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As a consultant, I have the opportunity to visit many different kinds of dealerships. I have consulted with many different brands, but the most common question I get is about increasing the overall effective labor rate.
The story usually goes in this order: The dealership has someone call around to other stores to see what their door rates are and decides there is some room for an increase in the door rate. For this example, the decision was made to increase the door rate by $20.00.
A month goes by, and the total customer pay effective labor rate goes up by $5.00. Then the search goes on to find out why it has not increased by $20.00. Also, the overall effective labor rate has only increased by $2.50. So, the Service Advisor must be discounting the thought process, and the search begins to figure out what the advisors are doing that is keeping the effective labor rate down.
The first item that needs to be thought out is breaking down the total effective labor rate into its 5 components. Not the normally thought of 3: Customer Pay, Warranty, and Internal. Customer pay has 3 different components to it: repair, maintenance, and competition. Without understanding how each area delivers an hourly contribution towards the effective labor rate, then making changes is just a shot in the dark. The effective labor rate will go up if you make changes to the door rate. That is not in question. The question is how much? This is an entirely predictable number once you can forecast and feel comfortable in getting the desired results. With the proper training on how all the Effective Labor Rate math really works, your forecasting will be a lot more accurate than just stating a 10% increase for your next budget.
In the case above, the repair hours were only contributing 25% of the total customer pay hours. This store does a lot of maintenance and competitive work. So, the customer pay side only got 25% of the $20.00 increase, which is the $5.00 on the customer pay side. Overall, the customer pay makes up 50% of the total hours of the shop, so the effective rate only went up 50% of the $5.00.
Why do Service Managers need continual training? Because details like this matter to the overall net profit. You could make a $5.00 labor charge change on one opcode that could make as much difference as changing the door rate. But, how would you predict that without understanding how all the math works?
Reach out to us here at M5, and let’s explore how financial training for the Service Manager matters. If you include the Advisors and Advanced Production System training, you might really see how we can help the overall net profit of the parts and service departments.