Workshop indicators help the dealer detect the Service Department’s behaviors and trends, discover revenue opportunities, learn which activities are more profitable, and foresee the future of the business.
A dealership whose strategy is based on key indicators knows its Service Department and has the necessary tools to succeed. But what indicators should dealers analyze?
The indicators featured in this series of articles allow the dealer to monitor and improve the performance of its aftersales operations.
Indicator #5. Labor (Service) Gross Profit
1st calculation: Retail Labor – Tech Pay = Gross Profit
2nd calculation: Gross Profit / Retail Labor = Gross Profit %
Typical case: A customer arrives at the dealership and requests a job priced at $450, and which takes 30 minutes. The technician in charge of the service is paid at the rate of $65/hour (in this case, $32.50). The gross profit of this service is $417.50 (retail labor minus the tech pay), so the gross profit percentage is 92%.
In this case, the indicator is showing that the job performed by the technician has a high gross profit, but if it its value were lower than the ideal, the dealer should analyze the following:
• Is this the right technician for this kind of job?
• Is the technician well trained?
• How can I improve the Gross Profit?
Indicator #6. Parts-to-Labor Ratio
This indicator shows how much labor is invoiced against the parts sales in the workshop.
Why is this important? Because it allows you to detect if the business depends on parts sales, services and labor sales, or if it is balanced.
Parts-to-Labor Ratio = Parts Sales / Labor Sales
Typical case: The workshop invoices $480,000 for parts and $180,000 for labor every month, i.e. they sell $2.6 of parts for every $1 of labor. What does this mean? On the one hand, that the business depends greatly on parts sales; on the other hand, that Service Advisors are not generating more jobs despite the high demand of parts. If Advisors develop sales skills, they can offer customers maintenance jobs, which will help improve this indicator.
The aim of the dealer is for the labor sale to increase with every job. The best way to do that is by increasing preventive maintenance, which can be achieved if the Service Advisor sets a goal: each Repair Order must have more than one job. This will help balance the Parts-to-Labor Ratio.
Indicator #7. Effective Labor Rate
Effective Labor Rate (ELR) = Labor Dollars / Flag Hours
Benchmark: The higher, the better
What is this indicator for? The answer is simple: It allows the dealer to have a true measure of workshop profitability. For example, a customer arrives with a vehicle that requires a job with a labor cost of $65, and the technician finishes this job in 30 minutes.
$65 Labor Rate / 0.5 Flag Hours = $130 ELR
This indicator doesn’t have a definite benchmark, but the higher the benchmark, the better the benefits for the dealer since labor is selling at a higher value, and/or flag hours are reduced because technicians are more efficient.
The indicators analyzed in this series of articles are essential to monitoring the Aftersales Department, and successful dealers continually track and improve them to increase revenue and profitability.