not charging enough labor time for testing, electrical work, and other complicated repairs.  
      Once you have determined the correct labor rate and pricing, review your entire operation. Then, tighten up on all those labor leaks and inefficiencies. Improving production and paying close attention to the labor on each job will add much-needed dollars to your bottom line.
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