All too often in this business we strive to move our organization to an advanced level before we maximize the potential that exists right now, right in front of us. That is like building a rocket ship without first building the launch pad. Many Service Operations have tremendous potential in improving the value per repair order (customer pay) with just minor changes in operating setups and practices. When I refer to the “value per repair order” that includes performance indicators that all Service Managers are pretty familiar with, such as; flat rate hours sold per customer repair order, # of lines per repair order and of course effective labor rate. In most cases Service Departments have sufficient customer traffic, the real potential for improvement comes from improving the value per transaction.  

The first item to consider is how many customers, not repair orders that each Service Advisor is handling on average per day. The quality time must exist for these people to handle each transaction properly. I like to target 15 to 17 customers per day per Service Advisor. I also like a Technician to Service Advisor ratio of 3 to 1, (certainly no more than 4 to 1) meaning three technicians for each Service Advisor. With this ratio, how many customers must each Service Advisor handle on a daily basis to keep the technicians busy all day? The inventory that is available to sell would be 24.0 flat rate hours @ 100%, (with 3 technicians). So even with an overall average of 1.5 flat rate hours per repair order only 16 customers are required. With an overall average of 2.0 flat rate hours per repair order only 12 customers are required, and so on. You can actually reduce the number of customers arriving each day through scheduling and improve the value per repair order as well as the total shop production for the day. Give that some thought. 

Selling additional services to improve flat rate hours per repair order and increasing the add-on lines by having the Technicians look for additional operations are two key areas to improve the value per transaction, this article however will focus on what is usually the lowest hanging fruit of all…”customer effective labor rate.” 

I recently had the opportunity to perform an evaluation for a dealer organization consisting of seven small to mid-size stores. The improvement opportunity of customer effective labor rate alone totaled in excess of $750,000.00 annually for the group. The exciting part of this for me is this improvement opportunity exists right now in each of their stores, with no additional customer traffic, with no additional advertising or specials and with no additional flat rate hours sold or produced. That being the case, where does this $750,000.00 really fall to on the financial statement? The bottom line, less any pay plans tied to sales or gross profit. Does this type of opportunity exist in your store? If you don’t know you should. Consider the following formula:

Current Customer Effective Labor Rate             $__________

Projected Customer Effective Labor Rate         $__________

CELR Improvement Opportunity                         $__________

                                                                                               X

# Customer Flat Rate Hours, avg. month           __________

                                                                                               =

Profit Improvement-Month                                $__________

                                                                                               X 12

Profit Improvement-Annual                               $__________

I have seen the Customer Effective Labor Rate as much as $20.00 below the dealerships warranty rate, quite an opportunity. So how do you improve? Many articles have been authored in publications including this one on the process of establishing a variable rate structure. Because of this and the assumption that most Service Departments are already utilizing a variable rate structure I will not go into detail here on that part of the effective rate improvement process. I prefer to list objectives and potential pitfalls to obtaining and more importantly maintaining the targeted customer effective labor rate.

1. Review the Competitive operations at least quarterly. Make adjustments if possible. Many dealerships sell the 3K service (Lube, Oil and Filter) below the average in the market.

2. The Maintenance Effective Labor Rate should be equal to or greater than your Customer Effective Labor Rate goal. Review all established op-codes set up in the system and adjust to meet or exceed the goal. Many op-codes may be outdated and not designed to achieve current goals. Be careful not to let vendors or suppliers, such as chemical company sales reps. set your prices.

3. Set the Customer Effective Labor Rate goal  $2.00 above the current Warranty Rate. This should allow you to make application for a rate increase whenever the other qualifiers are met. I know some dealerships will have a difficult time with this due to current work mix, market conditions, etc.

4. Review the system generated over-ride or exception report daily. If left unchecked the Service Advisors may be overriding the system defaulted labor rate and all to often this override is to reduce the sales price not to increase. 

5. Establish a dealership service pricing policy. Each Service Advisor should build a quote using the same time standard, parts price, supplies, labor rate and “cushion.”

6. Do not post or publish labor rates and flat rate times (be sure to review your state requirements). Customers really only want to know…how much and by when.

7. Perform a “felt tip” review of the repair orders daily. Inspect for rate adjustments, discounts and coupons. Also inspect for lost sale opportunities and warranty compliance.

8. Track the Customer Effective Labor Rate daily by Service Advisor. The Service Manager and Service Advisor must know on a daily what their individual month to date effective labor rate is averaging. This becomes even more important to track closely whenever pay plans do not include effective labor rate as a component. The tendency may be to “give” the hours away to the customer.

9. Do not design Service Advisor pay plans to include Customer Effective Labor Rate, (or flat rate hours per repair order either). A Service Advisor that is paid on effective labor rate may be inclined to avoid the low-end or competitive type operations. We should have our Service Advisors focused on obtaining every tenth of an hour possible. An occasional “spiff” program for effective rate performance can be implemented. Also, be careful of pay plans based on labor sales or gross profit particularly if the effective rate improvement opportunity is substantial. The Service Advisor could receive a pay raise without producing any additional labor sales. Be sure to track performance, see #8.

10. Track the Effective Labor Rate by work type category, at least monthly. It is important to know the effective labor rate by category; competitive, maintenance and repair. The effective rates by category will indicate if each work type is contributing properly to the overall customer effective labor rate and when adjustments may be required.

11. Track the Work Mix, at least monthly. Regardless of how high the repair or high tech. rate is set you still may not achieve your effective rate goal if the work mix is heavily weighted to low-end competitive type work. The total shop as well as individual Service Advisor performance should be monitored.

A final note. Building a variable rate structure is just the beginning. In order to reach your goal and maintain you must monitor performance. Just like with many things in this business…what you measure, improves. 

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