Looking to a Framework for Service Profitability

From an earnings and returns perspective, contributions from fixed operations make the difference between an investment that makes sense and one that leaves the owners wondering why they bothered in the first place.

For a dealership to be viable it has to be stable, well-managed and profitable. Although front-end operations like new and used vehicle sales, accessories and aftermarket sales are important to turnover, fixed operations cannot be underestimated.

With new vehicle margins under increasing pressure (in some cases slipping below 5%), the need for the service department to capitalise on the over 65% gross profit to sales it has available, is crucial. This raises an important question, what business model should the service department follow to ensure the dealership remains balanced and healthy?

Most service departments operate under a classical capacity model. The most relevant and comparative example we can look at is a dentist’s practice. The dentist business offers a unique blend of maintenance and repair work, undertaken by limited resources for customers who would rather not be there. The ability of dentists (or more importantly, Service Managers) to leverage their skills in a productive and efficient way influences the level of throughput they are able to create as well as the earnings they make.
The drivers of profitability under this model are complex, but can be condensed to the following key components:

Margin Management

The ability of the workshop to create a balanced mix of income streams i.e. contributions from retail, internal, warranty, fleet and sublet. These need to be managed to maximise the level of gross profit contribution; a healthy mix would reflect a gross profit to sales figure over 65%.

Expense Management

The extent to which throughput and gross profit relates to the operating expenses incurred by the department. A quick way to look at this is to measure the retained portion of gross profit (i.e. profit before Tax / Gross Profit). Dealers should be looking at retaining at least 25% of their gross profit on the
bottom line.

Capacity Management

The extent to which productive resources are kept busy with customer paid work. This is the responsibility of the workshop management team and is reflected in the relationship between available hours and clocked hours. A target of greater than 90% applies.

Workflow Management

This is the ability of productive resources to complete work on time and without compromising on quality. Sound work processes, and the skill and motivation of the technicians are important here. The metric is the relationship between worked hours and sold hours, a figure above 110% is the target.

Dealers who relentlessly manage these components will set themselves up for considerable benefits.

The importance of fixed operations and in particular, service contributions is no longer under question. In fact, dealership viability and investor returns depend on it. Without a healthy service department there is no viable dealership business model, and so it makes sense to get your service model right.

 

Author: Greg Strydom

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