Monthly Archives: July 2018

Internal Labor Rates – Customer Pay Rate or Lower?

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The debate of what the Sales Department should pay for repairs and maintenance continues year after year.  Most Dealerships elect to do most work at a Retail Labor Rate, understanding that the cost of the work will be passed on to the vehicle Customer and the Dealership ultimately will make more profit, since the Sales Department typically sells from cost on Used Vehicles and the commission rates are probably lower.

However, there are still Dealerships whose Internal Labor Rate is 50% – 60% of the Retail Labor Rate and deeply discount the parts.  To those Dealerships, I pose the following question:

What if you’re the Used Vehicle Manager and every week you bring in a beautiful trade at a great price, and you expect to make $2,000 on it, plus finance income.  Now you’re told to sell it to an employee for $500 over cost.  (Even if the employee has plans to retail the vehicle.)  If this happens every week, the $104,000 Gross Profit you would have made for the year is now $26,000. 

Although the numbers may be more significant in this example (and maybe not), the effect is the same when the Sales Department “asks” the parts department, the service department, and the body shop to discount their efforts.

The Service Department, the Body Shop, and the Parts Department could be selling their work at a higher rate to retail Customers.  For Service and Body, there is no replenishing the time sold – once it’s sold at a discounted rate, there’s no chance of selling it at the higher rate.  The time the Parts Counter People spend tracking down the parts the Parts Department doesn’t stock could be spent providing excellent service to the Departments and Customers who pay a higher markup percentage.

As any Service Manager or Body Shop Manager can tell you, finding Technicians is a challenge; just like finding beautiful used vehicles at bargain prices.  The effort of finding, hiring, training, and coaching Technicians is valuable –just like the time spent by the Sales Managers finding, appraising, preparing a vehicle, and then ultimately working a deal to get the best price.

If the Labor Rate for Service work was only worth 60% of the Retail Labor rate, you can be sure that the Factory would pay claims at that Labor Rate.  If a parts Markup of 20% made sense, then the Factory would pay no more.  I’ve run the analysis many times, for many Dealerships, and a 25% Markup on parts will allow the Parts Department to break even.  There is little pride or sense in breaking even.

There will be times when the Service, Parts, and the Body Shop will need to help the Sales Department with a discount, but it shouldn’t be an everyday occurrence — we call them “Mulligans.”  Maintenance work should be done at the same price as Customer Pay – not more than the Customer Pay work.  If there is a “special” price, then that is what Sales should pay.  The Sales Department should also be part of the “Team” and not send work outside the Dealership because they can get it done “so much cheaper.”  This is a disservice to all involved, including the Customer if something on the vehicle fails because the cheapest guy on the block did the work.

The Service Department should be part of the Team and earn the right to charge the retail labor rate, by providing excellent service and not putting the vehicles from the Sales Department at the end of the line.  If it takes a week to get a car through reconditioning, then I can’t fault the Sales Department for demanding a discount, and now Service needs to figure out how to get the vehicle reconditioned in under 72 hours.

There are a lot of challenges and debates when running a Dealership and its departments; let’s not make the Internal Markup be one of them.

Prevent Lower Sales per Repair Order This Summer

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The summer is half over and you may have seen a dip in your sales per Customer Pay repair order, but it’s not too late to improve your sales per repair order.

I see it every summer: lower labor sales per repair order compared to previous and succeeding months!
It comes down to one thing: not enough Techs and/or Advisors to take care of the Customers!!
When the staff takes a well earned vacation, our sales per repair order drop because either (A) the Advisors become order takers because we are short Advisors, and we’re doing everything we can to take care of the Customers who are coming in, or (B) we are short Technicians, and we don’t want to anger the Customer by recommending work we know we can’t get to today.
Factory experience also supports the fact that Summer is when CSI Scores are most likely to fall.
So here are several ideas to improve BOTH Service Sales AND CSI.

Tips on preventing a dip this Summer:
1. Have a well planned out vacation schedule. This is key to keeping your sales per repair order strong and taking care of your Customers. It’s not too late to lay out a plan for vacations. Based on your staff count, determine how many Advisors and Techs can be scheduled off at one time. First choice for dates could be based on seniority or on most productive employee. What we don’t want is everyone requesting off June 29th to July 3rd.

2. Coordinate Technicians’, Advisors’ and Back Counter Peoples’ vacation time. If you have three Techs off and a full staffing of Advisors and Back Counter People, some people will be standing around. Think of a restaurant, if you only have one person preparing food, you don’t want 10 waitresses pushing orders at the chef. If you have only 1 waiter you won’t need 10 people preparing food.

3. Based on your vacation schedule, adjust the number of appointments for a given day or week. Regardless of how Customers are scheduled (the Advisors, appointment setter or a third party scheduling system) these people need to have the full vacation schedule so they reduce the slots available to take in certain kinds of work. If you have two diesel Techs and one goes on vacation, there is little chance your one remaining Tech can do double the work. When we schedule the same amount for fewer Techs, we only compound the frustration and the quality of the work done for the Customer.

4. Can you schedule your employees to come into work a little earlier or stay later to knock out carry-overs or internal work?

5. Hire students or teachers who are off for the summer to help in the Service Lane (full or part-time) —moving vehicles, greeting Customers, or pulling the pre-work order packages (the work order, the service history, and the factory records). This time is also a great time to start apprentice Advisors, even if all of your Advisors are on deck – they’ll be happy to have an extra pair of hands.

6. Unless it is your only chance for a specific class, don’t schedule off-site training in June and July.

7. Coordinate your marketing and coupons. If you know you’re going to be short-staffed, then pull the coupons off your website for those time periods based on your vacation schedule. Don’t send email campaigns or direct mail campaigns if you won’t be able to take care of your Customers.

8. Don’t be stingy with your loaner vehicles. If you can sell a job, but it will take an extra day, SELL the Job and put the Customer in a loaner car.

9. Implement every efficiency technique you know. For a list of 28 ways to help your Service Department be more efficient, call us at 877.316.7418.

If you’re thinking “if I dial back the number of Customers who come in, I’ll lose business,” think about this: Your Techs can only do so much; currently what’s happening is we’re just rushing the Customers through the process. But if you slow it down to the normal pace, your team gets to do a better job of taking care of the Customer. Schedule the non-emergency Customers for the following week — when you are better staffed to provide them with an exceptional service experience.

Improve Dealership Cash Flow With Best Practices

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Every business faces unexpected events which can strain its bank balance; the trick is to be prepared for them.  Stop-sell orders could destroy your annual forecast for New and Used Sales.  A tornado or a hailstorm could put a dent in your vehicle sales and tie up cash while you wait for the insurance check.  You finally got (and paid for) all of those recall parts, now you have to find the time to install them.  A significant increase in the factory Customer rebates, along with an aggressive sales campaign, could boost your sales to the point where you are stretched for cash because your profits came from factory money and IT’S NOT HERE YET – but everyone wants to be paid—NOW!!  These are just a few of the potential times when all of a sudden “Where did all our cash go”?  The financial statement’s balance sheet shows the two main areas to look for that money: Receivables and Inventories.

When it comes to the financial statement, most managers see their role to make the profit and control the expenses.  Cash flow is low on the list of priorities; after all, isn’t that accounting’s responsibility?

Actually, cash flow should be everyone’s responsibility!  On the last page of your Profit Blueprints© report, there is an analysis of key assets.  Not only do we track the monthly balance, but we put it into perspective by comparing the balances to the appropriate sales accounts.  The values highlighted in green show you how much cash, if any, is tied up in frozen assets.

Be familiar with the schedules and the accounts that concern your department to understand where cash could potentially be hiding.  The checklists on the following pages are for each department manager to make sure his or her accounts are always within target — and that processes are in place to keep the cash flowing.

SALES DEPARTMENT

VEHICLE INVENTORIES

  • Review the aging of your inventory; always be looking for “a sale” for the older vehicles. What are we doing to sell the five (or 10) oldest vehicles?
  • For new vehicle inventory, review the combination schedule that includes the inventory detail and the floor plan amount to confirm all vehicles are floor planned. For most dealerships, vehicles are floor planned.  If that is your policy, make sure dealer trades are either sold or floor planned promptly.
  • Look at your day’s supply of vehicles, either on the last page of your Profit Blueprints Report or on your own internal spreadsheet. Keep in mind handling costs and missing out on potential bargains are just two of the costs you pay if your inventory is too heavy.
  • Walk the lot; inspect the vehicles for faded stickers and cleanliness. Ask the question “if I were a potential customer, would this vehicle appeal to me?”  Don’t let “ugly” vehicles take up space and tie up your money.

Bottom-line: Don’t fall in love with a used vehicle and hope to sell it if it hasn’t sold after 45 days.
Sell it!  Free up the cash and move on to a better return on your investment.

 

RECEIVABLES

Confirm that you will be paid before you extend credit.  Review Receivables Schedules weekly and follow-up with past due amounts:

  • Customer deposits, full payments, and drafts.
  • Finance Contract Receivables.
  • Factory Rebates and Incentives. These could easily get out of hand or charged back if we have sloppy paperwork.  Clearly defined processes and continuous updates to staff will help collect and keep the factory money.
  • Finance Reserve Receivables. This should be reconciled when paid or the amount due is acknowledged by the finance source.  If there is a shortage, ask the finance manager to determine why and then adjust accordingly.
  • Service Contract/Programs Refunds. Any money you are expecting should be on a schedule.   When you refund a Customer, make sure you follow through and get your portion refunded also.

 

SALES PROCESSES

  • Move the deals from Finance to Accounting quickly. Eliminate bottlenecks and monitor pending deals daily.  The faster the deal gets to Accounting, the faster contracts are cashed; the faster the trade-ins are sold, the faster the cash gets to the bank.
  • Make the decision on trade-ins when the vehicle is brought into inventory. Retail or Wholesale – those are your choices.


SERVICE DEPARTMENT, BODY SHOP, and PARTS DEPARTMENT

SERVICE DEPARTMENT

OPEN REPAIR ORDER REPORT

This report could easily hide thousands of dollars of potential cash or potential write-offs.  Keep this report clean by closing Repair Orders promptly.  If not paid in full, CLOSE the Repair Order to a receivables account when the vehicle leaves the lot.  This will make it a “thorn in your side” when it starts to age but is better than the labor and parts sitting on a report that few people review.  Open Repair Orders should have a vehicle on your lot; verify this at the end of every month.

SCHEDULES

Receivables

  • Confirm that you will be paid before you extend credit. This includes Extended Service Contract companies.
  • Warranty Claims Schedule. Clearly defined processes and continuous training of staff will help collect and keep the warranty money.  The last page of your Profit Blueprints report tracks your Warranty Receivables in relation to your warranty sales.  If you are above the days supply target, the excess will show in green.

Sublet Schedule – Service and Body Shop

There is nothing worse than when you have to write off a balance on the sublet schedule because when the work was done, you thought you were going to be paid for it…then something slipped through the cracks and now you have to write off a balance.  Compare the Sublet Schedule to the Open Repair Order report every few weeks to make sure the two are in sync.  Shore up your sublet processes when you see a problem.

BODY SHOP

OPEN REPAIR ORDER REPORT

To free up cash and avoid potential write-offs, close Repair Orders when the vehicle is delivered to the Customer, don’t wait until the end of the month.  Open Repair Orders should have a vehicle on your lot; verify this at the end of the month by touching every vehicle.

RECEIVABLES

The Body Shop should have a receivables schedule separate from the other departments.  The only balances on this schedule should be for Insurance companies you have a Direct Repair Agreement with; all other repairs need to be paid-in-full before the vehicle leaves the Body Shop.  Deposit Customers’ checks in accordance with your dealership’s policy.  Do all of this and you will have a picture perfect schedule.

PAINT AND MATERIALS

Because most paint suppliers deliver requested materials within hours of a request, there is little reason to stock more than a month’s supply.  If your financial statement’s balance sheet doesn’t breakout Paint and Material (P & M), we don’t analyze it on your report unless the inventory balance is supplied by your Controller.  Calculate your P & M supply of inventory by comparing your General Ledger Balance to your P & M Cost of Sales for the Month.  (Sales – Gross Profit = Cost of Sale)  Ideally, the inventory value will be around the average Cost of Sale.  Reconcile the General Ledger balance to the physical Paint and Material balance every month.  Do not let your paint vendor count this inventory!

PARTS DEPARTMENT

INVENTORY

The Parts Department is special because, even though the parts inventory can range from hundreds of thousands of dollars to several millions of dollars, there is no Accounting schedule to confirm that the General Ledger balance is accurate.

  • We recommend a monthly reconciliation of the General Ledger to the Parts Management Report to watch for growing gaps, but this does not assure that all the parts are on the shelves. Perpetual inventories (done 3 – 4 times a year) plus a physical inventory performed by an outside company should confirm all parts are present and accounted for 99% of the time.
  • Watch the days of supply as calculated on your Profit Blueprints© 30 days is too skinny while over 60 days may raise a red flag.  Parts managers will confirm when they got off the 30-day supply and stocked more parts, their sales went up!  Work towards the optimal range of around 45 — 55 days supply.
  • Keep your eye on your stocking status and aging analysis from your Parts DMS Management Report. You could show the ideal days supply — only to find out 30% of the inventory is over 12 months old.  Stocking Status (Normal or Active) is another indicator of the quality of your inventory with a target of 70%+ for most franchises.
  • Do everything you can to minimize Special Order Parts. If the part(s) could be here tomorrow, hold the vehicle.  If it is a Customer Pay Part, the part(s) needs to be pre-paid.  If it is a warranty part(s), the Customer has to confirm an appointment before the part is ordered.  If we saw those Special Order Parts sitting on shelves as hundred dollar bills, we’d do what we could to get them to the bank.

 

RECEIVABLES

The Parts Department should have a receivables schedule separate from the other departments.  The only balances on this schedule should be for approved Wholesale Customers.  Approved means you also have on file a complete credit application and, if appropriate, a sales tax exemption number.  Only extend credit to companies who have good references, continuously pay on time, and have a low percentage of returns.  Being wary of a Customer suddenly buying more than usual – this may indicate they have been cut off from other vendors—or it could mean you are doing a great job!  The Parts Department should be vigilant for Customers who drag their feet on paying.  By the third week of the month, most wholesale accounts should reflect only current purchases.

Each department manager has the responsibility to keep the cash flowing.  Review your responsibilities for your department’s cash flow.  With the proper processes and continuous monitoring, the bank account will be flush and, you can focus on selling more and controlling expenses.

If you’d like a cash flow analysis, call us at 877.316.7418.