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Profitability Bootcamp

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The opportunity is there; you’ve likely noticed.

2016 was a record year for the automotive industry. New vehicle sales caught the headlines (franchised dealerships sold more than 17.5 million new vehicles last year, an industry record), but it was fixed operations that saw the largest gains. According to the National Automobile Dealers Association’s latest NADA DATA report from late April, dealerships sold more than $109.52 billion in parts and service in 2016; that’s a 12.7 percent jump from the $97.18 billion the industry did in 2015. Profit—both gross and net—are also up in fixed operations, despite profitability remaining flat across the rest of the dealership.

“Fixed operations is where the largest opportunity resides,” says Larry Edwards, a longtime fixed ops consultant, who works with service, parts and collision repair departments. “It’s about time people woke up to that.”

Don’t worry, though; Edwards realizes it’s not quite as simple as it should be. For far too long, dealerships have treated fixed ops as an afterthought, he says, watching sales get fat (again: $109.52 billion) and paying little attention to how thin the margins can become.

But the truth is, Edwards says, there are many independent service and collision centers churning out net profits above 20 percent—and that’s net, not EBITDA. Why aren’t dealers hitting the same marks?

Fixed Ops Business asked that very question to a number of industry experts and high-performing operators. According to one fixed ops director, it all comes down to building a foundation, retraining your team (and yourself) to focus on key fundamentals that increase profitability. By focusing on a three-phase program—a bootcamp, if you will—any fixed ops department can increase profitability.

 

Orientation

Objective: Achieve the right operational and leadership mindset

Thought No. 1: Profit is Not a Dirty Word.

Steve Hofer jokingly calls himself a “bean counter.” He laughs when he says it, as he realizes it’s not a flattering way to refer to a fixed ops director.

But that’s the big problem here, right?

“People definitely have a negative connotation to that,” says Hofer, who manages the fixed ops department at Park Chrysler Jeep in Burnsville, Minn. “But if you don’t understand your numbers, closely monitor them and make sure you’re making a profit, you can’t effectively operate.”

For too long, “profit” has been viewed as a dirty word. Instead, think of profit as an absolute necessity for growth and improvement. Higher margins mean greater investment opportunities; they can mean increased wages, larger marketing budgets, new technology and equipment purchases, etc. Maximizing profitability allows you to accomplish all your other goals, Hofer says.

“Everything funnels into [profitability],” he says. “Efficiency, productivity, customer service, marketing—it’s all added up into that. We can’t just ignore it.”

 

Thought No. 2: Not All Segments are Created Equal.

For Hofer, who started his automotive career in the parts department, it was an adjustment learning the nuances of service when he took over his current role.

“The two departments are just totally different, as everyone likely knows,” he says. “They call it fixed operations because it’s supposed to be somewhat consistent, but it’s far tougher to [create that consistency] in service than in parts.”

The lesson: Each segment of fixed ops is entirely different—and should be treated that way.

Sure, there are clear lessons to be gleaned from each that can apply to another, Edwards says, but in order to excel in each area, you need to understand how those differences play out and affect your ability to turn a profit.

Parts mostly comes down to inventory control, and requires a more analytical approach than other segments. Both service and collision have divisions within themselves: Estimators and service writers in the front of the shop need a customer-focused approach, and sales ability plays a crucial role; technicians, by nature, Edwards says, tend to be a bit more task focused and, clearly, efficiency is key.

“The [fixed operations] department, as a whole, needs to be managed properly, and to do that, you really need to break it down into each segment and treat them for what they are,” Edwards adds.

You can’t approach parts with the same leadership mentality that you would service, Hofer says. You need to differentiate your approach and ensure that you fully understand what’s needed for each.

 

Thought No. 3: Numbers have Context.

Industry benchmarks are helpful as a starting point, Hofer says, but key performance indicators (KPIs) don’t transfer universally to all dealerships—even within the same franchise, network or group.

There’s context at work in each segment of your operation, he says.

“You can’t just roll in and say, ‘I want my effective labor rate to be this,’” he says. “You have to be mindful that what works in one store might not in another.”

For service and collision, evaluate work mix, vehicle type, vehicle age, customer demographics, etc. Understand what your business deals with on a daily basis, and how that can affect your KPIs.

 

Thought No. 4: Businesses have Development Stages.

Having consulted and coached fixed operations departments for 22 years, Edwards says there’s a clear reason some larger, multi-facility operations achieve greater margins than their smaller competitors.

And, no, it’s not about volume, overhead or buying power.

“A lot of that goes back to the evolutionary process of business,” he explains. “Some might still be in the ‘embryonic stage,’ or the ‘childhood stage,’ learning to talk and walk and what’s hot and what’s not.

“By nature, the ones that have more locations are further along in the evolutionary process of the business. It’s more of an evolution than anything else.”

The more “evolved” a business is, the thinking goes, the more likely it is to have refined processes, systems and operational approaches that have already been tested and proven. Now, those operations simply repeat those strategies and continue a stable, calculated growth model.

“Once you have the system down for it,” Edwards says, “you can replicate it, you can grow it, and the margins remain.”

You can’t hurry that evolution, Edwards says. Sure, some evolve quicker, but all successful dealership operations first learn the fundamentals, perfect them and adjust before they find high-level results. Once you understand it’s a process and program to follow, the rest can fall in line.

 

Phase 1

Objective: Develop a team-first culture that leads to increased efficiency and a dedication to profit

Exercise 1: Develop a Pay Plan that Demonstrates Worth.

There’s a thick, heavy, three-ring binder that Tom Davies has kept on his desk at Yark Body Shop for the past 10 or so years. Names and numbers—it’s filled with them; every single body and paint technician that’s worked for him at the Yark Automotive Group’s Toledo, Ohio, collision repair facility is accounted for in that book.

“You want to know someone’s monthly production numbers from three years ago? It’s right here,” Davies says. “We track it religiously, and that’s because we have to if we’re going to be efficient.”

Today, Davies is the dealer group’s fixed operations director. He’s approaching his 30th year at Yark, and he’s spent the majority of them fine tuning an operational approach built on a shop culture of dedication to a unified, team-based approach. The results? It’s ensured a quality end result and maintains effective processes in place.

So, getting back to that folder, it was created at a time when Davies completely overhauled his team’s pay plan, a move he says has led to year over year efficiency and profitability gains each year over the past decade.

 

The Yark Body Shop Technician Pay Plan 

Base Pay. Davies starts each technician—paint and body—with a competitive base pay determined by skill level, training and years of experience. “It’s usually not the highest in the area, but it’s close,” he says.

Tracking Hours. Davies closely tracks efficiency and productivity numbers, but for the pay system, he keeps it simple for his team. It’s all done off book hours. (“That’s how you get to the other [metrics] anyway, so I just try to make it clear and obvious and easy to understand,” he explains.) He breaks down each tech’s performance into a weekly average of book hours performed. When a tech has been there long enough, this accumulates into a six-month average for book hours per week.

Month-Over-Month Improvement Bonus. Each technician sets his or her own benchmarks based on performance. Those six-month averages become the minimum. Each tech is expected to improve those numbers each month to receive a bonus, doled out in incremental increases to the base pay. It differs from one tech to another (based on position, experience, etc.), but each must hit a threshold of improvement (often a certain percentage increase in efficiency) to get, say, a $0.50-per-hour raise. Those bonuses are paid at the end of each month.

Year-Over-Year Improvement Bonus. Davies also gives out an annual bonus for techs that beat their six-month averages throughout the year. He tracks it June to June, and techs must be on staff the entire 12-month period to be eligible. “There are a lot of shops that will recruit away techs in busy seasons for a few extra bucks, and then let them go when it slows down,” he says. “This keeps our guys here and motivated all year.” The annual bonus also gives an incremental pay increase per hour flagged over the course of the year. Often, it’s roughly a $0.50 increase per hour. Davies says the majority of his techs get a bonus between $2,000 and $3,000.


The results show in the shop’s numbers, Davies says, and are evident in the amount of hours his team flags. For instance, he said his five-person paint team flags more than 480 hours per painter per month. It’s that increased efficiency (spurred from proper incentivization) that leads to the shop’s 16-plus percent net profit.

"I’m blessed to have an incredible team,” he says. “It’s all created this culture where everyone will go that extra step to get work completed. We have a great, great team in place.”

 

Exercise 2: Incorporate Continuous Training.

Edwards worked with one multi-facility dealership group that made one major change to its operations over a five-year period that led to 87 percent growth.

“They had their staff train twice per year on customer interaction,” he says. “They made it a requirement and part of the company culture. And they saw quick results across the board.”

It seems like a simple enough concept: a better trained and more educated team will result in a higher level of success and profitability. Getting management on board with an initiative like this can be difficult and takes time, Edwards says, and getting buy-in from the team requires a thoughtful leadership approach. But the gains can be exponential.

“Too many times in our industry, we send someone to a training class or have them take a course and they think they’re trained now and we don’t need to learn anything else,” Edwards continues. “Successful operators know it’s a journey, not a destination.”

There’s a reason the larger dealers groups like Hendrick and Sonic, among others, are building training facilities for their teams.

“The most successful operations realize the benefits, and everyone needs to adopt this approach to even have a chance to be profitable,” he says.

 

Exercise 3: Always be Recruiting.

The rule is as simple as it is cliche at this point: Operational success and profitability depends on having the right people in the right places. But finding good team members—particularly technicians—is a daunting task, Davies admits.

“The way it’s always been is that you have to steal them from somewhere else,” he says. “You would either steal them, or you don’t get them.

“That’s not a long-term solution, though.”

The old model is broken, he says, especially when you consider that the average age of techs (whether service or collision) has steadily risen over the past decade. When Davies takes a walk around his three service centers on Yark Automotive Group’s Toledo campus (one each for Subaru, Nissan and Chrysler, Jeep, Dodge, Ram) or through the body shop, “most guys are 50 to 55 years old. That’s the way it’s trending.” Many dealerships see the same across the country, and with fewer teenagers entering trade and vocational programs, finding quality techs is seemingly impossible.

But Davies has a solution: Grow your own, and always be recruiting.

Davies sits on the board for Toledo Public Schools and for a technical college, and he works to not only place graduates into his facilities, but also to recruit more into those programs.

“People don’t realize the opportunity that’s out there; it’s all supply and demand,” he says. “Demand is high, and obviously, there’s a low supply. You need to show kids that this is an industry with great opportunity. You need to show them the numbers that are attainable—how much does a good bodyman make? We have some that make over $100,000.

“The pay scale will only increase as supply and demand play out.”

 

Phase 2

Objective: Become a process-driven operation

Quick: What’s the most important marketing tool your parts department has? If you said your truck drivers, congratulations, you and Hofer on the same page.

“If you think about it, your drivers are the ones in front of your (wholesale) customers,” he says. “For us and our volume, that can be 100 to 200 times per day that our drivers are in front of customers. How do you not realize and act on that opportunity?”

Hofer says to view—and treat—a truck driver as a sales manager and client rep. Every delivery is a sales visit. Park Chrysler Jeep, which averages roughly $1.1 million per month in parts sales (roughly 70 percent of which is wholesale), employs six drivers.

So, here’s the question: How do you ensure six drivers approach customer interactions the same way? How do you ensure that there’s a consistency in the way the parts department is represented on each and every visit?

Well, that’s simple: clear processes.

“We hire for that role, but it really comes down to having a system that creates efficiency and allows them to take the time to interact [with customers],” Hofer says. “Having processes in place creates consistency, and it allows you to increase profitability.”

It all comes down to identifying roadblocks in your operation and creating systemized solutions for your team to follow moving forward—solutions that can be repeated over and over.

“Think of walking into a Ritz-Carlton,” Edwards says. “You’re always greeted the same way, you always receive a similar experience regardless of where you are in the world. It’s the same reason you can go into McDonald’s and have the same meal anywhere in the world. It’s all about processes. Processes increase efficiency and increase profit.”

This can and should be applied to every segment of fixed ops, but Hofer points to one simple process/system set up in his parts department as a prime example:

The Problem: Too much idle time for delivery trucks.

“We’d have customer calling asking where their parts were,” Hofer explains.

Too often, loading the trucks was a hold up, and drivers spent too long at each stop.

The Solution: Using a software program, Hofer set up a system tracking driver routes that showed where the truck was at any given point and how long stops (either at the warehouse or at a customer) took.

The Process: Hofer wants trucks loaded within 30 minutes of arriving back at the dealership, meaning he had to reorganize his in-house parts staff to prepare to load orders before a driver returned. Also, drivers are instructed to keep their deliveries quick and to the point.

“We don’t worry as much about the time at the stop, because we want them to build that relationship,” he says, “but we don’t want them to spend five minutes at a shop, and if we see those times getting high, we’ll see what we can do to make improvements and help.”

Routes were broken up into simple geographical territories, where each driver covers a certain area with a similar number of stops (usually 15–18 stops per run; three runs per day).

The Results: A lot went into these changes (including the new “sales manager” mentality for drivers mentioned earlier, as well as a restructuring of the warehouse and its personnel), but during this period of time, Hofer’s parts department more than doubled in sales volume and overall net profit rose 130 percent.

“It’s night and day different,” he says.

 

Get Paid What You're Worth 

Tom Davies has no issues turning high net profits on DRP work at Yark Auto Body, and it’s because of a simple policy: no discounts.

“We set up our relationships with insurance partners using the lowest prevailing rate for labor,” he says. “This sounds [counterintuitive] for profit, but what it does is it keeps it even across all our DRPs, and also lets them know that we're not here to fight over prices. We identify the rates being used [by insurers] in the area, and say, ‘This is our rate. These are our prices.’ And because we take this straight-forward approach, we get reimbursed all the way through.”

Rather than fighting over hours and labor times, Davies says his willingness to see both sides allows his team to write accurate estimates for all work performed without any issues. Full labor times and full-price parts keep profitability at the shop’s typical high levels. text..

 

Phase 3

Objective: Create a system of checks and balances for constant evaluation

Back to Steve Hofer’s bean counting:

“I’m a process-, numbers-driven person,” he says. “We put things in motion, add in processes and then evaluate—we evaluate everything.”

And often, changes need to be made. After overhauling his parts department’s delivery system, Hofer realized processes in the warehouse still held up the trucks during restocking. He reorganized staff and added two people: one person dedicated to receiving orders and another packing the trucks for drivers.

“The added expense of two people is more than made up for in the efficiency it creates,” he says.

Often, investing in a better method, process, system or technology provides a clear path to profitability, Davies says. Yark Body Shop focuses heavily on maintaining the latest levels of training and utilizing the latest equipment and technology available.

“Bottom line is that … to be successful, you can’t skimp on things,” he says. “You need to pay technicians properly, you need the right equipment, you need the proper training. Without that, you can’t succeed. You get a return when you have the right people in the right places, and you give them the right tools to succeed. It’s really that simple.”

 

By the Numbers 

Many across the auto industry point to fixed operations as a tremendous opportunity to improve dealership profitability. And as the National Automobile Dealers Association’s latest NADA DATA report reveals, the numbers are telling:

Segment Summary

Total Fixed Ops Sales: $109.5 billion (up from $97.2 billion in 2015)
Total Parts Sales: $64.7 billion (up from $53.7 billion in 2015)
Total Labor Sales: $49 billion (up from $43.5 billion in 2015)

Key Takeaways:

  • 11.7 percent of all dealership sales come from from fixed ops (up from 11.4 percent in 2015).
  • Fixed ops gross profit topped $3 million (average per dealership) in 2016, a substantial rise from just above $2.2 million in 2010.

  • Total sales for dealership body shops was below $5 billion in 2010; it now stands at $8.1 billion.


SHOP STATS: Yark Automotive Group   Location: Toledo, Ohio  Operator/s: Tom Davies, fixed operations director Staff Size: 19  Average Monthly Car Count: 300-350 Annual Revenue: $3.2 million (insurance and retail collision work only; excludes parts and inter-department dealership work)   Technician Efficiency: 160+%  Technician Productivity: 110+%   Key-to-Key Cycle Time on All Jobs: 8-10 days   Touch Time: 4-5 hours/day   Average Ticket: $3,000-$3,999   Gross Profit: 50-59%   Net Profit: 16+%

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