(Originally published in DealersEdge Service Manager Publication, September 2003)

Question:
Don, this month’s question comes from a reader looking to make a change on how he charges for shop supplies.  Right now he has a charge on the bottom of the ticket based on a percentage of labor sale.  Lately he’s gotten a lot of customer complaints about the charge and wants to eliminate it as a satisfaction issue.  What should he do?

Answer:
Having a line items shop charge has been a growing issue as a point of customer dissatisfaction.  Like the way hotels overcharge for phone calls, too many customers just see it not as a way to recover your costs, but to increase your profits.  The words ‘shop supplies’ just doesn’t relate to a direct benefit for the customer so they don’t see any value in paying the fee.

But shop supplies are a very real expense and we still need to recover the costs in some manner.  When it becomes necessary to eliminate the shop supply charge, I suggest that a shop incorporates it into its labor rate.  A nice side effect of bringing it into the labor rate is that it can be built into your factory warranty labor rate over time.  In most cases, it is the only way to get the factory to pay for these costs- albeit indirectly.

First, you need to build in any basis for making charges on shop supplies on a good system.  Before we do anything, we need to do everything to put good controls on the inventory.  The only way to make this work is to make the sure the dollars being spent on supplies are truly needed.  If there is waste in the system it will throw the whole plan out of balance. 

I am a believer that shops should inventory as much as possible.  Put it in inventory and control it.  Because of this I am not a big fan of bulk fluid.  With bulk fluids you save by the penny and lose by the gallon.  The shrinkage on bulk supplies can quickly elapse any savings.  For instance, one shop I was working with bought a drum of brake cleaner.  The techs were using it to clean their tools and everything else.  It was evaporating- literally- from the drum at an alarming rate.

If you have good controls, the next step is to make sure your shop supply expense is correct.  I was working with a shop recently where a $6,000 special order tool was put into the shop supply account and that caused it to spike through the roof.  Make sure the figures you have on the statement are a true and average month.

Once we have our base amount, we need to determine the divisor.  For this we need to know the shop’s average customer paid hours for the month.  Then it is simple division: the total month’s shop supply costs divided by the CP hours booked.  Depending on how good the controls on supplies are, I would expect to see about $3 to $4 as being normal.  Certainly that number can be lower with good controls.

The last step is to incorporate that amount into your labor rate.  But you can’t just add $4 to the door rate and be done.  Depending on the complexity of your labor rate (variables, discounts, etc.) you need to be able to recover $4 to your effective rate.  So that might mean more dollars are added to your repair labor rate and less to your maintenance or discounted rate.  You may need to work the numbers a number of times to get the right balance, but the key is that on the overall average your should end up with the $4 increase.

Once you get the math right, you’re still not completely done and I have several cautions for you to keep in mind.   Realize that you will need to revisit the amount at least quarterly to make sure it is still right.  Things change in pricing and you want to make sure you are still where you need to be. 

Also keep in mind that this change will cause your standard gross profit to spike up.  To keep the picture true, you almost need to subtract off the shop supplies along with the tech wages to get a better view of your gross profit.

Along the same lines, don’t be tempted to give away this new found gross.  For instance, a shop with an effective rate of $60 an hour has the average technician making $18 an hour for a healthy 70 percent gross.  They increase their door rate to $64 to cover the $4 per hour supply charge and suddenly there is a parade of techs at the service manager’s door asking for a raise.  If we gave the techs a buck an hour raise, we’ll keep our gross above 70 percent but we give away 25 percent of our shop supply money.

Additionally, if you’ve been charging for supplies separately, you’ve probably found that it is a nice little profit center for you.  But now those negative balances in the shop supply account are going to disappear.  Just something to keep in mind when doing those 20-Group comparisons.

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