Your Source for Up-To-Date News and Research on the Collision Repair Industry 

 

click here to subscribe to the FREE INSIGHT Editor's Desk News Alert Email

SUBSCRIBERS-ONLY
Today's News
INSIGHT This Month
INSIGHT Archives
Survey Center
Letter to the Editor

Business Tools
Subscription Information
CSI Reporting
Financial Analysis
IRS Audit Guide

Management/
Technical Info
1998 Market Watch Rates
INSIGHT Inside this month's issue...

Feedback
Letter to the Editor

Tracking Key Performance Indicators

Monitoring key ratios provides collision repair facility managers with the tools to maintain and improve profits...

For long-time subscribers of INSIGHT, our emphasis on the importance of tracking financial performance indicators in the collision repair shop is nothing new. Establishing and tracking the profit generating performance of a collision repair facility is crucial to determining what processes work well and what processes need improvement within the facility.

In the past, financial and operational analysis has occupied little of a collision repair shop's time. This changed with the introduction of computerized and manual job costing systems that placed importance on performance analysis. Shops that took advantage of job costing found that they gained valuable insight into the health of their business.

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

• Labor
• Parts
• Materials

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 valuable 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 were 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. These processes include customer communication, production scheduling, repair production, and finally vehicle delivery and followup.

The Larger Picture

Unfortunately, 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.

For example, with consistent parts discounts and careful tracking of parts use, the parts gross profit figure will not vary from the target determined when the damage report is written.

On the labor side, gross profit percentages also tend to remain consistent once top-level performance is achieved. When declines do occur, job costing can provide a tool to find the cause of the decline. For example, labor gross profit margins, examined on a technician-by-technician basis, can point towards training or motivational needs of a new employee.

Job costing, with its emphasis on gross profit margins, will provide an after-the-fact determination of labor profitability and help spot poorly performing technicians or departments. But poor performance on an individual job does not necessarily indicate poor overall performance. Bad labor gross profit could also indicate a poorly written estimate. If the technician in question regularly achieves acceptable gross profit percentage levels on estimates written by Estimator A, but fails with sheets written by Estimator B, it may be time to take a look at Estimator B's performance.

Also, job costing on an individual repair order basis makes little sense for materials costing. Larger shops, those with in-house paint mixing systems, have a difficult time accounting for materials charges on an individual RO basis. An easier number to generate is a monthly materials gross profit figure.

Key Performance Measures

The chart on page 13 lists six key 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 are:

1. 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.

2. 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.

3. Parts to labor ratio: Provides an indication of parts profit contribution to the overall gross profit figure as outlined above.

4. 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.

5. 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. As illustrated in the example above, this figure provides an excellent measure of the true gross profit per clock hour.

6. 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

Taken together, monitoring of the six key performance measures above gives an overall view of shop profit making performance. In next month's issue of INSIGHT, we will examine the impact of the parts to labor ratio on profitability and its real impact on shop profitability on a real-time basis. As we will show, the traditional, per job GPM analysis, performed by many repairers and computerized systems, leads to profit reductions in real world applications. ?    o

Feedback

Have a comment about this article? Send Email to Russell Thrall, INSIGHT's Editor

©1999 Collision Repair Industry INSIGHT
All Rights Reserved

FEATURED
LINKS:

INSIGHT Supports the NABC!
Do You?