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Comparing actual, potential labor sales

November 22, 2010
Is your dealership's service department firing on all cylinders?
In the service department, inventory is time-the highly marketable time of trained technicians. Technicians' time must be managed skillfully to retain profits while giving customers value that exceeds their expectations.

Service labor, then, must be priced competitively and monitored against the mix of work the shop performs. Repair Orders should be analyzed daily to make sure that every RO is complete, that pricing is correct and effective, and that the Effective Labor Rate is where it should be.

Of the various labor-pricing options, variable labor rates based on job complexity is a good option. When a tech's skills are matched to the job, labor is used efficiently and the dealership's competitive stance is enhanced. Guidelines for the work mix are 60 percent competitive and maintenance, 40 percent repair.

Competitive labor comprises such services as lube, oil and filter changes (LOF); and tire rotations, and is billed at a low hourly rate, perhaps at or near the LOF rate charged by quick-lube shops and gas stations.

Maintenance labor is work the manufacturer recommends or requires. Including common but less competitive services-emission control or air conditioning service-maintenance labor is priced at a moderate hourly rate, perhaps at or above the existing warranty rate.

The maintenance rate is the target rate for the department and should never be lower than the warranty rate.

Repair labor, like fuel injection calibration and engine overhaul, comprises the least competitive, most specialized services charged at the highest hourly rate, which might be $8 to $10 above the maintenance rate.

Monitor performance. Use daily reports to study ROs and calculate the Effective Labor Rate, which is the dollar figure reached when dividing sales in each category billed by hours billed in that category. Analyze ROs monthly to determine what needs to be done to maintain an ELR that always exceeds target. Then use a month's actual performance to calculate the monthly labor sales potential:
(1) $ Labor sales ÷ Hours billed = Effective Labor Rate
(2) Number of techs x Hours/day x Working days/mo. = Clock hours available/mo.
(3) Available hours/mo. x ELR = $ Labor sales potential/mo.
How does your actual total (dollar amount labor sales in #1) compare with your potential total (labor sales potential, #3)?

Among the many adjustments you can make to achieve potential-pricing tweaks, minimizing one-item ROs, upselling needed service and maximizing the use of menus, pricing guides, extended hours, work-mix scheduling-are improvements in facility utilization and in technician performance.

This article was adapted from an NADA Management Education publication, "Service Department Performance Analysis," which can be ordered at 800-252-6232 ext. 2, or