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This is a story about a phone call I received several months ago from a service director who had recently attended our NCM® Institute class, Principles of Service Management I. Although not her real name, I’m going to call her “Debbie” throughout the remainder of my story.
“How can I help you today, Debbie?” I asked. “Well, my dealer principal and I have identified a major area of opportunity in my department. Our GPM on customer-paid labor sales is well below the NCM Benchmark® average, and we’re also significantly below our 20 Group average. We need to raise our labor rates, and I’m looking for some guidance.”
I then took a look at her group’s composite and reviewed the “Service Sales and Gross” and “Service Department Expenses and Profit” pages, and I said to Debbie, “I see what you’re talking about. Your GPM on customer-paid labor is at 62.66%, and that’s without question exceptionally low, but let me point out a couple of things.”
“First, your average monthly customer-paid gross profit is one of the highest in your 20 Group. Second, your departmental net profit retention is the third highest in your group. Finally, your departmental operating profit is the highest in your group. Are you sure you want to risk that level of performance, just to improve a metric like GPM? Remember what I told you in class…you can’t eat metrics such as GPM…you can only eat Net Profit! I need to have you slow down a little, Debbie.”
“Also remember that I said GPM is a function of three independent things. First is your Effective Labor Rates (or ELR), that’s what we normally consider it to be the low hanging fruit…but sometimes it isn’t! That’s why we need to consider the other two variables. As you’ll recall, the second variable is our Cost of Labor Sales (or COS). That’s determined by our mix of technicians, their pay rates, and the way we dispatch our work. And the third variable is our Discounting Policies and Practices. Have you taken the last two variables into consideration?” I asked.
“I’m way ahead of you, Robin,” she responded. “I have. Like a lot of dealerships, our technician mix doesn’t very closely match our business mix. We’re way too heavy with master and journeymen technicians, and we are trying to do a better job of dispatching the right jobs to the right technicians, but as you’ve said, that’s not easy with our current technician mix.
“Debbie, I can already hear your next question forming…Have you considered adopting a Variable Flat Rate Pay Plan?”
She answered, ”yes, we have. But we’re not ready to take that step yet. When you look at the Technician Productivity section of the composite, you’ll see that our technicians are averaging slightly more than 220 flat rate hours per month. That exceeds your NCMi® guideline of 200 flat rate hours per month. We’re afraid that if we implement a variable flat rate pay plan today, our technician productivity will suffer and we may lose some techs as a result. So to clarify my answer…Do we understand the Variable Pay Plan concept...? Yes! Do we like the idea…? Yes! Are we prepared to adopt it today...? No!”
I then asked Debbie if she had been tracking her customer-labor discounts, and she quickly replied, “Of course! As soon as I got back from the Service Management class in Kansas City, I met with my controller and we began a process to sub-account for and track discounts. And, WOW, that was an eye-opener! We learned a lot and implemented a lot of quick-fixes. We now believe we have our labor discounts under control and expect to be able to maintain current discounting levels. And my advisors’ average productivity is fine at close to 800 flat rate hours per month, so I don’t want to hamper that productivity by messing around with our budgeted and managed discounting policy.”
“OK, Debbie,” I responded. “You obviously got some important take-aways from the NCMi Service Management training you attended. So let’s tackle the challenge of how and how much to raise your customer-paid labor rates….”