The Effects of Measurement Job Costing Managing By The Numbers

Section CONTENTS AT A GLANCE The Effects of Measurement... 5.1 Job Costing Managing By The Numbers... 5.2 Profit Benchmarks Where Should You Be?... 5.3 Establishing Your Facility s Production Potential... 5.4 Keeping Score with the Sales/Production Chart... 5.5 Calculating Employee Labor Efficiency... 5.6 Hourly vs Flat Rate Comparison... 5.7 Understanding Gross Profit per Hour... 5.8 Benchmarks& Performance Measurement

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Section 5 2

T H E E F F E C T S O F M E A S U R E M E N T Section 5.1 The Effects of Performance Measurement Objectives To provide the information necessary to establish a solid pricing structure. To provide management with the necessary Vital Signs to strategize and plan the efforts of the business. To motivate the entire staff by providing information and feedback regarding their efforts. I C O N K E Y To recognize and encourage exceptional performance. Valuable Information Exercise Caution Corrective Actions To provide the business and its staff with a system of establishing goals and performance objectives, and providing a method of keeping score. To improve productivity and profitability. Introduction This entire section, Benchmarks and Performance Measurement, is dedicated to teaching the benefits of thorough and accurate measurement of bodyshop business performance. In addition to explaining the benefits of performance measurement, the chapters in this section offer step-by-step instruction on how and what to measure, and outline the guidelines and benchmarks to compare your company s performance to current industry standards. 3 Section 5.1

B E N C H M A R K S A N D P E R F O R M A N C E Application & Suggestions It s a proven fact that measurement alone can improve performance. In the early part of this century, many studies on productivity were conducted and one study in particular was eventually labeled The Hawthorne Effect. In this study, the principals of a large factory operation decided to measure the effect of lighting on worker productivity. Management explained to the staff that they intended to measure their production output, and established initial benchmarks based on historical data. A short time after the light levels were increased, productivity was measured and considerable increases were noted. Again, management raised the light levels and a second time productivity increased. The immediate opinion was that lighting was a major factor in production efficiency. To further validate their findings, management elected to reduce the light levels and measure the results again. To their amazement, they found that once again, productivity increased. After careful scrutiny of their findings, they discovered that the light levels did have some influence on the increases, but the primary influence was that the workers knew they were being measured. In his book The Game of Work, Charles Coonradt gave many examples of this country s lack of consideration for measuring performance in the workplace. In contrast he gave many examples of the sports world and its obsession with measurement and statistics. In one example after another, Charles Coonradt illustrated the benefits of measurement in the workplace. This book is highly recommended reading for those managers who have the desire to maximize the performance and productivity of their staff. Best Practices Read The Game of Work by Charles Coonradt Conduct thorough and detailed job costing on each job every day. Share the job costing data and information collected with the entire staff. Establish company/employee benchmarks and goals that can be reviewed and assessed every day. Recognize staff members for good performance. Section 5.1 4

J O B C O S T I N G Section 5.2 Job Costing Managing by the Numbers Objectives To provide the information required to manage a shop by the numbers. To compare actual company performance with objectives and goals. To identify the most profitable and least profitable jobs. To maximize the profitability of each and every job. I C O N K E Y Valuable Information Exercise Caution Corrective Actions Manual Job Costing vs Computer Management Systems A solid system of job costing can be accomplished either by developing a manual system or by using a computerized bodyshop management system. Since the amount of effort required to do the job manually often outweighs the automated version, and considering the profit potential, it makes good sense to think about a computerized version. Not only has the price of computer hardware dropped dramatically in the past few years, the benefits of an automated system over a manual version are countless. A comprehensive computer management system not only provides job costing information, but it also offers estimating, production control, parts management, financial data, marketing tools, contact management, scheduling and supplemental billing, just to name a few. 5 Section 5.2

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Since all of the basic functions of job costing done manually or with a computer system are the same, the remaining information here will be targeted at job costing with a computer management system. Once again, if you are not presently using a computer management system, it is strongly suggested that you consider it. In Section 7, Bodyshop Forms you will find a Computer System Comparison form to help you determine which system would work best in your shop. If you elect to conduct your job costing manually, there are several forms provided in Section 7, Bodyshop Forms to help you get up to speed quickly. Since each bodyshop computer management system is slightly different we won t discuss the detailed characteristics of each one but will merely review the standard procedures common to most systems. Recommended Procedures Opening the Job After a job is captured and converted to a repair order, the job costing process begins immediately. Initially, a new job renders a 100% profit margin; then, as costs are applied, the profit continues to deteriorate until the job is complete. This process, when monitored closely, provides shop management with the opportunity to influence and control the costs applied. In addition, the sales can be influenced favorably by conducting efficient supplemental billing procedures. This continual monitoring of job profitability is the foundation for sound job costing procedures. Applying Parts and Sublet Costs Typically, any necessary parts will be ordered and received before the repairs begin. Each of the invoices received from the parts vendor should include the repair order number indicating the appropriate job. In addition, invoices should contain only the parts for one job, thereby eliminating the confusion of posting more than one parts order to the same invoice. This criteria should be worked out in advance with your parts vendors. 1. Ordinarily, by selecting Receive Parts from the computer management system menu, the user is prompted to enter the appropriate repair order number, vendor and invoice number. 2. Next, the user is prompted to enter the cost and list price of each line item included on the invoice. Section 5.2 6

J O B C O S T I N G 3. If there are any differences between the prices listed on the parts invoices and the prices listed on the original estimate, the program provides the user with the opportunity to automatically create a supplement for the difference. 4. You may also receive parts using the lump sum method by entering invoices as a lump sum rather than entering parts costs and invoice numbers line by line. It is strongly suggested that you avoid this method and instead use the detailed approach of line-by-line entry. It is much more likely that you will discover more opportunities for increasing profits using the line-by-line method vs the lump sum method. A disciplined approach to applying parts costs with a computer management system provides several benefits: Verifies proper discounts promised by vendors. Tracks parts price increases & creates immediate supplemental billing. Tracks parts inventory by repair order or by vendor. Creates parts labels for accurate identification. Creates and tracks parts returns and credit memos. Tracks back ordered parts. Keep in mind that our objective is to maintain at least a 25% gross profit margin on parts and sublet, so a disciplined approach to estimating and negotiating terms with your vendors, is essential. Target Department Benchmarks Gross Profit on Labor 60% Gross Profit of Parts 25% Gross Profit on Materials 25% Gross Profit on Sublet 25% 7 Section 5.2

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Applying Labor Costs The first step in recording labor costs is to implement the use of Labor Control Cards. The sample below is the actual size and has been designed so that a technician can place a packet of these forms in his or her shirt pocket. LABOR CONTROL CARD Name Emp # Date 1 - Metal 4 - Mechanical 2 - Refinish 5 - Detail 3 - Frame 6 - Misc RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs TOTAL HOURS Note Some computer management systems offer the ability to log labor times using a computer time clock that automatically enters the labor costs to the job. A computer terminal is placed in the shop and the employee simply enters the same data into the computer that he or she would ordinarily enter on a labor control card. Section 5.2 8

J O B C O S T I N G Applying Labor Costs 1. Using a labor control card, each day the technician enters the repair order number, the task and the hours worked on each job during the day. Every productive employee should turn in a daily labor control card and account for eight hours or more if any overtime was worked. 2. Hourly and Flat Rate employees should both use the same system. Even though flat rate employees costs are pre-determined, you still need to track the employee s time to calculate labor efficiency and gross profit per hour. 3. The Labor Control Cards should be collected at the end of each day and entered into the computer. Ordinarily, by selecting Enter Labor Costs from the computer management system menu, the user is prompted to enter the appropriate employee, date, task and hours worked on the job. 4. After the Labor Control Cards have been entered, the computer management system automatically calculates the added employee benefit costs based on information given during the initial setup of the program. This automatic calculation will determine the true cost of labor and apply it to the appropriate repair order. This process is uncomplicated and simply calculates the hours worked times the rate of pay. true cost of labor includes Workman s Compensation, State Disability Insurance, Sick Leave, Vacation Pay, Holidays, Unemployment Insurance, Health Plans, etc. Although benefit costs vary from one shop to the next, a simple rule of thumb is to add 30% to the employee s base rate for benefits. 5. For a flat rate employee, the labor costs are entered into the computer upon completion of the job by entering the flagged hours on to the appropriate repair order. Keep in mind the objective is to maintain at least a 60% gross profit margin on labor. Target Department Benchmarks Gross Profit on Labor 60% Gross Profit of Parts 25% Gross Profit on Materials 25% Gross Profit on Sublet 25% 9 Section 5.2

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Applying Material Costs It would be difficult and time consuming to job cost all of the materials used for every repair job. It would require recording each piece of sandpaper used and every ounce of paint reducer poured. A more sensible approach would be to use a minimum of ninety days of historical data as follows: 1. Calculate the total amount of material sales for a ninety-day period. 2. Next, determine the total cost of materials for the same time period and subtract it from the sales to determine the gross profit dollars for the period. 3. Finally, divide the gross profit by the total sales to determine the average profit percentage for the period. 4. Apply this profit margin average to each job thereafter. Note Ordinarily, computer management systems will provide the user with a field entry during the setup of the program that will automatically enter the appropriate profit percentage on each job. It s usually a good idea to spot check your actual profit percentages every few months and make any necessary adjustments in the setup mode of the computer management system. Remember, the objective is to maintain at least a 25% gross profit margin on materials. Target Department Benchmarks Gross Profit on Labor 60% Gross Profit of Parts 25% Gross Profit on Materials 25% Gross Profit on Sublet 25% Section 5.2 10

J O B C O S T I N G Application & Suggestions There are countless ways to put the information collected during the job costing process to work. Here are just a few: Identify the Least Profitable and Most Profitable Insurance Companies and the volume of work they each contribute to your monthly gross sales. Have this information available when negotiating pricing agreements. You may find that a particular insurance company contributes such a small portion of your overall business that it s in your best interest to avoid overly generous terms in your negotiations. Identify the Most Profitable Dollar Range of Repairs, sometimes referred to as severity. You will find that high dollar jobs, usually in the $8,000+ range, often reveal a decline in profitability. Notice the term usually. Every shop is different and there are exceptions to the rule, but generally, the most lucrative jobs fall in the $2,500 to $5,500 range. Identify the Star Performers. These are technicians or service writers who consistently produce the best results in terms of productivity, customer satisfaction and profitability, just to name a few. Identify the Least Profitable and Most Profitable Vehicle Makes. With this information in hand, you can be much more selective in the work you take on, or be better equipped to price a repair appropriately on a vehicle make that has been less than lucrative in the past. Identify the Break-Even Point. With daily job costing, gross profit calculations are a significant part of the daily business operations. Initially, the number you will look for is overall gross profit dollars. When calculated on a daily basis you can project your break-even point on the calendar by figuring the average gross profit produced per day. You can do this by dividing the total gross profit dollars by the number of work days it took to produce that amount. You can compare this daily average with your monthly overhead to determine when you ll hit your break-even point. Provide Feedback and Scorekeeping. As mentioned in the chapter titled The Effects of Measurement, measurement alone can improve performance. Let your staff know the score and the results will prove to have a positive impact on performance. 11 Section 5.2

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Forms Labor Control Card LABOR CONTROL CARD Name Emp # Date 1 - Metal 4 - Mechanical 2 - Refinish 5 - Detail 3 - Frame 6 - Misc RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs RO# Task Hrs TOTAL HOURS If you elect to conduct the job costing manually, there are several forms provided in Section 7, Bodyshop Forms of this manual to make the job easier. DAY PHONE # ( ) - VEHICLE: VIN#: WORK PHONE ( ) - COLOR: MFG DATE: / # PARTS ORDERING INFORMATION INSURANCE INFORMATION Insured Claimant Date Vendor Contact Ordered Misc By Insurance Co: Deductible $ DOL: Adjuster Phone # ( ) -- Policy # Claim # LABOR COSTS PAINT LABOR COSTS PARTS COSTS METAL Invoice List Hou Rate Cost Benef Hou Rate Cost Date Vendor Estimate Cost Employee True Employee Benefi True d rs its Cost rs ts Cost 1 2 3 4 5 6 Job Costing Summary Report Close R O# for 19 Last Vehicle Metal Labor Paint Labor Frame Labor Other Labor Parts Sublet Materials Sales Totals Gross GP Date Name Make Sale Cost Sale Cost Sale Cost Sale Cost Sale Cost Sale Cost Sale Cos t Tax Sale Cost Profit $ % 7 8 9 10 TOTALS TOTALS TOTALS SUBLET COSTS FRAME LABOR COSTS OTHER LABOR COSTS Hou Rate Cost Benef Hou Rate Cost Benefi Employee True Employee True TOTALS TOTALS TOTALS JOB COSTING SUMMARY Sales Costs GP$ GP% Metal Labor PAYMENT INFORMATION Paint Labor SUMMARY $ 1. Original $ 8. Misc Check/Card # Date Emp Frame Labor 2. Estimate Revised. $. $ 9. Insurance Other Labor 3. Estimate. $ 10. Check Supplement. $ Parts 4. $ 11. Supplement $ Sublet Supplem Customer. $ 12. Check Customer. $ 5. Pay Materials 6. Pay (Ded). $ 13. (Ded) Betterment. $ Tax *** *** *** *** 7. 14. Total Paid TOTALS Total Repairs $ (Must Match Line #7) $ Individual Job Costing Form 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Copyright 1995 by Mainline Products Job Costing Summary Report c:\docs\masters\jobcost\jcsummry.doc Job Costing Summary Form Section 5.2 12

P R O F I T B E N C H M A R K S Section 5.3 Profit Benchmarks Where Should You Be? Objectives To provide management with objective criteria when reviewing performance. To provide comparative data to help in establishing targets and goals. To provide management with a viable system of scorekeeping. I C O N K E Y Valuable Information To enable management to focus their efforts on profitable, high-leverage activities. Exercise Caution Corrective Actions Important The benchmarks provided on the following pages can often be the subject of much controversy. Keep in mind that these benchmarks are provided with one primary purpose: to provide shop owners and managers with information that will help them improve the performance of their companies. Other sources offering similar information may differ due to outdated information, varying formulas for calculating profits, or simply a difference of opinion. Be assured that the figures provided here are real world and many successful shops today are exceeding these standards by considerable margins. 13 Section 5.3

B E N C H M A R K S A N D P E R F O R M A N C E M E A S U R E M E N T Recommended Profit Benchmarks Overall Benchmarks Gross Sales 100% <Direct Costs> 57% Gross Profit 43% <Overhead> 35% Net Profit 8% Overall Benchmarks, Terms and Conventions Gross Sales are the total combined sales of all labor, parts, materials and sublet. Direct Costs are everything that touches the car. Includes all the costs directly related to the repairs of the vehicle (i.e. parts costs, labor costs, material costs, and sublet costs). Keep in mind that labor costs should be calculated using the true cost of labor, which includes Workman s Compensation, State Disability Insurance, Sick Leave, Vacation Pay, Holidays, Unemployment Insurance, Health Plans, etc. Typically an additional 30% in benefit costs is added to the base rate of pay. Direct costs should not exceed 57%. Gross Profit is the amount of gross profit retained after deducting the Direct Costs from the Gross Sales. Overhead or Operating Expenses consists of all the operating expenses not directly associated with the actual repairs (i.e. rent, advertising, administrative wages, insurance, utilities, etc.). The percentage allocated to overhead has risen dramatically in recent years, partially due to inflation, but much can be attributed to the added administrative costs of direct repair programs and governmental agencies. Overhead should not exceed 35% and the objective is to keep it well below 35%. Net Profit consists of the profits retained after deducting the Overhead from the Gross Profits. Section 5.3 14

P R O F I T B E N C H M A R K S Department Benchmarks Gross Profit on Labor 60% Gross Profit on Parts 25% Gross Profit on Materials 25% Gross Profit on Sublet 25% Gross Profit on Labor Labor Sales <Labor Costs> Labor Gross Profit Be sure and include all the added costs which are important in determining the true cost of labor. The true cost includes things like Workman s Compensation, State Disability Insurance, Sick Leave, Vacation Pay, Holidays, Unemployment Insurance, Health Plans, etc. A simple rule of thumb is to add between 25% - 30% additional costs for benefits. Our objective is 60% gross profit on labor. Gross Profit on Parts Parts Sales <Parts Costs> Parts Gross Profit This category includes all OEM, used, and aftermarket parts. After a shop has developed efficient job costing procedures, each of the parts categories can be job costed individually. Gross Profit on Material Material Sales <Material Costs> Material Gross Profit Material profits can be determined by subtracting ninety days of costs from ninety days of sales and determining an average. This average can be applied to every job thereafter. Gross Profit on Sublet Sublet Sales <Sublet Costs> Sublet Gross Profit Sublet sales pertain to anything that your shop arranges to have performed by an outside vendor. 15 Section 5.3

B E N C H M A R K S A N D P E R F O R M A N C E M E A S U R E M E N T How to Calculate Overall Gross Profit To fully understand the 43% gross profit standard, consideration must be given to the fact that each of the cost centers labor, parts, materials, & sublet do not share equally in the repair breakdown. As illustrated in the chart below, labor is typically 50% of the repairs while parts occupy 35%, leaving materials and sublet at 10% and 5% respectively. Labor 50% Typical Repair Breakdown Sublet 5% Materials 10% Parts 35% Consider the following sample job with a $1,000 sale. If you maintain the profit standards listed in each category, you will earn $424.50 in gross profits. TYPICAL $1,000 REPAIR Cost Center % of Sale % in Dollars Gross Profit Std Gross Profit $ Labor 50% $500 60% $300 Parts 35% $350 25% $87 Materials 10% $100 25% $25 Sublet 5% $50 25% $12.50 Total Gross Profit $424.50 Overall Gross Profit Percentage 43% We cannot simply average the percentages of profit for each of the cost centers and expect to get the overall gross profit percentage. The correct method is to divide the total gross profit dollars earned by the total sale of the job. In the sample job below, we earned $424.50 in gross profits on a $1,000 job. The result is a 43% gross profit overall. $424.50 $1,000 =.4245 rounded to 43% Regardless of the size of the job, simply divide the gross profit dollars by the total sale. Section 5.3 16

P R O F I T B E N C H M A R K S Applications & Suggestions Achieving these standards may be much more difficult in some markets than in others. Keep in mind that the primary purpose of these benchmarks is to bring about improvement. By using these benchmarks along with the tools to measure and provide feedback, improved performance and profits will be the final result. 17 Section 5.3

B E N C H M A R K S A N D P E R F O R M A N C E M E A S U R E M E N T Section 5.4 18

E S T A B L I S H I N G Y O U R F A C I L I T Y S P R O D U C T I O N P O T E N T I A L Section 5.4 Establishing Your Facility s Production Potential Objectives To determine production capability. I C O N K E Y Valuable Information Exercise Caution Corrective Actions To determine profit potential. To establish daily, weekly and monthly production goals and objectives. To provide objective criteria for measuring management staff. Recommended Procedures Important There are many methods for determining a shop s potential. Square footage, market share and performance history are just a few. The method illustrated here is based on the available work force. In other words, what is the potential of total sales based on the number of technicians available? 19 Section 5.4

B E N C H M A R K S A N D P E R F O R M A N C E M E A S U R E M E N T Important Considerations The formula outlined in this chapter is a simple method of determining a production department goal or potential based on the number of production staff available. When calculating the total number of production staff, be sure to include anyone who actually works on the car during the repairs. Painters helpers, for instance, contribute to the overall throughput of the shop and should therefore be included in the calculation. There are two extremely important considerations when using the formula. Production Efficiency Labor Ratio Important These two elements are an important part of the calculations and must be determined prior to completing the formula. A review of two or three months of past financial data will provide the necessary information. Production Efficiency Production efficiency is calculated by dividing the total hours produced by the total actual hours worked. Hours Produced Hours Worked For example: 6 technicians x 8 hours per day x 5 days per week = 240 actual hours worked. During one week, 16 jobs completed totaling 272 hours (avg. 17 hours each). Total Hours Produced: 272 Hours Total Hours Worked: 240 Hours = 1.13 or 113% Section 5.4 20

E S T A B L I S H I N G Y O U R F A C I L I T Y S P R O D U C T I O N P O T E N T I A L Labor Ratio Labor Ratio represents the percentage of the total sales that are allocated to labor. To calculate the labor ratio divide the total labor sales by the total sales. Example: $39,550 $82,146 = 0.48 or 48% Labor Sales Total Sales Labor Ratio The typical industry standard is 50% as outlined in the chart below. Labor 50% Typical Repair Breakdown Sublet 5% Materials 10% Parts 35% Keep in mind that a shop specializing in paint jobs or restorations may exhibit a greater percentage in labor, yet a shop specializing in late model collision damage may hold a smaller percentage of labor. This is often due to parts occupying a larger share of sales volume in a shop specializing in collision damage. As parts increase or decrease, labor decreases or increases proportionately. A detailed look at the formula can be found on the following page. 21 Section 5.4

B E N C H M A R K S A N D P E R F O R M A N C E M E A S U R E M E N T Establishing Facility Potential Based on Work Force 1. The first step is to calculate the total amount of man hours available each day. 2. Multiply the daily hours available by the number of work days in the month. 3. Multiply the total hours available by the Production Efficiency percentage. 4. Next, multiply the total of hours determined in the previous step by the shop rate to determine the amount of labor sales potential. 5. Divide the total labor sales potential by the Labor Ratio to determine the total production goal. Example: Take an example of a shop with six production personnel working five days a week, a shop rate of $30 per hour in a month with 22 working days. Consider the following assumptions: Assumptions: Production Efficiency: 100% efficiency standard. Labor Ratio: Industry average of 50% of sales allocated to labor. The formula looks like this: Sample Data: The number of work days will vary by month. Calculate accordingly. Labor Ratio: The percentage of sales allocated to labor. Step 1: Step 2: Step 3: Step 4: Step 5: 6 men X 8 hour shift = 48 hours per day 48 hours per day X 22 day month = 1056 hours 1056 hours X 100% efficiency = 1056 hours 1056 hours X $30 shop rate = $31,680 labor sales $31,680 50% = $63,360 total production goal $63,360 Goal for the Month Section 5.4 22

S A L E S & E S T I M A T I N G C O N S I D E R A T I O N S Sales & Estimating Considerations Objectives To meet or exceed the needs of the production department. To measure and improve the sales capture rate or batting average. To provide objective criteria for measuring sales staff performance. Considerations Another consideration when establishing production goals is getting the work in the door. How effective you are at sales and estimating becomes a serious issue. For instance, the example on the previous page in which we determined the monthly production goal to be $63,360. To repair $63,360 of jobs, first you need to sell $63,360 in estimates. Consider this: most experts agree that the average capture rate or batting average runs about 50%. With a 50% batting average and a production goal of $63,360, you will need to write twice that amount in estimates. Here s the Formula: Example 1: $63,360 50% batting average = $126,720 $126,720 Estimates Written or Traffic Needed If you improved your batting average to 70%, the criteria would change dramatically. Example 2: $63,360 70% batting average = $90,514 $90,514 Estimates Written or Traffic Needed 23 Section 5.4

B E N C H M A R K S A N D P E R F O R M A N C E M E A S U R E M E N T Application & Suggestions Utilize the Sales/Production Chart with the formulas in this chapter to establish daily and monthly goals and provide regular feedback on performance. Refer to Section 2, Bodyshop Sales & Estimating to learn the techniques on improving batting average to 70% or better. Run the formulas for establishing goals at the beginning of each month and compare performance on a daily basis. Consider applying the same formulas to each department or team (i.e. metal department, paint department, etc.). Section 5.4 24

T H E S A L E S / P R O D U C T I O N C H A R T Section Keeping Score with the Sales/Production Chart Objectives To track the vital signs of the business. To compare company performance with goals and objectives. To improve performance by measurement. 5.5 Note I C O N K E Y Valuable Information Exercise Caution Corrective Actions The information contained in the Sales/Production Chart should be considered one of the most important administrative tools available to enhance the profitability of the bodyshop. Most experts agree that if a task or a group of tasks can be measured, profitability can be improved. Overview A sample of the Sales/Production Chart is provided on the following page. An additional blank copy for shop use is provided in Section 7, Bodyshop Forms. Review of the sample chart shows several columns highlighted with bold print. These columns represent the Goals or Objectives for the categories of Sales, Hours and Production. These columns should be filled out at the beginning of each month using the formulas outlined in the previous chapter titled Establishing Your Facility s Production Potential. Once the goals are in place, the information in the chart should be updated and reviewed each day so that any necessary steps can be taken to achieve the goals. 25 Section 5.5

SALES SALES PRODUCTION CHART September - 97 PRODUCTION Date # Est's Daily # Est's Total $ Est's Daily $ Est's Total New Sales Daily New Sales Total Sales Goal Batting Avg # of Work Days Total # of Jobs Hours Daily Hours Total Hours Goal Total Gross Profit $ Gross Profit % Production Daily Production Total Production Goal 1 5 5 $6,185 $6,185 $4,495 $4,495 $5,000 73% 1 2 68 68 80 $1,910 44% $4,322 $4,322 $5,000 5 5 10 $7,320 $13,505 $6,295 $10,790 $10,000 80% 2 7 90 158 160 $4,554 46% $5,685 $10,007 $10,000 6 7 17 $5,144 $18,649 $2,839 $13,629 $15,000 73% 3 10 73 231 240 $6,512 45% $4,611 $14,618 $15,000 7 4 21 $7,657 $26,306 $3,675 $17,304 $20,000 66% 4 13 50 281 320 $8,247 46% $3,155 $17,773 $20,000 8 4 25 $7,155 $33,461 $8,052 $25,356 $25,000 76% 5 15 93 374 400 $10,414 44% $5,856 $23,629 $25,000 11 8 33 $12,505 $45,966 $4,923 $30,279 $30,000 66% 6 19 108 482 480 $13,402 44% $6,829 $30,458 $30,000 12 6 39 $8,142 $54,108 $4,056 $34,335 $35,000 63% 7 23 65 547 560 $15,217 44% $4,126 $34,584 $35,000 13 3 42 $6,311 $60,419 $6,120 $40,455 $40,000 67% 8 27 73 620 640 $17,642 45% $4,620 $39,204 $40,000 14 6 48 $8,743 $69,162 $5,966 $46,421 $45,000 67% 9 31 76 696 720 $19,359 44% $4,793 $43,997 $45,000 15 3 51 $6,120 $75,282 $4,311 $50,732 $50,000 67% 10 33 50 746 800 $20,765 44% $3,196 $47,193 $50,000 18 8 59 $6,281 $81,563 $3,847 $54,579 $55,000 67% 11 35 48 794 880 $22,601 45% $3,032 $50,225 $55,000 19 6 65 $5,152 $86,715 $5,268 $59,847 $60,000 69% 12 38 111 905 960 $25,681 45% $6,901 $57,126 $60,000 20 8 73 $6,822 $93,537 $5,051 $64,898 $65,000 69% 13 43 80 985 1040 $27,051 44% $5,044 $62,170 $65,000 21 6 79 $7,385 $100,922 $4,323 $69,221 $70,000 69% 14 46 70 1055 1120 $29,279 44% $4,431 $66,601 $70,000 22 4 83 $7,685 $108,607 $4,847 $74,068 $75,000 68% 15 49 80 1135 1200 $31,513 44% $5,076 $71,677 $75,000 25 7 90 $12,584 $121,191 $8,230 $82,298 $80,000 68% 16 53 98 1233 1280 $34,562 44% $6,151 $77,828 $80,000 26 $85,000 17 1360 $85,000 27 $90,000 18 1440 $90,000 28 The "Goal" columns are filled out at the beginning of each month. $95,000 19 1520 $95,000 29 $100,000 20 The numbers in this column can vary 1600 If you know your overhead depending on the number of work budget, the figures in this column $100,000 $105,000 21 days in the month. 1680 can be helpful in finding your $105,000 $110,000 22 1760 "breakeven" point. $110,000 $115,000 23 1840 $115,000 Tip: This chart may seem overwhelming at first, but take the time to study it along with the other documentation and you'll see how simple it really is. The information is essential to a well-run organization. This sample was produced using a computer; however, it is relatively simple to generate the same results with pen and paper. Another option is to build the chart using an erasable ink board and 1/16" striping tape. The ink board is very effective because it s in constant view of the staff members who need to know the score. Most of the data contained here could be generated by keeping a basic log book and posting it each day to the chart. If you're using a computer management system, it will be even easier. Try it for one month and you'll be amazed at the results.

T H E S A L E S / P R O D U C T I O N C H A R T Putting the Sales/Production Chart to Work Month/Year Enter the month & year at the top of the chart to provide a permanent record for future reference in market trends, scheduling, establishing goals, etc. Bodyshop Sales Date Enter the date in each cell block in the left column each month. This gives an accurate record of work days, holidays, weekly trends, etc. Number of Estimates Daily Enter the daily number of estimates written. analyzing performance and trends. Number of Estimates Total This proves useful when The cumulative total of all the estimates written for the month. This information provides data to track everything from the effect of an advertising campaign to the average dollar amount of an estimate. Dollars in Estimates Daily Very important. For example, if shop A was averaging five estimates a day at $500 each, its potential would be limited to $2,500. But if shop B was averaging five estimates a day at $1,000 each, its potential would be $5,000. Dollars in Estimates Total The cumulative total of estimates written. This information is used to determine the batting average and average estimate as described later on. New Sales Daily The estimates converted into repair orders, not yet repaired, but committed sales. This should be reviewed daily and compared with the daily sales goal. New Sales Total The cumulative total of all new sales. This figure should also be compared with the daily sales goals. Very important. Sales Goal This column should be entered at the start of each month. Refer to the chapter Establishing Facility Potential for details. Extremely critical. Batting Average The percentage of dollars in estimates written vs dollars in estimates sold. Divide the total dollar amount of estimates sold by the total dollar amount of estimates written. This number can be used to evaluate the performance of estimators, or the effectiveness of the sales scripts used, etc. Industry average is 50%, but many shops operate in the 70% range or better. 27 Section 5.5

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Bodyshop Production Number of Work Days Tracks the number of work days in any given month. Since the number of days varies from month to month, so should the monthly goals. Months may range from 19 to 23 workdays, depending on work schedule. Total Number of Jobs The cumulative total of the jobs completed up to the current day. Hours Daily The daily total of paid, billable hours completed. Hours Total The cumulative total of paid, billable hours completed for the month. Hours Goal Predetermined at the beginning of each month using the information provided in the chapter titled Establishing Your Facility s Production Potential. Gross Profit Dollars The cumulative total of all gross profit dollars earned. This is very important for calculating the monthly breakeven point. When the total of gross profits earned equals the monthly overhead or fixed expenses, the breakeven point has been reached. All gross profits earned after this point transfer directly to net profits or the bottom line. Gross Profit % Useful tool in tracking trends in profitability from week to week or month to month. If it falls below standard, a closer look should be taken at the individual departments of labor, parts, etc. Production Daily The total dollar amount of work completed each day. Only those jobs that are completely finished should be included. Production Total The cumulative total of all production dollars completed to date. Production Goal This column should be filled out at the start of each month. chapter Establishing Your Facility s Production Potential Extremely critical. Refer to the for details. Section 5.5 28

T H E S A L E S / P R O D U C T I O N C H A R T Application & Suggestions There are three choices for implementing the Sales/Production Chart into your operation: 1. Pen & Ink Use the blank form provided in the Bodyshop Forms section and manually enter the information each day. This can be accomplished in just a few minutes each day. 2. Computer Spreadsheet The sample provided was created in Microsoft Excel. The electronic copy contains automated formulas for most of the calculations and offers additional information not found in the printed sample. The spreadsheet version is available by contacting your local paint distributor or by calling (800) 366-5429. 3. Large Erasable Ink Board If office space allows, a large erasable ink board can be used to construct a duplicate of the chart. 1/16" stripe tape works great to mark the grids of the chart. This version will give managers and staff a constant and quick reference of company performance. This version is the ideal format to have posted at the daily release meeting. One of the previous examples should be used in conjunction with the erasable ink board so that a hard copy will be available for filing at the end of each month. Summary Most of the information in the Sales/Production Chart can be gathered with a calculator and a simple log sheet. Even if all the information is not available, use the portions of the chart that you can. The rewards will be well worth the effort. 29 Section 5.5

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Section 5.5 30

C A L C U L A T I N G L A B O R E F F I C I E N C Y Section 5.6 Calculating Employee Labor Efficiency Objectives To determine individual employee efficiency standards necessary to maintain the needed profit guidelines. To establish individual performance benchmarks based on earnings and productivity I C O N K E Y To establish standards and benchmarks to drive incentive pay plans Valuable Information Exercise Caution Corrective Actions Situation Overview When it comes to employee pay scales and labor efficiencies, shop owners and managers are frequently challenged with questions that appear simple on the surface, but are often complex and difficult to answer. How much can I afford to pay my technicians? What level of labor efficiency is acceptable? The following page outlines the steps necessary to utilize a mathematical approach in answering these and several other questions. 31 Section 5.6

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Calculating Employee Labor Efficiency 1. Establish the gross profit standard on labor sales. In the chapter titled Profit Benchmarks, Where Should You Be? it was determined that 60% Labor Gross Profit was the necessary benchmark. 2. Calculate the added benefit costs to determine the true cost of labor. True cost includes Workman s Compensation, State Disability Insurance, Sick Leave, Vacation Pay, Holidays, Unemployment Insurance, Health Plans, etc. Although benefit costs vary from one shop to the next, a simple rule of thumb is to add 30% to the employee s base rate for benefits. Example: $10 base rate x 30% benefits = $3 $10 base rate + $3 benefits = $13 true cost 3. Determine the needed door rate. Divide the employee s true cost by 40%. Remember, you need to retain a 60% gross profit, leaving 40% in costs. This step determines the needed door rate. Labor The term needed door rate is only used to describe the needed rate based on 100% labor efficiency. Since the actual door rate is often lower, the efficiency standard must be greater than 100% to maintain a 60% gross profit. True Cost 40% Gross Profit 60% 4. Determine the necessary efficiency standard. Divide the needed door rate by the actual door rate. Review the example on the following page for a detailed illustration. Section 5.6 32

C A L C U L A T I N G L A B O R E F F I C I E N C Y Example Using Sample Data 60% Gross Profit Target $32 Shop Door Rate $12 Employee Base Labor Rate 30% Added Benefit Costs Step 1: 60% Gross Profit Target Step 2: $12 Base Rate x 30% Benefits = $3.60 Step 3: Step 4: $12 Base Rate + $3.60 = $15.60 True Cost $15.60 40% = $39.00 Needed Door Rate Step 5: $39.00 $32.00 Actual Door Rate = 1.218 Step 6: Step 7: 1.218 or 122% Efficiency Standard 40 Hour Week x 122% = 48.8 Hours per Week In the example above, with a shop operating at a $32 door rate, the hourly employee at a $12 base rate must be 122% efficient in order to maintain a 60% gross profit standard. If the employee worked 160 actual hours in a month, he or she would need to produce 195 hours. Application & Suggestions The chart on the following page provides a simple method for determining the necessary efficiency standard for a variety of door rates and pay scales. Keep in mind that the labor costs shown in the chart are true cost which includes the added benefit costs. 33 Section 5.6

Production Efficiency Requirements @ 60% G/P Door Rate True Labor Cost $7.00 $8.00 $9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00 $16.00 $17.00 $18.00 $19.00 $20.00 $21.00 $22.00 $23.00 $24.00 $28 63% 71% 80% 89% 98% 107% 116% 125% 134% 143% 152% 161% 170% 179% 188% 196% 205% 214% $29 60% 69% 78% 86% 95% 103% 112% 121% 129% 138% 147% 155% 164% 172% 181% 190% 198% 207% $30 58% 67% 75% 83% 92% 100% 108% 117% 125% 133% 142% 150% 158% 167% 175% 183% 192% 200% $31 56% 65% 73% 81% 89% 97% 105% 113% 121% 129% 137% 145% 153% 161% 169% 177% 185% 194% $32 55% 63% 70% 78% 86% 94% 102% 109% 117% 125% 133% 141% 148% 156% 164% 172% 180% 188% $33 53% 61% 68% 76% 83% 91% 98% 106% 114% 121% 129% 136% 144% 152% 159% 167% 174% 182% $34 51% 59% 66% 74% 81% 88% 96% 103% 110% 118% 125% 132% 140% 147% 154% 162% 169% 176% $35 50% 57% 64% 71% 79% 86% 93% 100% 107% 114% 121% 129% 136% 143% 150% 157% 164% 171% $36 49% 56% 63% 69% 76% 83% 90% 97% 104% 111% 118% 125% 132% 139% 146% 153% 160% 167% $37 47% 54% 61% 68% 74% 81% 88% 95% 101% 108% 115% 122% 128% 135% 142% 149% 155% 162% $38 46% 53% 59% 66% 72% 79% 86% 92% 99% 105% 112% 118% 125% 132% 138% 145% 151% 158% $39 45% 51% 58% 64% 71% 77% 83% 90% 96% 103% 109% 115% 122% 128% 135% 141% 147% 154% $40 44% 50% 56% 63% 69% 75% 81% 88% 94% 100% 106% 113% 119% 125% 131% 138% 144% 150% $41 43% 49% 55% 61% 67% 73% 79% 85% 91% 98% 104% 110% 116% 122% 128% 134% 140% 146% $42 42% 48% 54% 60% 65% 71% 77% 83% 89% 95% 101% 107% 113% 119% 125% 131% 137% 143% $43 41% 47% 52% 58% 64% 70% 76% 81% 87% 93% 99% 105% 110% 116% 122% 128% 134% 140% $44 40% 45% 51% 57% 63% 68% 74% 80% 85% 91% 97% 102% 108% 114% 119% 125% 131% 136% $45 39% 44% 50% 56% 61% 67% 72% 78% 83% 89% 94% 100% 106% 111% 117% 122% 128% 133% $46 38% 43% 49% 54% 60% 65% 71% 76% 82% 87% 92% 98% 103% 109% 114% 120% 125% 130% $47 37% 43% 48% 53% 59% 64% 69% 74% 80% 85% 90% 96% 101% 106% 112% 117% 122% 128% $48 36% 42% 47% 52% 57% 63% 68% 73% 78% 83% 89% 94% 99% 104% 109% 115% 120% 125% $49 36% 41% 46% 51% 56% 61% 66% 71% 77% 82% 87% 92% 97% 102% 107% 112% 117% 122% $50 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% $51 34% 39% 44% 49% 54% 59% 64% 69% 74% 78% 83% 88% 93% 98% 103% 108% 113% 118% $52 34% 38% 43% 48% 53% 58% 63% 67% 72% 77% 82% 87% 91% 96% 101% 106% 111% 115%

H O U R L Y V S F L A T R A T E C O M P A R I S O N Section Hourly vs Flat Rate Comparison Objectives To evaluate pros and cons of both pay methods. To compare the mathematical differences of both pay methods. To provide additional perspectives for implementing a pay plan. Definitions Hourly 5.7 Employee receives a fixed wage rate for every clock hour worked. Flat Rate Employee receives a fixed dollar amount for every billable labor hour produced regardless of clock hours. The Controversy The controversy over hourly vs flat rate has long been a hot topic of debate. In choosing a pay method for your shop, remember the objective is to find a method that is fair to the staff and the shop, yet allows management to maintain control and provides the shop with the ability to earn a profit. Don t get sidetracked into implementing a plan that serves some other purpose. Don t fall victim to prevailing practices either. There are no guidelines set in stone. An hourly plan may work fine in one shop, and flat rate may be just the ticket in another. Challenge tradition, do the necessary research and planning, then do what s right for your shop. 35 Section 5.7

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Advantages and Disadvantages Flat Rate Hourly Built-in motivator, encourages initiative. Less supervision required. Built-in guarantee on shop s profit margin Often focuses on short term goals. Sometimes causes conflict or negative influences between management and production staff. Promotes quality-oriented work. Provides management with greater control. Provides workers with a stable work environment. Promotes trust, loyalty, team spirit, and focuses on long-term goals. Sometimes requires more systematized management practices. What Employees Really Want Use the comparison on the following page only as a guide to influence your opinions. Keep in mind that when you introduce a pay plan, the important thing to address is to determine what your people want. This may seem obvious enough. People want to work, make good money and go home, is the common assumption, yet many sophisticated studies have been conducted over the years that contradict that assumption. When employees are asked what they really wanted from their jobs, the most common answers are: 1. Appreciation for a job well done. 2. A feeling of being in on things. 3. Management s understanding of their personal problems and interests. Section 5.7 36

H O U R L Y V S F L A T R A T E C O M P A R I S O N Hourly vs Flat Rate Analysis The following example illustrates the production efficiency required for an $11 flat rate employee and an $11 hourly employee to produce an equal amount of gross profit dollars. To fully understand this example it s important to review the previous chapter Calculating Employee Labor Efficiency. It s important to analyze the sample data for a full understanding of this comparison. SAMPLE DATA $30 Door Rate $11 Base Labor Rate 60% Gross Profit Target 20-Day Month EXAMPLE A HOURLY $11 Base Rate + 30% Benefits = $14.30 $14.30 40% = $35.75 Needed Door Rate $35.75 $30 Actual Rate = 119% Eff Std 160 Hours X 119% = 190 Hours 190 Hours X $30 = $5,700 Labor Sales $5,700 X 60% = $3,420 Gross Profit $3,420 Gross Profit @ 119% Efficient EXAMPLE B FLAT RATE $11 Base Rate + 30% Benefits = $14.30 $30.00 Door Rate - $14.30 Cost = $15.70 $15.70 GP $30.00 = 52% Gross Profit $3,420 Needed GP $15.70 = 218 Hours 218 Hours 160 Hours Actual = 136% Eff $3,420 Gross Profit @ 52% Gross Profit $3,420 Gross Profit @ 136% Efficient Example A With the shop operating at a $30 door rate, an hourly employee at an $11 rate and 30% added benefits, must be 119% efficient in order to maintain a 60% gross profit standard. If the employee worked 160 actual hours, he would need to produce 190 hours which would result in $3,420 in gross profits. Example B In the same shop, a flat rate employee at an $11 rate must be 136% efficient in order to produce the same $3,420 gross profit as the $11 hourly employee. If the employee worked 160 clock hours, he would need to produce 218 hours. Regardless of how many hours the flat rate employee produced, the gross profit percentage would be fixed at 52%. 37 Section 5.7

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Section 5.7 38

U N D E R S T A N D I N G G R O S S P R O F I T P E R H O U R Section 5.8 Understanding Gross Profit per Hour Objectives To determine the characteristics of jobs with the highest impact on profit. To identify and select the most profitable jobs. To develop estimating practices to maximize job profitability. I C O N K E Y Valuable Information Exercise Caution Corrective Actions Definition The term Gross Profit per Hour represents the amount of profit generated for every actual hour applied to the job. For example, if a technician worked on a job for ten hours, and the total gross profit produced from parts, labor, sublet and materials totaled $300, the gross profit per hour would be $30. Example: $300 GP 10 Actual Hours = $30 Gross Profit per Hour Keep in mind that the actual hours represent the actual hours applied to the car, not the number of hours listed on the estimate. 39 Section 5.8

B E N C H M A R K S & P E R F O R M A N C E M E A S U R E M E N T Overview An area of major controversy exists over the process of replacing parts vs repairing parts. Many people hold the opinion that since the gross profit percentage is usually higher on labor than on parts, it appears to make more sense to repair parts rather than replace parts. The information provided in this section illustrates that the influence of parts profits on overall job profitability can be dramatic, and that in most cases it is preferable to replace the part rather than repair it. Naturally the condition of the part often dictates whether to repair or replace. Nevertheless, there are occasions when the choice can go either way. The following illustration should provide some food for thought and clarify the benefits of replacing parts in most instances. Analysis Repair A Notice that although Repair A features a 57% gross profit, the end result offers only $18.83 gross profit per hour. Repair B In contrast, Repair B features only 36% gross profit, yet offers nearly double the gross profit per hour at $35.50. Labor Efficiency The illustration provided assumes that the labor efficiency in Repair A and Repair B is equal at 100%. Increasing the labor efficiency can have a dramatic impact on gross profit per hour, especially with a parts-intensive job. Gross profit per hour is one of the highest leverage areas of profitability in the entire bodyshop. A combination of high labor efficiency and parts intensive jobs will yield greater profits. Consider calculating the gross profit per hour on several sample jobs from your shop and the message becomes clear. Replace more parts, earn more profits. Section 5.8 40