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Posted

Curious how many other shops are paying attention to their 'effective labor rate' in their shop. I heard that industry standard is 90% of your 'standard flat rate'. That sounds great, but I wonder how realistic that really is. Also, how do you personally go about raising effective labor rate at your shop? Did you cut hours paid to technicians for certain jobs? Raise labor rates on menu items?

Posted

Mitch Schneider's book, Managing Dollars with Sense, gives a perfect layout of exactly what you're talking about here.

The formula is this:

Productivity = Billed hours / hours available to work (Example: 34.8 billed / 40 hours per week = .87 or 87%)

Average Shop Productivity = Sum of billed hours / Sum of total hours for all techs (Example for 3 techs: (26 + 34 + 44) / (40 + 40 + 40) = 104 / 120 = .87 or 87%

Effective Labour Rate = Labour Rate x Average Shop Productivity (Example: $95 x 87% = $82.65)

These number will fluctuate daily, even hourly.

 

So yes, what you heard is correct, 90% is a good average shop productivity, compared to the majority of independent shops which are below 70%.

Many shops are actually closer to 55% according to the book - can you survive on barely more then HALF of your labour rate??? ($95 x 55% = $52.25)

Productivity = Profits, plain and simple!

 

Industry standard from what I've read, is 110% nowadays (average 9 hours billed in an 8 hour day per tech) to have a truly profitable shop.

The book outlines multiple methods for you to figure out what you should set your labour pricing at based on your shop's numbers, rather then basing off other shop rates in your area.

 

As for increasing productivity, you need good techs, but also good front counter processes (efficiency is purely on the tech's shoulders, but productivity has just as much to do with your service writer, shop layout, tooling etc)

I don't think cutting hours paid for certain jobs actually pertains to this calculation, nor would I feel this would be the morally right thing to do to try to be more profitable. (Profitability should be win-win for your shop and your techs)

Raising labour rates on menu items would have the desired effect (higher labour rate for that job), but I strongly believe that improving productivity would have a far more drastic effect then raising pricing on certain jobs, as it would apply to every tech and every RO.

Posted

Productivity is important, but it's equally important to manage the profitability of the work you are doing. We all have loss leaders like oil changes and state inspections. You have to make sure you are getting these done with the cheapest labor possible. We struggle with the master tech who doesn't want to give up the oil change that's on a big ticket so we end up paying him $30 per hour to do lube tech work.

Posted (edited)

Mitch Schneider's book, Managing Dollars with Sense, gives a perfect layout of exactly what you're talking about here.

The formula is this:

Productivity = Billed hours / hours available to work (Example: 34.8 billed / 40 hours per week = .87 or 87%)

Average Shop Productivity = Sum of billed hours / Sum of total hours for all techs (Example for 3 techs: (26 + 34 + 44) / (40 + 40 + 40) = 104 / 120 = .87 or 87%

Effective Labour Rate = Labour Rate x Average Shop Productivity (Example: $95 x 87% = $82.65)

These number will fluctuate daily, even hourly.

 

So yes, what you heard is correct, 90% is a good average shop productivity, compared to the majority of independent shops which are below 70%.

Many shops are actually closer to 55% according to the book - can you survive on barely more then HALF of your labour rate??? ($95 x 55% = $52.25)

Productivity = Profits, plain and simple!

 

Industry standard from what I've read, is 110% nowadays (average 9 hours billed in an 8 hour day per tech) to have a truly profitable shop.

The book outlines multiple methods for you to figure out what you should set your labour pricing at based on your shop's numbers, rather then basing off other shop rates in your area.

 

As for increasing productivity, you need good techs, but also good front counter processes (efficiency is purely on the tech's shoulders, but productivity has just as much to do with your service writer, shop layout, tooling etc)

I don't think cutting hours paid for certain jobs actually pertains to this calculation, nor would I feel this would be the morally right thing to do to try to be more profitable. (Profitability should be win-win for your shop and your techs)

Raising labour rates on menu items would have the desired effect (higher labour rate for that job), but I strongly believe that improving productivity would have a far more drastic effect then raising pricing on certain jobs, as it would apply to every tech and every RO.

 

I have not read his books, so this is just me asking an honest question. I see the book was written back in 2003. Do you feel like the figures provided in the book apply to a shop in 2014?

Edited by mmotley
Posted

The figures are dated, but the formulas are still the same.

The book actually used $65 as an example labour rate, far below most shops nowadays.

 

The 110% productivity standard is from other recent (2012+) sources. At the time of the book's printing, it called for 100% productivity.

Here is an article from 2012 that uses 113% productivity as it's example (9 / 8 = 112.5%).

http://www.motor.com/magazine/pdfs/022012_10.pdf

  • Like 1
Posted

I'm not sure if I'm missing something here, but I always understood effective labor rate as being calculated another way.

 

Labor sales dollars / flat rate hours paid out to techs

 

This way, it accounted for your .5 hour oil changes, .5 hour tire rotation, etc. and would give you a figure that represented an average labor rate, or effective labor rate.

 

A quick google search for 'effective labor rate formula', and I now have about 3-4 different methods of calculating it, none of which are really similar...

Posted (edited)

There is multiple ways to calculate just about anything.

I found your formula in a dealers edge magazine article, so it could apply to independent shops as well.

 

Here is another article from 2004 that shows 2 methods of calculating effective labour rate, but focus on Table 2, not Table 1 which is for hourly.

http://www.motor.com/magazine/pdfs/112004_07.pdf

As a side note, this article uses 138% (bill 11 hours per 8 hour day) as a benchmark, which is somewhat unattainable. Future articles do not use the 135% standard, they go back to 113%.

 

I think the best idea would be to find a formula that you like, and works for your situation.

Hourly and flat rate require different formulas.

Edited by bstewart
Posted

I think the best idea would be to find a formula that you like, and works for your situation.

Hourly and flat rate require different formulas.

I agree. Just to follow up and maybe explain a little more of how I was originally taught effective labor rate, here is a quick youtube video I found...

 

http://youtu.be/2mDzFLgza3k

 

Either way, like you said, it's probably best to find a formula that you like and applies to your situation best and stick to it so you can track it.

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  • Have you checked out Joe's Latest Blog?

         0 comments
      It always amazes me when I hear about a technician who quits one repair shop to go work at another shop for less money. I know you have heard of this too, and you’ve probably asked yourself, “Can this be true? And Why?” The answer rests within the culture of the company. More specifically, the boss, manager, or a toxic work environment literally pushed the technician out the door.
      While money and benefits tend to attract people to a company, it won’t keep them there. When a technician begins to look over the fence for greener grass, that is usually a sign that something is wrong within the workplace. It also means that his or her heart is probably already gone. If the issue is not resolved, no amount of money will keep that technician for the long term. The heart is always the first to leave. The last thing that leaves is the technician’s toolbox.
      Shop owners: Focus more on employee retention than acquisition. This is not to say that you should not be constantly recruiting. You should. What it does means is that once you hire someone, your job isn’t over, that’s when it begins. Get to know your technicians. Build strong relationships. Have frequent one-on-ones. Engage in meaningful conversation. Find what truly motivates your technicians. You may be surprised that while money is a motivator, it’s usually not the prime motivator.
      One last thing; the cost of technician turnover can be financially devastating. It also affects shop morale. Do all you can to create a workplace where technicians feel they are respected, recognized, and know that their work contributes to the overall success of the company. This will lead to improved morale and team spirit. Remember, when you see a technician’s toolbox rolling out of the bay on its way to another shop, the heart was most likely gone long before that.
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