May 1998 INSIGHT Feature:

The Next Level of Competition

How Will Repair Facilities Compete in the Next Millennium?
Part 4 - Performance Measurement and the Drive Toward Industrialization

One of the major consequences of consolidation and the next level of competition it creates will center on the efficiency of shop production. Much has been done by repairers across the globe to improve the efficiency and productivity of technicians during the past 10 to 15 years.

Increased spending on technician training, computerized information systems, dimensional diagnostic equipment, structural repair systems, downdraft prep stations and spray booths have all had their effect on improving the speed with which technicians turn out their work. But, much of this investment has already been made by large, professionally managed repair facilities, the productivity gains have been realized and their competitive advantage over less able repairers secured.

With the lessons learned from their investment in technology and training in the ’80s and ’90s, many potential consolidators and other large independent facilities are looking towards the future and the next great leap forward in technician productivity. The questions these forward-looking repairers are asking themselves include, "Where will the next leap in technician productivity come from?" and "How can these productivity increases best be used to secure a competitive advantage?"

INSIGHT believes that the competitive environment that will exist with the coming of the new millennium will enable repairers to capitalize on their specific abilities to improve capacity utilizaton, increase labor productivity and gross profit, reduce cycle times for repairs, and ultimately provide a greater return on the repairer’s investment. In doing so, these repair facilities will raise the level of competition by creating a new standard for low-cost, but higher profit, collision repair service in their local markets. Capitalizing on this ability, repair facilities that realize productivity gains will better position themselves to grow at the expense of their direct competitors.

Over the next two issues, INSIGHT will examine how shops can measure and improve upon their productivity and equipment utilization. In this issue, we will examine the key measures of productivity and profitability, providing a benchmark to work with over the improvement cycle.

Performance Tracking

Tracking the actual performance of a collision repair facility is crucial to determining what processes work well and which need improvement within a facility. Traditionally, financial and operational analysis has occupied little of a collision repair shop’s time. This changed in the 1980s with the introduction of computerized and manual job costing systems that placed importance on performance analysis.

The theory behind job costing is straightforward. By tracking labor, parts and materials costs on an individual job basis, the gross profit producing activities of a collision repair facility are glaringly apparent. This type of costing focuses on the gross profit margins achieved in the three sales categories of the production process.

With labor, parts and materials gross profit figures at hand, collision repair facilities can compare their individual performance with national and group averages. Poor, or low gross profit figures indicate potential improvement areas.

Job costing, when applied to every single repair order, has provided many repair facility operators with important information concerning the efficiency and profit making capacity of the production process. Traditional job costing, while time consuming, does provide a profit-based score for labor, parts and materials sales. This is an excellent starting point for a shop that recognizes that they are not making as much profit as possible from their operations - especially if today the extent of performance analysis is little more than looking at the checkbook at the end of each month, wishing the balance is higher.

Composing a picture of operational health is critical for every collision repair facility - especially those that participate in direct repair programs with parts or labor discounts attached. Job costing is the first step in performance analysis, but for many facilities, it does not accurately reflect operational health. What is needed is an expanded scorecard that enables a facility to examine the four basic processes in a collision repair facility.

Production Process Measurement

For larger firms, the benefits received from job costing each and every job are reduced with ever expanding volumes. How can this be? Well, as research conducted for this article indicates, for the typical large facility, once gross profit targets are achieved, they usually become little more than standard operational figures. Minor variances may occur, but the overall gross profit picture stays the same. The conventional logic of job costing says that all aspects of the cost of the job should be measured and compared to standards and the planned profitability of the job at hand. While fine in theory, once top level performance is achieved, job costing does not tell management much in the search for increased efficiency.

The chart at right illustrates six measures of job performance. These numbers help develop the relationship between parts and labor, to repair days sold vs. actual repair days. This measures the throughput of the facility in repair days produced per calendar day.

The six measures include:

Total flagged hours to clock hours per job: This number gives a quick overall picture of productivity. If this number is bad, examination of the departmental performance indicates where the problem lies.
Ratio of flagged (flat rate) hours sold to clock hours by department per job: This number measures the efficiency of each department or function within the production process. The number should be broken down into metal, structural and refinish components.
Parts to labor ratio: Provides an indication of parts profit contribution to the overall gross profit figure.
Billed material sales per refinish labor sale: Think of materials as the parts of the refinish process. On most repair orders, this is a straightforward percentage of refinish labor since materials are traditionally estimated based upon the refinish hour. However, the caps now being placed on clearcoat times by information providers will affect this ratio on larger repair orders that trigger the cap. This new development forces shops to watch this number carefully. Any appreciable drop will have to be made up by an increase in the refinish materials allowance, or a reduction in materials usage to maintain an even materials GPM.
Total gross profit per technician clock hour (including parts and materials): This number incorporates the parts, on the metal and structural side, and materials sales, on the refinish side, into the profit picture. This figure provides an excellent measure of the true gross profit per clock hour.
Total flagged days sold divided by actual days the vehicle is in the shop: This number provides an insight into the overall efficiency of the operation. The faster vehicles move through the facility, the less labor expended per job, the greater the opportunity to produce more labor and parts sales. The closer this number comes to one, the better performing the facility.

Conclusion

In next month’s installment, INSIGHT will detail measures of equipment utilization and how to use these numbers to plan for increased volume.

Have a comment? Send an E-mail to: rthrall@postoffice.ptd.net

Reprinted from the May 1998 Issue of Collision Repair Industry INSIGHT.