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Lee Rosenhan's Management 101 Revisited
Posted to Shop Management Forum on 7/5/2016 13 Replies

Almost a generation has passed since Lee wrote this series and shared it with all of us here on iATN.

I have consolidated all the parts here for ease of reading for those who have never seen it before. It requires no modification as it's timeless and every word of it applies today. Below lies the formula for financial success in this business. This is solid gold so enjoy!

JC

Marketing 101 By Lee Rosenhan

Ideal #1: The total cost of production labor (wages, benefits, vacation, holidays, etc.) should never exceed 40% of the labor money taken in. We are talking about production employees, technicians, not management or service writers. That part of a working foreman's hours that go to production should be considered as well as the compensation he is given for that. You should calculate this ideal monthly, averaging the last three months. This ideal should be labor driven, meaning that one should consider first what it costs to have and keep good, qualified, productive people and then use that to decide what the shop's average labor rate will be. You will be tempted to fudge on this. If costs creep over 45% you will be in trouble.

Ideal #2: MINIMUM profit on parts sales should be 40%. If you sell a banana for 100 pieces, 40 of those pieces should be yours. This is an annual average of all parts sales. Your parts are a separate business center and should be operated with that in mind. It should be self supporting. Some parts, like engines, may need to be marketed lower, so other parts, like small parts or performance parts, may need to be marketed higher to compensate. On annual parts sales of $200,000 - one percent will make a $2,000 difference, enough to buy a new piece of equipment or computer system. This ideal should be checked weekly to see if you are on track. If you check something at the end of the year it is too late. If you check something monthly, you have 12 chances to correct the problem. If you check something weekly, you have 52. If you sell an engine, your percentage may drop for a few weeks till it is made up. If you sell a lot of engines you may need to make some adjustments to bring things back into line. This is for mechanical parts sales only. Gas and oil - as in gas stations - is a different profit center and is not considered here. Sublet sales should follow the same rules as your mechanical parts sales.

Ideal #3: You must have more than one labor rate.

To some this will be a huge understatement. To others it will be a new idea. Remember this is only management 101. It is meant to establish some simple rules to more profitability and all that comes with it.

Each labor dollar is worth it's face value plus the parts profit or other profit it generates. A repair order with half labor and half parts, with 60% gross profit on labor and 40% gross profit on parts, has a labor dollar worth $1.40. This repair order would represent your ANNUAL AVERAGE. You may find your annual average repair order is more like 60% labor and 40% parts rather than half and half, in which case each labor dollar would be worth $1.32 at the same gross profits.

Today we diagnose more than ever. There are no parts attached to diagnosis. Thus the need for more than one labor rate. It may not be as simple as charging out diagnosis at 140% or 132% of the rate you would charge to install a water pump. There is expensive diagnostic equipment that has to produce a return on investment as well as sharp diagnostic technicians that demand higher compensation. All these things must be taken into consideration in forming a labor rate scale. There will be as many ideas on this as there are shops but the ideal is that you must charge a higher labor rate for diagnosis and other like situations. You may settle on a simple formula of diagnostic labor being one and a half times standard labor. It's a place to start. On the other end of the scale, you may find you can charge a lower labor rate for maintenance services because you may have less skilled and lower compensated people doing this work with low tech equipment. So right off you can see the possibility of three labor rates. Some honest book keeping may reveal the need for more. You be the judge, but don't give away diagnosis.

Ideal #4: You must have a minimum service charge.

Every other professional charges one, so should you.

A case in point: Yesterday I had to take my youngest son to get a physical for school track. We were at the clinic about 30 minutes. Mike was fine. Charge? $95. I wasn't offended at the cost, it made me a little nervous, as any bill does, but I didn't take it personal. I guess you could say I expected to pay even though Mike was fine. After all, I had been provided a service. Now, I know that I probably could not charge $95 for a quick check over of a car that took, say, 30 min. of my time. Or could I? Other than being used to paying a doctor, there were other things that made it acceptable to pay the $95. The office was professionally appointed. The counter was clearly marked with a nice sign indicating where to pay and that payment was expected. The people that talked to me clearly knew what was expected of me and looked (dressed) and acted professionally. When someone approaches you dressed that way (nice blouse and skirt / shirt and tie) with papers in their hand and that confident and expectant look on their face, you automatically reach for your wallet. And I had value for my money also. I had papers in my hand clearly indicating the service provided and Mike had his form to take to school. Value Received. Is any of this making sense? Are we getting the point? If the medical technician had slapped Mike on the back and said "can't see anything wrong at this time, why don't you just go ahead and go", I might have felt cheated and certainly less secure. I might even have said something to a friend or relative.

CHARGE A MINIMUM CHARGE, but be prepared to give value in return and look and act like you believe you deserve to get compensated. You might prepare a standard form to use in these kinds of situations. Charge what the market will bear and what the service is worth. You decide what that is, but you might at least consider .5 hr. at your standard rate. A place to start. Have something to place in their hands - as much as possible - to help support the perception of value. Have your conclusions clearly stated on the form and any recommendations clearly explained to help confirm the value of what you have done for them. With the medical form, it took just checking a couple of boxes and circling a sentence or two.

Remember, someone performed that service and if he is working flat rate it is just that much more time to add to his wage. Over a week's time it can add up and it makes for happier techs and a more profitable shop.

On the occasion when in the spirit of customer bonding you do say "it's on the house", at least it will have some meaning, but be prepared to pay your tech anyway.

Making more money and paying our people more by just charging for what we're already doing. What a concept!

Ideal #5: Use "block" operations to increase shop productivity and value to your customer.

Somewhere between the complaint "I have to keep adding water", and replacing the water pump, is a block of time that brought you to that conclusion. How well was that time used and what value did the customer get from it? It's very possible that you could get down on one knee, look under the car and notice the stain in the appropriate spot on the bottom, front of the engine and correctly conclude the water pump was the source of the complaint. Was the customer served? Was your risk of a comeback increased or decreased? Was it a professional repair? Consider instead a in - house operation that printed out the same each time and read something like this:

DIAGNOSE COOLANT LOSS; Includes: fill and pressurize coolant system. Raise car and check for leaks. Check condition of hoses, clamps and belts. Visually check radiator flow. Pressure check radiator cap. Check overflow system. Check condition of coolant.

You will want it to read easily and in terms understood by your customer and represent honest value. You get two things from this. One, is your technician has a set procedure to follow each time, that helps prevent comebacks and missed steps. The other is that your customer gets a more complete job and real value because he doesn't want to come back still having some secondary problem.

Say you charged .5 hr. for this service, and since it is diagnosis, it is charged out at your diagnostic rate. Say you built such blocks of time for "the battery is dead every morning", "It overheats", "the brakes squeak", "it runs rough and stalls", "my wipers don't work", etc., etc. You would feel more secure in that all known checks for each problem were included in each block of time - that you were getting compensated for it, and your customer was getting real value. You can manually adjust the time up or down to suit almost any situation. It takes no time for the operation to be printed out and, after the "block" operation is finished, about one minute for your technician to complete a "check chart" handed out with the repair order. With this "check chart" attached to the invoice, the customer has more proof of the value of your service.

There are many ways to do this. The ideal is to make your diagnostic time billable and of real value to your customer.

On the line above the standard "water pump" operation on just about any invoice should be a "block" of time that brought you to that base repair.

Ideal #6: Honesty in accounting, the key to controlling expense.

We're talking about the old axiom "garbage in, garbage out". In other words, if the figures you're dealing with do not represent reality, the resulting conclusions are worthless. I am one of the biggest offenders in this area. My nature is such that I don't really enjoy playing with numbers. I just want to fix cars, make money, not offend anyone, buy what I want and live happy. Why can't it be that easy? This personality trait has cost me many tens of thousands of dollars over the years and less security for my family. Learning to be honest about accounting has become a learned trait brought about by necessity. I now enjoy the challenge of keeping this living, breathing thing called a "business" thriving. It can be as much fun as fixing cars. Remember, at the end of the year whether you have money in the bank, had to borrow money, went without or stayed the same, you will have "accounted" for every cent. Why not account for it on paper daily, weekly, in advance, so when the end of the year comes there will be no surprises because you will already have been there on paper. I don't want to offend anyone, but in my opinion a CPA seems to be little help in this area. With today's software you can know almost to the minute how you are doing.

Let's look at where we are to this point. I recently read in a trade magazine that the average annual sales for the reporting shops was $250,000. Let's use that figure for an example. Let's say the parts sales were $112,000, labor sales were $123,000, you took in $12,000 from sublet sales and you decided to create a "supplies" category that brought in another $3.000. That totals $250,000. Let's look at parts first. Let's assume you have been completely honest in your entries and every part you purchased that was not consumed as supplies was invoiced either to a customer or the shop and therefore the costs were figured against your parts gp and you ended up with a 40% gp or $44,800. Your gp on labor you kept at 60% or $73,800 and you were equally as honest in including all wage and benefit expenses. You tried hard, but the best you could do for the year on sublet gp was 30% or $3,600. Supplies were a wash because you were just recovering cost and so there's no gp there. This adds up to a total gp for the year of $122,200. Lets give you plenty of room and say your overhead was 30% of sales or $75,000. After taking out another $40,000 for yourself you end up with a net of $7,200. Not much room for error.

If your true parts gp dropped to 30%, your net would be ($4,000), in the hole. If your parts stayed at 40% but your labor gp dropped to 50%, your net would be ($5,100), in the hole. If both dropped, sell. (just kidding). On the other hand if your true parts gp was 45% and your labor gp was 65%, then your net would be $24,550. A little more room. The shop these figures represent is likely a modest shop with one working owner (fixes some cars), one good tech and some part time office help, and not much time off.

Lets look at the overhead (after labor, parts and owners salary, everything else you paid out). In this scenario we used 30% of sales. This is probably high unless you just built a brand new shop on a busy corner with great signage (why would anyone put such a burden on their backs when less costly options are available?). Sounds like some idealistic thing I would do. If overhead dropped to 20% of sales then the net on our beginning scenario would be $32,200. Wow. Now you could take a little time off or buy your wife something nice. But only if you maintained your parts and labor gp.

Proper control of overhead requires a budget. OH, the B word! This runs contrary to my most basic nature but is absolutely necessary to survive, prosper and provide for your family and your employees. In my opinion, a owner who refuses to budget violates the trust between himself and his employees, not to mention his family. A good friend of mine, Jim McFarland recently posted in the Open Discussion forum about, through necessity, lowering his overhead $1,200 a month or $14,400 annually. It can be done. If you E-mail him, I'm sure he will tell you how he did it.

BTW, a few years ago I participated in an accounting profile sponsored by ASA. Over 100 shops responded. The average overhead (less owners salary) as a percent of sales was 20.8%. The top 25% of the shops had an overhead of 14.8%. Food for thought. I won't tell you what mine was.

Ideal #7: Shop Productivity, the essence of life.

All other percentages, formulas, principles and procedures pay homage to this principle. All things are subject to it and all efforts in other areas fail if it is not understood.

Let's visit again the shop scenario in Ideal #6. If labor gp was a true 60% then obviously labor costs were 40% of the labor dollars or $49,200. A pretty good wage for one real good tech. These techs are hard to find, so, more likely it will be like I suggested that we have one good tech at say $35,000 (still not bad for most parts of the country) and one working owner (tech, gone owner) who, along with service writing and managing, fixes cars. Say he does the balance, or $14,200. This will still work and there is room in the budget for some office help to take some of the pressure off. This is because the important gp has been maintained. Let's look at a more common situation. Same shop, but the owner doesn't fix cars and has two techs putting out the same volume. $49,200 divided by two is $24,600 each. This is gross (pun intended). Not much take home there.

The pressure is on. The techs need more, the owner knows it. He doesn't want to lose anyone because it's such a hassle to find replacements and he didn't get into business to be doing this all the time anyway. He raises compensation to a point where he feels his men will stay around. Let's say $35,000. Now his labor gp has dropped to 43% and the shop is ($14,000) in the hole, assuming nothing is done about overhead and the increased compensation did not result in increased production.. Now, he won't want to go in the hole so he takes less home and falls into the poverty level. We won't argue about who's at fault here, it's the owner. If his people cannot work faster because of their nature then he must replace them. If his people just cannot work faster at his shop then he has to fix the shop. If his people can improve he has to learn how to encourage it. If the way he compensates needs to change, he will have to do it. It's the owner's shop, only he can fix the problems. Here is where a lot of pressure is created between techs and owners. The two techs mentioned would be operating at about 50% productivity. In order for the owner to meet the required gp without the situation changing, his average shop rate would have to be $70 per hour. Everybody loses, including the customer because it takes longer to get his car fixed and he has to pay more.

In the beginning of this series, we said it would be assumed shop productivity was 80% or above to make the series have meaning. If you didn't know why before, you do now.

Someone once said that the world is made up of two kinds of people, those who understand interest and those who pay it. The same can be said of shops. There are two kinds of shops, those who understand productivity and those who are broken by it. Good management classes will help you learn to do all of the above better. The purpose of this series is to help you understand the basics. Productivity IS everything.

Ideal #8: Establish "closed loop" customer service.

I use the words "closed loop" because it is a term we all understand. Just like the computer in your car knows what your engine needs by the input from its sensors, we also need to know what our customers' needs are by establishing a feedback system. At first blush, one might feel trepidation at the prospect of inviting people to vocalize how they feel about you.

Kind of like posting to a forum.

On the other hand, think for a minute, if a customer was less than satisfied, wouldn't you want to be the first to know? How will you know unless you ask? Sometimes, quite a few times, customers never say anything. They just change shops and you never know why. People don't like to complain and it's often easier to just go somewhere else. Of course we're talking about establishing a CSI, or Customer Satisfaction Index. There are many ways to do this, most seem to involve handing out or mailing out a card and hoping for a response. These programs may do some good. NAPA has one and so does AAA. I have never gotten a negative card returned. All returns that I can remember have been positive. I am good, but not that good. Here is my problem with these programs, most people throw away this kind of mail, and again, people don't like to complain. I've always wondered how many cards are still running around in peoples glove boxes attached to old repair orders. The only way I know of to measure the success of these programs is to pay attention to the size and nature of the response. I will tell you what I have settled on over the years. It works for me. I am happy with the response and the opportunity it gives us to catch a problem before it costs us a customer.

We call each one.

Or rather, I have someone do all our calling. This happens in the evenings when people are home. When people hear it is us on the line they are generally interested and not bothered by "another call". After all, they just spent some money with us and are pleased to get the feeling of being served. I get REAL response and feed back with this method. We catch the problem, if there is one, before it goes too long. Our calling person has the authority to schedule appointments on the spot and this adds to the feeling of being served. People talking to people, hard to find these days. I have been stopped in the store by people and, as I was listening to them, trying to figure out where I had seen them, come to realize they were talking about the conversation they had with our calling person and how pleased they were with what our person had said to them and that we had called. You can't get that from a card. Our calling person - how did I get started calling her that? It sounds too clinical. Her name is Marilyn, and she has wonderful phone techniques and knows our business well. Marilyn stops by the office and picks up invoices a couple of times a week and brings them back with notes on each one. Those needing immediate attention are tagged.

Each one of us can form their own best method, but the ideal is that you must have one, it must be done each time, and it must work. "Work" means it has to bring you the information you need to improve your service. Calling has been the only thing that has done that for us.

Ideal #9: Large or small, develop a Marketing Plan.

When a shop undertakes to come into the light and make the changes necessary to become profitable they will find that in addition to all the attitude changes that take place, they will also experience a clientele change. Not every customer, but many will migrate to other shops who are still like you once were. This phenomenon is best described by Phil Fournier in his post titled "The shop owners inferiority complex", posted here in archive 13. To get your message out and reach the people who now fit your business you will need to develop a marketing plan. Every shop will have its own unique needs in this area. I do not pretend to be a marketing expert. Two things I have learned about marketing is, it is necessary and you must quantify it. I remember the picture of a man kneeling and praying in front of a toilet while pouring money in. The toilet was labeled "advertising". Many of you have had this experience. At first blush one might say, I have always been busy and I have never needed to advertise. When we take that attitude it is usually with a sense of personal pride, like somehow we personally must take credit for this great situation. Someone once said that folks in that situation are either really lucky or they are not charging enough. You will find that if you want to charge low enough that you will have all the friends and work you want. Unfortunately that does not translate into prosperity and freedom, two things we went into business to get.

Any good management course will teach you of the necessity of quantifying. This is the procedure of measuring the results of your efforts. With each marketing effort you try, you must measure the results. If the results can't be measured, don't spend your money. For instance, say you bought some time on the radio or late night cable. These, by nature are hard to measure. The other extreme would be a coupon that people must bring in. You know immediately how well you did. There are more subtle areas of marketing, like Yellow Pages, that are sometimes just assumed bring in business. How about that sign out front? It is assumed it brings in people. How do you know? Have you asked? You must ask every new customer how they came to be in your shop and keep records of your findings. The results will surprise you. You may find that Yellow Pages does very little for you and you can decrease the size or your add and have no negative effect. Money saved. The same can be said for signage, for newspaper and other local advertising. Quantification takes effort and we all want things to be easier, not harder. Make it simple It can be as easy as a paper by the phone that you can mark in different categories about who is calling and why they are calling, how many appointments result from the phone calls, new or old customer, etc..

How much should you spend? The average of reporting shops is between 2.5 and 3% of sales. Quantify every cent and adjust as necessary.

Summary

We go into business to gain freedom, control of destiny, and return on investment. All this, we feel, will bring us that sense of satisfaction we so earnestly seek.

How are you doing?

If you had put all your money in the bank and worked for someone else would you be better off financially?

It is generally felt that business should provide a better average return than the bank or stock market, otherwise no one would take the risk of opening a business. That's why people invest in the stock market, to make money on businesses without going into business. How is your business doing?

Let's review. A shop with an average 80% productivity, making a minimum of 40% annual gp on all parts sales incident to production, similar on sublet sales, making 60% gp on labor sales, the owner taking home about 16% of sales ($40,000 on $250,000 annual sales), with overhead kept at a maximum of 20% of annual sales (including office and management help), will have a net (return on investment) of 14%.

The average McDonalds franchise, I am told, has a return on investment of 18%. No wonder the franchise is so popular. Banks are giving what, about 5%? The stock market maybe 10%?

If you are not accurate in your entries, or you think you cannot charge this much, then where do you think the money will come from? Do you have a money tree out back (bank loans, wife's credit cards, selling personal items, etc.) ? If you cannot find the courage to make changes then you must have a gene that enjoys despair, poverty, debt, discouragement and anger. I'm not trying to offend anyone, I'm just being frank. Numbers don't lie.

Each one of the proposed percentages will give you a "block" of money annually from which to pay expenses and get a return. You cannot cheat the numbers. Money is like a pile of rocks. If you take a rock from one pile and place it on another, no amount of fantasizing, wishful thinking, or ignorance will return the piles to their original size.

Barring famine, pestilence, insurrection, the demise of OPEC, huge economic down turns, fire, theft, or death, the above numbers will provide for a good business with decent return.

One last item. Perhaps it should be Ideal #10. Watch the small stuff.

At 14% net, a .32 cent stamp will cost you $2.24 in production dollars. At 5% net, it will cost you $6.40. If you let out $100 a month in small items not billed for, then it will cost you $700 in production dollars, if your net was 14%, to pay for those items. If your net was only 5%, then that $100 would cost you $2000 in production dollars (100 / 5 = 20, $100*20 = $2000). One more trans job to do for free.

If your operating in the hole, then the effect of the cost becomes, shall we say, Biblical?!

Work toward these Ideals as fast as circumstances will allow. Believe in yourself. You have the POWER.

I wish you well.

I would like to thank iATN for this forum and the opportunity to post this series, and to all of you for your interest and comments. Doing this has benefited me. I have had to take a closer look, again, at my own business and improve areas where I had become casual.

Lee Rosenhan Owner/Manager Lee Rosenhan Automotive, L.C. Lehi, Utah, USA

John from Oregon

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