Fixed Ops BHAG — 100% Service Absorption
In fixed operations, a good BHAG would be to achieve 100% service absorption. Since the average dealer in America is averaging less than 70% service absorption, achieving 100% would indeed be a “Big Hairy Audacious Goal.”
If you achieved 100% service absorption would that be a good thing or a bad thing? I would think it would be a very good thing yet why is it that so many dealers pay little or no attention to their own service absorption? In other words, where are you now and how many additional dollars in gross profit do you need per month to get to 100% service absorption?
Let’s explore some opportunities for improving your processes so that you can start to focus on achieving your BHAG.
Look at Your Financials
First of all, you can’t manage what you don’t measure. So do you have an accurate financial statement that follows generally accepted accounting principles?
This of course is a key form of measurement, since a good financial statement enables you to compare yourself to industry guides and effectively participate in 20 Groups …
- Once you have an accurate financial statement, what do you do with it?
• Do you compare this month’s statement to the same month of the previous year?
• Do you look for out of line conditions in sales, gross profit and expenses?
• Do you share your financial statement with your managers?
I was visiting a large family owned dealership recently and I was discussing with the dealer, his Controller and his Fixed Operations Director the value of 100% service absorption. During the course of the conversation, the Fixed Operations Director mentioned that he had never seen a financial statement for his Service, Parts and Body Shop.
He had no idea what his department expenses were. He had no idea what his profit margins were on each category of labor and parts sales (customer pay, warranty and internal). This man has been in the business for over 20 years and worked for this dealer for 10 years and has NEVER seen any financial data on his three departments. This is not an uncommon occurrence.
As a result, this Fixed Ops Director, his Dealer and his Controller, had no idea how many dollars they needed per month to achieve 100% service absorption. It should come as no surprise that this dealer lost over $500,000.00 last year in fixed operations.
How to Measure, Manage, Hold Accountable
Now, I understand that you might not want to share your balance sheet with your managers but how do you expect them to manage a department profitably if they don’t know what their Profit and Loss statement looks like? If you are going to hold your managers accountable for their respective department’s expenses, then they should know what those expenses are. Additionally, if your manager is responsible for producing a net profit in their department they should know where they stand. Their department’s profit and loss statement is their REPORT CARD, right?
Once you and your management team have good financials to measure your progress towards your BHAG, then you must give each manager their own individual BHAG. Your managers must then give each employee under their control their own individual BHAG.
For example, when setting goals you must be specific. You must put it in writing. It must be a stretch to reach it but it must be attainable.
In one of my workshops, I asked everyone if they had set goals for their Service Advisors and a couple of dealers raised their hands. I asked them what their goal was. One said “I want them to increase their Hours Per Repair Order by .2.” I asked what they were currently averaging in HPRO and the response was “1.0.” Well increasing HPRO by .2 is certainly attainable but it is not a stretch by any means so it is not a valid goal.
Author Jim Collins in his book Good to Great introduced the concept of a “Big Hairy Audacious Goal!” His point: Setting goals and measuring everyone’s performance is crucial to achieving the BHAG. In Fixed Ops, performance must be measured daily.
- Your Technicians must be given daily goals for productivity. These include all technicians-flat rate, hourly and lube techs. Their daily results should be posted on a performance board daily for their review.
- Your Service Advisors must be given daily goals for sales. This includes the number of repair orders written, the customer pay hours per repair order, profit margins on labor and parts as well as maintenance up sells. These goals must be measured daily and shared with the Advisors daily by using a Daily Advisors Performance Report.
These processes should be presented to all fixed operations personnel (Service, Parts and Body) in the form of a group meeting so everyone understands why their BHAG is necessary and how important their efforts are in producing the results that will enable the dealership to achieve it’s BHAG. The dealer needs to attend this meeting. It must be positive, informative and interactive. They must appreciate how the BHAG will benefit them all.
Can you think of any employee that would not benefit from 100% service absorption? I can’t! Would your customers benefit from 100% service absorption? Absolutely!
Achieving 100% Service Absorption
Now that you have established goals, you must go back to what I asked you to calculate earlier: “How many dollars in gross profit do you need to achieve 100% service absorption?”
Once you determine this number you need to understand that the only reasonable way to achieve that additional gross profit is by increasing your customer pay parts and labor gross profit in your service department. There is a huge opportunity in repair order sales … Okay, so we are going to focus our efforts on customer pay repair order sales and gross profits in order to work toward our BHAG of 100% service absorption. I only know of three ways to increase customer pay parts and labor gross profit:
- Increase your profit margins on parts and labor sales
- Increase your sales per repair order
- Increase the number of repair orders
We will deal with each of these in future blogs. In the meantime, think about your BHAG. Get focused on it and use our formula for establishing the “Big Hairy Audacious Goal — BHAG. It must be specific, it must be in writing, it must be a stretch to reach and it must be attainable. I strongly recommend you read Jim Collins’ book “Good to Great.”