Maximizing Effective Labor Rates

Bob Schwartz Performance, Inc. An ADP Company

Effective Labor Rates Profit problems in a marina usually show up in one or a combination of the following areas: – Gross. – Sales. – Expenses. Great work in any one or two of these areas can off-set weaknesses in the other(s). We can only maximize when we are firing on all cylinders. Today’s focus is on effective labor rates. – Which can/might/will affect gross, sales, and expenses.

We all understand posted labor rates. – Posted door rates are what we announce that we are charging per hour we sell. – It is the $125 we are putting on the wall for everyone to see. The posted door rate is probably the rate that is being quoted whenever a potential customer asks what we charge per hour. It has been my experience that we are overwhelmingly stating a rate that is too high. Quoting the posted door rate to someone either over the telephone or standing in front of us immediately puts us at a disadvantage compared to many of the marinas around us. Effective Labor Rates

The effective labor rate is what we actually collect per hour we sell when all is said and done. We pay our bills out of the effective labor rate we collect, not the posted door rate. Effective labor rates must: – Be high enough to provide a profit in the service department. – Provide enough profit to pick up those departments that are not doing as well as we would like. Effective Labor Rates

In a perfect world if our posted rate is $125 per hour and we sell 10 hours, we collect $1,250. Variances of $20 to $30 or more posted to effective are not uncommon with the marina people I work with. Conservatively speaking, probably less than 50% of our work is collected at our posted door rate. – I wouldn’t be surprised if none was, especially our customer retail sales. The inventory of a service department is hours. Maximizing effective labor rates is important if we want to maximize profit. The higher the effective labor rate, the fewer hours we have to sell. Effective Labor Rates

Mounts up quickly. – 5 hours quoted at $125 per hour. – 5 hours collected at $95. – Difference = $30 X 5 = $150. Multiply this by the number or repair orders we write. Effective Labor Rates

Repair Shop Sales Avg Month37,566 Gross % Sales Avg Month80.56 Labour Sales This Month40,904 Gross % Sales This Month81.34 Potential Gross %81.71 Posted Labor Rate86.95 Effective Labour Rate85.22 # Hours Sold Avg Month432 # Hours Sold Avg Month Previous Year531 # Hours Produced This Month480

Effective Labor Rates Repair Shop Sales Avg Month121,497 Gross % Sales Avg Month73.62 Labor Sales This Month133,573 Gross % Sales This Month75.18 Potential Gross %81.09 Posted Labor Rate Effective Labor Rate95.27 # Hours Sold Avg Month972 # Hours Sold Avg Month Previous Year978 # Hours Produced This Month1,402

Some dealer management systems can give us ELR by: – Individual technician. – Total technicians. – Labor category. Retail. Internal. Rigging. Warranty. – Service advisor. – Across the board. Effective Labor Rates

If by hand: Dollar Sales Collected For Job(s) Done Over A Set Period Of Time divided by the Hours Paid To The Tech To Do The Job(s) Over The Same Set Period Of Time – The total labor dollars I collected during the past month was ____________. – The total hours I paid out to technicians to collect these dollars was ___________. – My effective labor rate was $_______per hour. Effective Labor Rates

Under most pay plans, a technician will collect his hourly, no matter the effective labor rate. $100 – $25 / $100 = 75% gross retained as a percent of labor sold. – 70% - 75% is generally considered to be enough to pay all the bills, including rent and owner salary, and make a fair profit. $60 – $25 / $60 = 58%. – At this percentage the technician approaches partnership level in the department. – We pick up all the expenses. – Tough to make a decent profit in service. Effective Labor Rates

Causes and Cures Essentially anything that reduces revenue without reducing the hours paid to a technician reduces the effective labor rate. Here are some of the popular ones and things we might do to eliminate the problem. Effective Labor Rates

#1: Pricing based on: – Time it takes to do the job. – What the customer will pay. Competition may or may not be considered. What my people think we should charge may or may not be considered. Price includes: – One sum for parts, labor, and shop supplies. – Does not include tax. Hold the technician to the time quoted. Effective Labor Rates

Poor processes or training may allow someone to quote a price that is too low for the job. – Must be sure before we open our mouth. – Should have done the same thing dozens of times before committing to a number. – Take the time to look at each new job carefully before committing to a price. – Get everyone involved who should be involved (managers, technicians, etc.). Must be especially careful over the telephone. – We can’t let ourselves be pushed. – Specific word track. Effective Labor Rates

Provide ranges instead of exact pricing if necessary. Practice on each other instead of the customer. Lots of communication between the customer and the service department. Go as far as we can then stop and communicate. Everything communicated and initialed ahead of time. – Can’t have too many initials. Effective Labor Rates

Sample word track for regular retail work: “I am sorry Mr. Jones. I cannot give you a price for that until we have our technician look at the job and find out what is involved. This should take one hour. The charge for this diagnosis is $125 [This is equal to one hour of time it could be less depending on the boat]. I will call you as soon as the technician has had a chance to look at the job. We will let you know the exact cost parts and labor. The $75 charge will be included in the final bill if you chose to have the work done here. If you chose to have the work done somewhere else, we will charge you the $75 for our diagnostic time. Effective Labor Rates

#2: Legal discounts. Probably the simplest to deal with are discounts that are being accounted for incorrectly. – Charge these discounts to the proper account. – They are not a cost of sales. Usually charge $300 to winterize something. – Provide a discount of 10% if it is done before November 1st. – Bill is still $300. – $300 - $30 = $270. – $30 goes into advertising, etc. Effective Labor Rates

#3: Illegal discounting in a attempt to cover up a mistake. – Can we block the advisor from using the computer to change a work order? #4: Stealing. #5: Intentionally quoting an incorrect price. – Hourly person getting his. – Better to quote low and get the job rather than lose the job. – This is what the competition is charging. – Who has the right to give away our money? Effective Labor Rates

#6: Not holding to the times once a quote is given the customer. Allowing extra hours to do a job but not collecting from the customer kills profitability. Routinely throwing the tech extra hours for whatever reason. – Usually an issue when we pay based on flat rate hours. – Hourly or salaried people just slow down and ignore the time. Effective Labor Rates

#7: Not closing repair orders. #8: Poor maintenance package pricing. – Many people have not looked at their package pricing in years. – Too many hours to do, too little charge to the customer. – Might be able to cut the time we give to do the job. #9: Too many discounts at the low end without making it up at the high end. Effective Labor Rates

Some Other Ways To Raise The Effective Labor Rate Raising the door rate. – For internal work, which we can control. – For our repair work. Raise door rate may still have the same problems giving money away. Why raise rates if we can cut down on what we give away? Effective Labor Rates

Variable pricing structures: – Basic outboards vs. state of the art. – Diesel vs. gas. – Simple chart plotters vs. integrated systems. – Competitive vs. non-competitive. Increased: – Training. – Equipment. – Liability. – Time to get it right? Effective Labor Rates

Pay plans that offer kickers based on ELR. Service Manager: – 7% or 8% of gross. – 8% or 9% if the effective labor rate is at least 90% of the door rate. Or, – $3,333 a month with a bonus of $500 if the effective labor rate is 90% of the door rate. Service writer: – Salary of $28,000 + ¾% commission on total work orders + an additional commission of 5% if what is written is more than the previous quarter. Plus, – A bonus of $250 if her/his effective labor rate is 90% of the door rate. Effective Labor Rates

Use grid pricing. Effective Labor Rates

Tracking ELR by job, technician and service advisor either through the DMS or by hand. Review repair orders regularly. – Who is taking too long to do the job? – Who is discounting? Effective Labor Rates

Bob Schwartz Performance, Inc. An ADP Company