On a visit to a dealership to work with a new service manager, I had the following conversation:
Service Manager: “I just handed out paychecks yesterday and a lot of my technicians had really low flat-rate hours for the pay period.”
Me: “When did you first realize the hours were going to be that low?”
Service Manager: “When I was handing out the checks.”
This was for a 20-technician shop and a 2-week pay period. Granted, he was new, but I have seen the same thing with experienced service managers as well.
When should he have known that the productivity of the shop was too low? Not with half of the month gone. What should your technicians' daily objectives be, and are you looking at the number?
It is easy to calculate how many hours of labor your service department needs to produce to be profitable.
You need the following: total department expenses (including fixed), labor gross-profit percentage and overall effective labor rate. Here's the calculation (followed with sample numbers):
Expenses ÷ gross profit percentage ÷ effective labor rate = hours of labor.
$50,000 ÷ 68% ÷ $75.00 = 980.4 flat rate hours.
If technicians were all equal, they would each need to contribute equally towards that goal. But technicians are not equal in their ability to produce billable hours of labor. So how do you set individual daily objectives?
Begin by looking at a 10-week period and a 6-month period of technician flat-rate hours produced to calculate two average weeks.
Using the higher of the two averages, rank the technicians as to their contribution to cost of sale. Use the following guideline to set new daily objectives:
- Highest cost 1/3 of technicians, increase objective by 5%
- Middle cost 1/3 of technicians, increase objective by 10%
- Lowest cost 1/3 of technicians, increase objective by 15%
Increasing the average daily hours using these guidelines has a two-fold effect.
First, your highest contributors to cost of sale often are your highest producers. Can you realistically expect them to increase productivity by only an additional 5%?
Second, as you increase the production from your lower cost-of-sale technicians (typically the ones with the most room for improvement) you should expect a 15% production increase and you will increase your gross profit margin.
You will see an increase in production and gross-profit percentage by following this rule.
With daily objectives set, monitor technician production daily and compare actual hours to objectives. Your technicians need to know someone is looking at this.
It helps them manage their time and work. In our technician interviews, they often tell us they want this information.
In smaller dealership, the service manager may be best suited to review this with technicians. Elsewhere, it may be advisors, group leaders or production managers.
If a technician fails to hit daily production objective three days in a row, a meeting must determine the cause and set corrective action.
Tracking the technicians “hit ratio” or the times they reach their production objective is important to help determine if or when an objective should be adjusted. We should expect our technicians to reach their objective 60% to 80% of the time.
In the early 1900s, a factory tested a theory that productivity would increase if the lighting in the plant were turned up. So every day they increased the lighting a little bit and recorded the productivity.
As the lighting increased, productivity increased. Then they began to lower the lighting everyday and recorded the results. The productivity continued to increase!
Turns out, the productivity had nothing to do with the lighting. Productivity increased because it was being tracked.
So look at the numbers every day, not just after you realized your technicians had a lousy pay period.
Mark Sappington is a consultant with AtCon in Birmingham, AL. He can be reached at 800-692-2719.
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