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Strategy and Action

Quantifying Present Performance and Developing Long-Term Strategies for Improvement...Part 2

In last month’s installment, INSIGHT addressed the major trends affecting the collision repair industry and how they stand to impact an individual business. The goal behind this understanding is the development of a strategy to grow one’s business and to implement that strategy with quantifiable actions and measures.

In last month’s issue, we asked readers to ask themselves a set of questions regarding their business, how they are currently performing, and what they want to achieve in the next five years.

These questions included:

• Who are my competitors?
• What is the likely future of my competition?
• Will my competition grow themselves or sell to a consolidator?
• What referral opportunities exist in my market?
• How can I secure available relationships or position myself to capture existing relations from competitors?
• Is my financial and operational performance at optimum levels?
  And finally,
• What do I want to achieve in the next five years?

Many of the answers to these questions are readily available to the individual repairer. Understanding one’s competitors and the potential for referral business are easily obtainable in the local market. Having a firm grasp of a repair facility’s performance, especially relative to other facilities of similar size, is more difficult without outside help.

In this issue, we will examine both capacity utilization measures and financial performance measures that collision repairers need to understand and track on a regular basis, to quantify successful improvement strategies and tactics.

Capacity Utilization

The basic tenets of capacity utilization, both measurement and analysis, have been frequent topics in the pages of INSIGHT. At their core rests the fact that the more efficiently a repairer uses the tools, equipment and labor potential of his facility, the more profit should flow to the bottom line. In simple terms, the more flat rate hours produced on a piece of frame equipment, or the more jobs that go through the spray booth on a given day, the better the shop is using the tools at its disposal and the more efficient its labor use.

Many repairers have achieved gains in labor productivity over the last ten years through heavy investments in the equipment on the shop floor and also the redesign of their facilities to smooth and speed workflow through the facility.

What forced this investment?

In the early 1990s, the nature of the labor portion of the typical repairer’s estimate changed, with high-margin repair labor declining as a percentage of the overall job in favor of lower-margin remove and replace operations. To maintain profitability, shops needed to hang more parts and hang them faster to maintain average gross profits per technician clock hour. An oft forgotten fact is that every hour of R&R labor includes a portion of parts profit from the item being replaced.

Those shops that invested in their physical plants improved, or maintained, their profitability levels while those that didn’t, by and large, saw profits decline. Increased spending on physical plant and equipment, coupled with investments in new technology, such as computerized management and production control systems, enabled facilities to expand - dramatically in some cases. Where the typical large repairer produced from $1-2 million in sales in the late 1980s, the large repair facility today produces from $2-4 million- with a select number producing even more.

While these investments have produced results, many operators are looking to take the productivity of their facilities to an even higher level of capacity utilization. What is driving this renewed search for increased productivity and efficiency? The emergence of consolidators is one factor, but the desire to continuously improve profit performance is equally important.

Productivity Gains?

Part of the basic premise behind consolidation holds that increased work volume enables economies of scale. The more work a shop owner puts through their facility, the more profit they should have at their disposal to market themselves, invest in their future improvement and get a better return on their investment.

But, as many large repair facilities have determined, large gains in productivity are not easily achieved. By some measures, large-scale facilities often perform below the level of their smaller brethren. For example, a multi-store operation needs a certain amount of corporate staff to manage the overall operation. With this staff comes increased overhead that can drive profit margins down. Also, shop owners often cite the difference between their managers, who have less of a stake in the business and less entrepreneurial spirit, and themselves.

For large facilities and multi-store operations to continue to grow, real productivity gains will be needed to offset this increase in overhead and justify the massive investment that is currently taking place.

While consolidators hope to use increased productivity to their competitive advantage, individual repair facilities and multi-shop operations can use the principles of capacity utilization to improve their own performance- enhancing their competitive position in their local market.

Are real productivity gains possible? Many believe they can be achieved.

How will gains in productivity be realized? INSIGHT believes that careful attention to facility utilization and employee performance measures is one key. Careful attention to benchmark performance is the most common factor among successful repairers. Secondly, increased workflows will enable all repairers, not just large scale consolidators, to put to use industrialization and management concepts that totally re-work the traditional production process within the repair facility.

Setting the Stage

Building capacity utilization into your facility’s mindset requires vigilant attention to the most common measures of the financial and productive health of the facility.

In last month’s issue, the top six productivity measures to quickly judge the performance of your facility were detailed.

These measures include:

1. Flagged (Flat Rate) Hours to Clock Hours per Job
2. Flagged Hours to Clock Hours by Department per Job
3. Parts to Labor Ratio
4. Billed Materials Sales per Refinish Labor Sale
5. Total Gross Profit per Technician Clock Hour
6. Total Flagged Days sold by Actual Days in Shop

The six measures are most commonly used to compare month-to-month and year-to-date performance within an individual facility, or to compare the performance of different facilities.

In addition to these six measures, INSIGHT believes that benefits can be achieved by looking deeper at the performance of the typical facility by using measures based upon the physical size of the facility, the equipment in use and the number of employees that perform the work. For example, individual sales and profit figures can be benchmarked based upon the size of the facility in square feet, enabling comparisons between the overall efficiency of the shop’s design compared to other facilities. Also, comparison of sales and profit in terms of the equipment used to produce the repairs and the employees, both management and technical that perform the work, allow a shop to compare their equipment utilization and the overall productivity of their employees.

Facility Utilization and Employee Performance Measures

Careful tracking of facility utilization and employee performance measures has helped many repairers improve their bottom line profit. These most common utilization and performance measures include:

Total Sales per Square Foot:

This measure enables a shop to compare its sales performance against itself, on a month-to-month or other time period basis, and also against the performance of other facilities. Higher sales per sq. ft. indicates increased efficiency- all things, such as labor rates and hours of operation, being equal.

All too often, however, regional variations in the internal and external factors affecting a facility can make broad-based comparisons and benchmarks difficult. For example, high real estate costs in metropolitan markets often force repairers to build smaller facilities. To produce in the confined environment, increased hours of operation through the use of second or third shifts is often necessary to meet production demands economically.

Also, labor rate variations from market to market make strict sales comparisons on a square footage basis difficult.

Gross Profit per Square Foot:

Like the sales per sq. ft. measure, the amount of gross profit per sq. ft. measures the overall efficiency of the facility. The gross profit figure will help to eliminate some of the labor rate bias that can affect the sales/sq. ft. calculation.

Flat Rate Hours per Square Foot:

This number eliminates the dollar bias of different labor rates entirely. Second and third shifts will skew results, but allowances can be made by taking this figure one step further- dividing the Flat Rate Hours per Square Foot performance by shift.

Breaking each of these three square-footage measures out by shift is a necessity to compare the apples-to-apples performance of multi-shift operations.

Additionally, square footage comparisons can be performed on a departmental basis, i.e. metal shop versus paint shop, etc.

In addition to the sales, gross profit and flat rate hour calculations above, individual measurements of departmental performance can also be performed. Often repairers look at the performance of the big-ticket items in which they have invested. For example:

Flat Rate Refinish Hours per Spray Booth Clock Hours:

This measures booth cycle time and can be used to judge how changes in scheduling and workflow increase, or decrease, the efficient usage of spray booth time. Changes in refinish prep workflow can often eliminate the need for a second or third spray booth- less money invested equals a better return on investment.

Structural Flat Rate Hours per Frame Machine Clock Hour:

Another measure of cycle time, this time geared towards the metal shop. Again, careful tracking, coupled with experimentation in changing workflow techniques can point towards methods of increased efficiency.

Another department, all too often overlooked when studying efficiency, is the front office. The cost of management, estimator and other overhead staff play an obvious role in whether or not gross profit becomes net profit. Front office efficiency can be measured several different ways, based upon the size and how the facility is organized. Common measures include:

Total Sales per Estimator:

Tracked as an average of the overall estimating staff, or per each individual estimator.

Total Sales per Front Office Employee:

If the repair facility does not have dedicated estimators, or a large number of estimators, this figure can provide a better indicator. The manager, receptionist, parts handler, and other overhead staff should be included.

Computerized estimating and management systems have enabled front office staff to increase their efficiency and the quality of the information they provide customers and management. Further gains can be achieved.

One area consolidators hope to capitalize on is the reduction in redundant functions in their repair facilities. For example, a dedicated accounting staff can take the place of individual bookkeepers in each facility.

The chart below details these and additional profit and productivity benchmarks for the Top 25 percent of collision repair facilities as measured by INSIGHT’s Benchmark Financial Analysis program.

Collision Repair Industry INSIGHT
Worksheet on Current Facility Performance

Using the Tools

With careful tracking and continuous monitoring of utilization and performance measures, shops can use the information they gather to compare their performance against benchmarks and their own prior performance. Analysis will lead management towards areas that can improve within their facility. But, this incremental improvement is only part of the overall picture.

Redesigning workflow in the facility, coupled with changes in the way labor is organized and performed, stand to improve overall productivity and profitability the most. Changes can fall into three main categories:

1. Improved Scheduling: The largest improvement in overall efficiency, as measured by the number of actual days the vehicle is in the facility compared to the flat rate days of repair work, can be realized through improved production scheduling. This is the first action item for shops looking to increase their facility utilization.

   With drivable vehicles, those that the customer continue to drive while parts are ordered, management can and should create schedules using this work to fill out their production schedule around the non-driving repair work.

   Every facility has only so many body or paint production hours at their disposal. For example, ten body technicians who spend 7.5 hours of working time at an average 150 percent efficiency will produce 112.5 flat rate hours per day. Filling this time, while taking into account the production capacity of the paint shop is critical.

   Each day, the paint shop will also need a specific number of repair hours to fill their schedule. Keeping work flowing between departments, at the proper time, is the crucial component of the art of production management.

   In competitive markets or in DRP environments, however, many shop operators complain that this is often not possible. Shop operators get the keys before their competitors or are trying to reduce insurance rental time. But, the actual repair work on these vehicles should be scheduled carefully according to parts availability and production capacity.

   Certainly, the shop must sell the job. But failure to deliver on-time because of production delays caused by poor scheduling will most likely cause more problems long-term for the facility due to poor customer satisfaction. Sure the shop got this job, but poor CSI on the repair may drive five jobs past your door in the future.

   Also, the DRP customer will be better served by reducing insurance rental time from speeding the job through the shop. While insurers often track the number of days between when a claim is filed and when the repair is completed, the actual cost of replacement rental days is a bigger concern.

2. Modifying the Division of Labor: In years past, it was quite common for one combination technician to see the repair job through each step of the repair process. The first major change to this technique came with the addition of the dedicated painter and ultimately the addition of the paint department as a whole. Little, however, has been done on the metal shop side of the typical collision repair facility.

   In some facilities, vehicle disassembly is performed by one set of technicians, structural repair by another, reassembly by yet another prior to moving to the paint shop. With this level of specialization, productivity has been enhanced. Further specialization will occur as increased volume provides the ability to group schedule similar repair jobs.

   One method that will see increasing implementation is the usage of lower-skilled, lower-wage apprentice technicians to perform larger parts of the repair job. Working under the supervision of highly-skilled, Class A technicians, these apprentices will perform much of the tear down and reassembly work.

   Shops that are employing apprentices in this manner typically pay an hourly wage or salary to the apprentices. Productivity and profitability targets are set for the apprentices, gradually increasing as does their skill level. To maintain profitability, shops can build their gross profit margin into the cost of these apprentices. This cost figure comes out of the overall labor dollars in the job that the Class A tech, typically a flat rate technician, gets paid. Under this type of system, it is in the best interest of the Class A tech to use his helper’s labor most efficiently and develop their skills to suit the work at hand.

   Another method under investigation is the assembly line repair methodology. Much like an automobile assembly line, the division of labor is much smaller than in traditional repair sequences. This method is best suited for light-to-medium hits, though heavier hits can be worked offline then brought into the assembly line process after structural repairs have been performed.

3. Shop Design: Modifications to the existing facility to smooth and improve flow offer repairers the opportunity to reduce bottlenecks and trouble areas and increase capacity to meet demand.

   Undoubtedly, individual repairers will find additional methods of improving productivity to meet their needs and goals. With a thorough understanding of facility utilization and employee performance measurement, the task of finding and quantifying improvements will be much easier to accomplish.

Conclusion

Using many of these measures, and the comparisons to top performers, repair facilities can gain a firm grasp of potential opportunities and improvement strategies. Over the next month, readers should begin measuring their individual performance, or if this is already a regular function in the facility, make sure the numbers are updated. Compare these numbers to the benchmark performance figures detailed on page 13 and determine the individual actions necessary to achieve the strategic goal of top flight performance.

In next month’s installment, INSIGHT will review additional goals repairers can focus on, and how performance measurement can be translated into specific growth enhancing actions in the facility.   o

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