Lynn, Mass. -- After more than 20 years as a management trainer for automotive parts and service businesses, Vin Waterhouse has determined that the difference between a barely profitable repair facility and a very profitable one can be as little as three minutes an hour in additional labor.Waterhouse said he worked in the automotive parts industry for 13 years before opening an accounting firm serving automotive repair businesses and parts stores in 1986. He said his accounting work allowed him a unique insight into what set certain stores and shops apart. "Basically, I became a student of the industry and watched those businesses that were the most successful and tried to quantify why."
Waterhouse, who now trains exclusively for NAPA, said that while the top shops earn about four times more net profit, they are not more experienced but actually average 2.8 less years in business than the average shop owner. "They don't work harder or longer, they are just better businesspeople," he said.
"A 5 percent increase in efficiency will more than double the average shop's net profit," Waterhouse said. "That equates to recovering 3 minutes an hour in labor per technician."
Waterhouse illustrates his point by noting that the average shop in the NAPA AutoCare Financial Profile has 3.76 technicians, a labor rate of $62.42, and a total of 6.3 employees. To be conservative and work with round numbers, he said he bases his example on a three-technician shop with a labor rate of $60 an hour. Using the report's average shop sales of $674,190 and average profits of 4.69 percent, a typical shop would have average net profit of $31,620, he said, or just $2,635 a month. A 5 percent increase in efficiency at the same shop would increase the monthly profit by $2,722 a month to $5,357, he said.
"It's the difference between doubling the net profit or working all year for almost nothing," he said, adding that the little bit of extra time has a huge impact because "the net profit is about 73 percent once you reach break-even."
Waterhouse said the single biggest cause of losing three minutes an hour is waiting for parts. "The best way to recover three minutes is to stock a balanced inventory and have a supplier maintain it for you," he said.
Waterhouse, who trains both automotive jobber stores and repair shops, said the constant shuttling of low-dollar parts is a drain on profits for the store and the shop.
"Three minutes for a shop waiting for a 50-cent bulb or tire plug is just as expensive as waiting for a $300 alternator," he said.
"If I have a part delivered more than two times in six months, I'm going to stock that part," Water house said, "and if a part doesn't sell within a year, I will ask my supplier to replace it with something that will.
"Choose a supplier and make them your first call, but also require that they design your inventory and maintain it," he said. "The old adage is, 'Don't put all of your eggs in one basket,' but Mark Twain said, 'Put all of your eggs in one basket, but watch the basket closely.' A shop needs a parts store as much as a store needs the shop. The shop invests in the inventory, and the store makes sure that it doesn't go obsolete."
Waterhouse said shops need every edge they can get because the average net profitability actually dropped to 4.69 percent in the 2006 NAPA AutoCare Financial Profile from 5.04 percent in 2004. At the same time, he said the top 25 percent of shops in the poll increased their average net profitability from 14.21 percent in 2004 to 18.34 percent in 2006.
"The strong got stronger and the weak got weaker," he said. "The good news is that there are solutions."
An honest appraisal of the business reveals that it is still an industry with a great deal of opportunity, Waterhouse said, but owners must be honest about the changes that have occurred and adjust their approach.
"You have to recognize that vehicles are better quality and that we don't sell as many parts," he said. "We also don't make as much money on the parts we do sell because of price reductions. Vehicles are also more difficult to work on -- there just isn't much space to get at things on a new car."
The effect of prices can get lost in the reports of modern computerized shop management systems, Waterhouse said. "Forty percent of a $2 filter is 80 cents," he said. "Thirty percent of a $4 filter is $1.20. It takes the same amount of time to install either one. People look at their computer screen and see 40 percent and think they're OK, but they still made less money." The difference in profit is just one of the reasons to consider using premium products, he said.
"In the last five years, we lost 36,000 shops," he said. "Many of those losses were preventable."
One of the ways to ensure that your shop is not the next to close is to have three labor rates, Waterhouse said. The first is a shop's standard rate, he said, the second is a labor-intensive rate, used when the labor is disproportionate to the amount of parts being sold, and the third is a rate for diagnostics.
The standard rate works fine when the ratio of labor is about 50-50, as it traditionally has been in the industry, Waterhouse said. The labor-intensive rate is necessary when a good deal of disassembly is necessary to replace a relatively inexpensive part, he said. The diagnostic rate, sold in blocks of time customized to the job, is used when the nature of the repair is unknown.
The impact of selling diagnostic work at the traditional rate was illustrated by Waterhouse in a scenario where a vehicle with folding mirrors is brought in with the complaint that they work most of the time but occasionally won't. "It may take two to three hours to find a chafed wire and repair it," he said. "That has the same financial impact as doing a brake job and letting the customer bring in their own parts."
A one-hour job at a $60 labor rate that is 50 percent labor and 50 percent parts with a 40 percent margin would result in a total sale of $120, with $84 left after the part is paid for. The same job, without parts, results in the shop only having $60 at the end of the same hour's time, Waterhouse said.
For diagnostics, Waterhouse said the effect is even greater because it requires the shop's most experienced -- and expensive -- technician using tools only used for diagnostics.
A labor-intensive job is one where you may have to remove and then reinstall a number of parts in order to reach to part that needs to be replaced, Waterhouse said. That type of work has become more common as the engine compartments of cars have become tighter, preventing easy access to many areas, he said.
In 1980, 85 percent of work was standard and 15 percent was labor intensive, Waterhouse estimated. In 1990, 81 percent of work was standard, 14 percent labor intensive, and 5 percent diagnostic, he said. In 2007, 40 percent of work is standard, 40 percent requires some form of diagnostics, and 20 percent is labor intensive.
Waterhouse said that between 1980 and 1990, the title of those who repaired vehicles changed from mechanic to technician. Today, with so many electronics involved, he said that perhaps the title should change again to "techtrician."
In his classes, Waterhouse said he has the shop owners create standard, labor-intensive, and diagnostic rates from their cost up. "They're either going to have to implement these three rates or fail," he said. "Ninety percent of people charge what the market will bare, and that's not good enough anymore."
An average repair shop has a $62.42 labor rate and bills just 62.9 percent of the technicians' available time, or 37.4 minutes of each hour, Waterhouse said. "That's an effective labor rate of just $39 an hour. If he is paying the technician $20 an hour, the owner is only making $19 an hour. He thinks he is doing fine, but in fact he is bleeding to death."
Waterhouse said the flat-rate system is failing the industry because there is no way to design a flat-rate guide for diagnostics. He said shops should sell diagnostics based on the actual time it takes but charge a rate that recovers the cost of the technician, the lost parts sales, and the advanced equipment.
Diagnostics should be sold in blocks of time, with the amount of time being determined by the description of the problem supplied by the customer, Waterhouse said. "I would tell the customer that I recommend a phase-one system service, which is a series of sophisticated tests using state-of-the-art equipment," he said.
If more time is needed after the first block of time is used up, Waterhouse said the service writer needs to carefully describe for the customer all of the tests that were completed and the causes that have been ruled out so that the customer will understand the value of what her or she is paying for.
At the same time, Waterhouse said if the diagnosis is made early in the block of time that was sold, the customer should be charged only for the actual time needed. "You are charging as though your customer is chained to the roof of the vehicle with a stop watch," he said. "You can afford to do this because you are charging the rate that you need to."
To determine which jobs are charged at each of the three rates, Waterhouse suggested that shop owners list all of the jobs the shop has done in the last year and ask the shop's technicians to assign a skill level from one to four. "Once you have the master list, you have a system that determines not just which rate to use but also for technician pay and for evaluating new technicians hired by the shop," he said.
Because diagnostic work is becoming a larger portion of all work, Waterhouse said it is essential that shops are not only prepared to do that type of work but also understand how to do it profitably. "You need to be very good at diagnostics because that's where the growth is," he said, "which means that is where the opportunity is."
While preventive maintenance has been a focus of many classes and industry articles and is an important part of shop's mix, Waterhouse said it is not a cure-all. "Preventive maintenance has been a big push for the past two or three years, but you can only do so much of it," he said. "There's not enough of it to keep people afloat. It won't make up for the growth in diagnostics."
Waterhouse said business owners need to recognize how the business is changing and position themselves to provide what is needed. "Selling is filling needs," he said. "If you don't need a shirt, I probably can't sell you one. If I understand what your needs are and fulfill them, then I can be successful."
Schedules for the two-day Waterhouse Group Financial Management class are posted on www.vinwaterhouse.com. Shop owners can register to attend a classes via the Internet or can find contact information.
Waterhouse added that NAPA offers a $440 scholarship sponsored by NAPA Brake & Chassis, NAPA Filters, NAPA Echlin and NAPA Heating & Cooling. These suppliers make this offer to every shop owner in the United States, he said regardless of whether they are NAPA customers, resulting in a net cost of $35 for the class. "This is a full two-day business class," Waterhouse said. "It is not an infomercial."
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