Chapter 14
Gus's Garage

By Jake Snyder

Gus suggested that I do an audit of Hometown’s operations and report back to him. Prior to going out, we had determined that I should assess Hometown’s operations in terms of current operating practices and financial performance.

For the operational assessment, I used process mapping to create a benchmark and assessment guide. We created a high level map of customer value-added activities used in Gus’s Garage operations to compare Hometown’s operations with. In auditing terms, this type of assessment is referred to as a "gap analysis".

See Gus’s customer process map illustrated in Figure 1.

In Hometown Chrysler, many of the process gaps identified were in non-technical areas. In pre-repair activities process steps were either omitted, out of sequence, or inconsistently performed. Also evident was the lack of quality assurance (QA) practices and control systems. Fortunately, the many breakdowns that did occur due to the lack of proper QA were hidden from the customer. Problems were often handled internally prior to the customer realizing a problem had occurred. Unfortunately, constantly resolving problems becomes expensive and leads to inefficiency and waste.

Good processing was apparent though in several areas: parts processing; documenting customer specifications & pricing; paint prep; detailing; billing & job costing.

Financially, I reviewed current financial statements to look at Hometown’s performance and to project the financial impact of different operating scenarios that Gus might use.

Figure 2: Hometown Summary

In Figure 2, I listed a few financial performance measures. We looked first at the low parts to labor ratio where sales were comprised of 40 percent parts sales and 46 percent for labor (87 percent parts to labor ratio). By comparison, Gus’s ratio is 104 percent where average sales revenues are 44 percent parts sales to 42 percent labor. Hometown’s low ratio would appear to be unusual for a dealer shop where selling parts is a key emphasis.

I had investigated Hometown’s low parts to labor ratio more closely and determined that the low ratio was due to several factors: high technician wages; an apparent propensity for the shop to negotiate in favor of labor operations, and highly detailed supplement line items. It also seemed that the techs were over-repairing in certain repair processes. As an example, during my visit I noticed that blend areas encompassed a vehicle zone (i.e. complete side, nose, rear) versus the next adjacent panel or the same panel. Similarly, a negotiating strategy to avoid A/M parts had evolved. The threat of a high frequency of OEM parts usage was leveraged against the accepted practice of writing extraordinarily high repair times on repair orders for fascias and other commonly used body parts.

The average repair order was $1,409. We expected this, as there is a large demand of smaller jobs through warrantee and internal work from Hometown and other local dealerships.

Gus and I then began to look at different scenarios with the Cash and Operating Statements. We changed variables and assessed the resulting financial impact. Initially, we excluded balance sheet adjustments and assumed the dealership still owned the shop.

By changing the Parts GP percent from 10 percent to 25 percent on the operating statement, the correct parts profit margin impact for an independent shop could be viewed. This change led to higher cash flows of $147,000 and EBIT increase to 9.2 percent. Staying with the higher Parts GP basis, we then changed the average parts to labor ratio to 95 percent or 42 percent parts sales compared to 44 percent labor sales. This scenario slightly reduced the average Tech pay, but also reduced Gross Profit, leaving an EBIT of 8.7 percent. Next, we increased sales by adding one additional job weekly. Tech Pay then increased back to original levels, Gross Margin stayed the same, and EBIT went up to 9.3 percent. We then understood what additional sales would be needed to maintain current wage levels.

If Gus was to take over operations at Hometown he did not want to mess around with the employees and their pay, he figured that if the staff stayed on board during the transition, he could eventually adjust average wages to lower levels with new hires and team systems.

We both realized that techs at Hometown had fallen into a routine and were accustomed to picking and choosing when and on which cars to work. All techs carried large WIP inventories of jobs allowing them to create the best workday workflow to maximize their hours flagged weekly. They were allowed to focus only on sold-hours instead of the overall customer service delivery that requires a consistent next-in, next-up sequencing of jobs and work activities.

My homework for this month is to create additional financial scenarios to account for significant revenue gains, changes in the mix of work to include more medium and heavy hits, and to also include balance sheet adjustments to account for new building and equipment investments and the need for Gus to add a lease payment and financing for purchasing the business.

In moving back to the process analysis, Gus was looking for a way to move Hometown’s current operating system closer to Gus’s Garage. If he purchased the new business, he would also expect operations to be even better than his and of superior quality and service to any competitor in the area.

Gus needed a clear differentiator and operating strategy that would be embraced and owned by the staff at Hometown. He did not want to have to micro-manage the operation to assure success.

I suggested to Gus that he consider the benefits of the new ISO Quality Assurance Management Standards that were just released in late 2000. The new standards are process based and designed with the small business operation in mind. They focus on the customer and continuous improvement; and with the Third Party Auditing and ISO Certification, a powerful message is sent to employees, customers, suppliers, and investors.

Next month we look closer at the affordability of the Hometown deal. We will also learn what ISO Quality Assurance Systems can offer and how a new operating system lends itself towards quality system management and auditing.

Jake Snyder, creator of the popular Gus’s Garage series, is interested in hearing from shop owners with real-life questions.
E-mail JJ the Remote Pro, Gus’s intrepid consultant.