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Tag Archive: Gross Profit

Joe Basil

From the 20 Group: A Plan to Address Falling Gross and Net Profit

businessman with laptop

We’ve had a good run. From 2010 to 2015, new car sales steadily increased and total dealership gross profits trended up along with net profits and blue sky values. But, beginning in the middle of 2015, things started to change. Some franchise sales rates began to flatten out. Then, the overall market started to level. Manufacturers began clawing for market share by raising incentive spending, and it became harder to sustain our customary net profits.

The evidence is in: Net profits are falling

Concerns about net profit aren’t just anecdotal. Within the thousands of car dealerships and 30-plus vehicle lines that we track at NCM, all but three vehicle lines had increased net profits year-over-year from 2014 through June 2015. Mid-2016, however, only seven car lines out of the 30 we track had improved net earnings year-over-year from 2015 through June of 2016. The remainder had YOY net profit decreases.

Build your plan

It’s no news to anyone that it will be challenging to generate the same net profits in the coming years. The real question is, what you are doing about it? As a dealer or general manager, it’s your responsibility to recognize what’s changing in the marketplace, acknowledge it, and adapt.

Having been through oil embargoes, manufacturer strikes, 21% prime rates with 14 percent unemployment and several recessions, I can help. Carefully consider the following list of questions, then use the answers to develop your strategy:

  1. Are you making excuses? Or taking action?
  2. Have you accepted the reality that you will have to make some adjustments in your business plan going forward?
  3. Based on the volume of business and gross profit you know you will develop, have you built a financial model that generates your desired return on investment?
  4. Have you set a date to initiate changes?
  5. Have you shared the information with your management team and challenged them for suggestions and solutions?
  6. Have you reviewed your organization chart to determine if you have the right number of people?
  7. Do you have the best people in the right position?
  8. When have you last ranked your management team on leadership abilities and results?
  9. When have you last sat with your CFO/controller and reviewed expenses line by line?
  10. When have you last sat with each department manager and discussed expenses line by line?
  11. Have you identified areas in which you are under performing and determined the cause?

Success is still possible

You can still make a lot of money and do very well in a flat market when you identify changes, acknowledge them, and take action to adapt.

During my years spent working with dealers and business owners, I have consistently found that sharing and reviewing financial data with management teams, and then showing them how to improve a particular financial performance metric, is one of the most effective ways to identify opportunities and increase market share and profits.

If you are a member of an NCM 20 Group, it’s even easier to do this. I recommend a page-by-page and line-by-line composite review with your department managers at your dealership. It will be a productive meeting and, once they understand how to change a number, you’ll be amazed by the suggestions and ideas they have for improvement.

Need more help? See how Joe Basil and his NCM colleagues can help your dealership through 20 Groups and in-dealership consulting.

Permanent link to this article: http://blog.ncm20.com/2016/09/from-the-20-group-a-plan-to-address-falling-gross-and-net-profit/

Terry Wichmann

My Favorite Sales Wordtracks to Defend UV Gross Profit

Thinking man

Used Vehicle sales continue to be a critical part of any dealership’s strategy.

Quarter after quarter, used vehicle sales continue to perform: in July 2016 alone, it’s estimated that more than 3.6 million units sold. But no matter how aggressively you promote used vehicles, your dealership won’t make the most profit unless your sales team is consistently and firmly defending the gross profit on each and every vehicle they sell. Saying this is easy, but it’s often difficult to effectively train sales staff to protect each vehicle’s profit, leading to diminishing returns on sales.

To help train your sales team, here’s my simple—but effective—wordtracks to protect the gross margin on UV sales. I’ve used them for years. And this is a tool I frequently recommend to my consulting clients.

Defend your used vehicle gross profit with these wordtracks

(In this example, the selling price of the car on the dealership website and “on the windshield” is $14,750.)

1. Use the first 30 seconds to introduce yourself and the dealership.

Here are my recommended wordtracks:

- “ Our dealership/dealer group has been in business for __ years because we treat our customers very well and we know that price is important when a customer purchases a car (or truck) …”

- “You may be aware that __ thousand customers purchased used cars and truck from our dealership/dealer group last year.”

2. Get the prospect back to the dealership after the demo.

After a demo ride with a prospect, the salesperson should instruct her to park the used vehicle near the entrance Service Department. As she gets out of the car, the salesperson should say “… let’s go back to my desk and I will show you what we found and fixed on this car/truck.”

3. Do a trial close.

If possible, walk the prospects into the showroom through the Service Department and comment, “This is where you will bring your car for oil changes and other maintenance ….” See how the customer reacts.

4. Demonstrate the vehicle’s value.

After the prospects are seated at the salesperson’s desk/table, you should say, “I will get the value folder for this car and show you what we found and fixed on this car.” The salesperson should review each item in the folder with the prospect and watch for their head to nod in agreement a “trial close.”

After the review, sales staff should summarize the folder: “…and that’s why we know the selling price…$14,750…on this ___ is a fair price.”

The prospect’s response will tell you the next moves. If she responds, “I’ll give you $13,500 for it right now,” the salesperson now knows that the prospect likes the car, but she is trying to get it for less. The salesperson’s job is now to defend the gross. (“$13,500” is not yet an offer; it is an indication that the prospect is willing to buy the car).

5. Defend the gross against price objections.

Connect the reconditioning to the current price. Your salesperson should explain, “If you had come to our dealership and purchased this car ‘as is’ before we completed all the repairs on it, we may have sold it to you for less than $14,750.”

Review the value folder again, paying particular attention to the clean Carfax and intern internal repair orders which reflect all the repairs which were performed “at our (internal) cost.”

Reinforce that these documented items are the reason “we know that $14,750 is a fair price.”

6. Protect gross profit from counter offers.

If the prospect counters with “We’ll pay $14,000 right now,” the salesperson should try to overcome the price objection without taking an offer to the Sales Manager.

Use one of the following scripts to protect the vehicles gross profit:

  1. “What financial formula did you use to determine that this car is worth only $14,000?  We price our used cars and trucks very competitively on the internet; that’s why we sell so many of them: __ thousand alone in 2015. If we didn’t price them competitively, people like you wouldn’t find them on the internet.”
  2. “I imagine you spent several hours on the internet searching for a car like this one; you drove __ miles to our dealership to see it so you must feel it’s a fair price.  No one drives __ miles to see a car if they feel the price is too high. But, I understand you don’t want to ‘pay too much’ for this car.  But I think you know that $14,750 is a fair price. So, that you can go home and tell your friends that you ‘got us down’ on the price, you can purchase the car for $14,700 and still go back and tell your friends that you ‘got us down’ on the price.”

At this point, if the prospect continues to offer less than $14,700, the salesperson should take the offer to the Sales Manager who should attempt to close at $14,700.

How does your dealership defend the gross? Tell us below. Have more dealership concerns? Meet with Terry or another NCM Consultant to identify opportunities for improvement in your store.

 

Permanent link to this article: http://blog.ncm20.com/2016/08/my-favorite-sales-wordtracks-to-defend-uv-gross-profit/

Wayne George

Five Tips to Build Your Most Successful Forecast Ever

Take Notes

There are many dealerships every year that embark on forecasting exercises. There are many that do not because their past experience has not been that productive. Let’s explore some techniques and tips that can help you come up with numbers for 2015 that will make your goals much more achievable.

Tip #1: Start with the end in mind.

By working backwards when building a forecast, you will be forced to address some issues that normally are overlooked. If we start with the desired Net Profit for the store, we can work backwards from there. If 2014 will result in net profits of $1.5 million dollars, the first approach to forecasting 2015 will be to dissect how we got to $1.5 million. Here are some questions that will need to be answered very honestly and candidly:

What percent of the gross produced did we retain? Were we a 30% net to gross store or did the $1.5 million come to the bottom line after we spent 85% of the gross (15% net to gross)?

Is any sub-par retention of gross an expense control issue or is it a result of sales and service volumes and lagging gross production?  (Hint – we all know it is usually a little of both).

If you are already netting out at 35 – 40% net-to-gross, then how much more can be produced? Small increases in sales and service volumes will produce huge increases in net dollars.

Did your management team have any input in setting the 2014 goals? Were all of the goals reasonable or was there some “fantasy” in the numbers?

Tip #2: Determine the total store net profit that should be produced before all “other Income” is accounted for. This becomes the objective for all departments in total.

Once you have decided on a reasonable Departmental (Operational) Net Profit number, assign each department their share of profit they will be responsible for generating. Now it’s time for the hard work. Each department head should be tasked with an exercise that has them identify any expenses that can be eliminated or reduced from this year’s operations. This will create your operating budget for 2015.  Now that you have that expense budget, you can start forecasting for sales and gross numbers. Then, run a test and see if the sales and budget will reach the desired net.

This is now the critical stage. Be very suspect of any increases in sales volumes, sales grosses, service volumes and gross, etc. If those numbers were that easy to do, why would you not already  be hitting them? Be relentless in your questions. Make the team develop action plans with timelines that will support their numbers. If the 2015 market is similar to this year, we know we can’t get better by just continuing to do the things we are currently doing; some things will need to change.

Tip #3: Give the forecast enough time.

Start this process well before December 31st. Be prepared to meet with your team over a few weeks. Break it up in steps that can be digested and allow time for buy-in. Defensive postures will diminish with time. Be sure their action plans are reasonable and measurable.

Tip #4: Set some stretch goals.

The forecast should not be the destination, but just a stop along the way. Ask your team for some stretch goals after the forecast is done. Don’t mention this until the last meeting when the numbers are finalized (this will help prevent sandbagging). Then reward them for achieving both sets of numbers.

Tip #5:  Review and adjust accordingly.

Once every three months there needs to be a formal “Forecast Meeting” where all of the agreed to objectives are reviewed. Adjustments are OK if warranted by a sudden shift in the market. But, if it is due to poor execution of their plan, it will require a separate conversation.

Make the numbers crystal clear, create the plans to reach them, execute the plan, and then hold everyone accountable.

Good selling.

Permanent link to this article: http://blog.ncm20.com/2014/11/five-tips-to-build-your-most-successful-forecast-ever/

Scott Norman

Today’s Hot Topic: Expense Control

Hot topics for Twenty Groups change as much as the seasons change. Recently, the hot topic has been expense control. I decided to recap some ideas that have been discussed over the past few years at some of my meetings in hopes they might refresh your memory or provide you with a different approach to expense control.

As we all (should) know, at a profit to sales percentage of 3%, $1 saved is worth $33 in sales. For instance, if you spend $25 on a policy adjustment the dealership must sell $833 to cover that expense.  The table below shows this impact at several levels of expense:

coins

   Expense Dollars      To Cover Expense  
$5 $166
$50 $1,667
$100 $3,333
$250 $8,333
$500 $16,666

Payables Meetings

Pick one day a month for your meeting with all department heads. Have the payables clerk provide you with the payables folders or invoices for all the checks you will sign during the meeting. As you sign each check, discuss whether the expense is a necessary one and if so, would another vendor be able to provide the same service at a better price.

Vendor Book

Create a book of all approved vendors and establish the policy that any purchase of supplies or services covered in the book are purchased from only those vendors. You also want your payables personnel to review all invoices to be sure the approved vendors continue to use the pricing they quoted when the original bids were taken.

Charitable Request Form

Create a form that each solicitor for a donation must complete for their request to be considered. Only the serious solicitors will take the time and effort to complete the form and return it, thus discouraging “drop-bys.”

Expense control begins with being aware of what goes on in your dealership. For example:

  • Open your mail. Frequent questioning of payables will reveal some “sweetheart” purchases. Review all invoices.
  • Review petty cash receipts.
  • Get bids on everything. (See Approved Vendor Book above.)
  • Invest all excess earnings into new vehicle inventories through your cash management account.
  • Don’t give up on fixed expenses. Simple water, compressed air and heat leaks can
    be plugged. Ask your insurance carrier for a print out showing your reserves for past liabilities.  These liabilities may be obsolete and costing you premium dollars. Review all of the “named perils: for which you are covered to determine if there are any from which you may be virtually risk free.
  • Review your computer hardware maintenance coverage. Is it cost effective considering the cost of replacement equipment? PS never cancel the maintenance on your computer’s CPU.
  • Never give anything away. Charge something for everything. It may surprise you to know that a customer who is clamoring for a 100% adjustment will pay 25% and be entirely satisfied.  If you do have to give 100%, do it loudly. Let everyone know you gave something for nothing.

To involve your employees in expense control, consider taking the agreed upon forecasts and offering all employees a percentage of every profit dollar over that forecast as a bonus in equal portions to each employee. This should make everyone very profit and expense conscious.

Lastly, be consistent in your expense control awareness. Don’t make it a hot topic one month and not the next. One of the many tools available in NCM’s axcessa™ program is the ability to trend and drill down into expenses.

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Permanent link to this article: http://blog.ncm20.com/2013/11/todays-hot-topic-expense-control/

Greg Easterly

Why Used Vehicle Profits are Falling

asisAccording to NCM, net profit per used vehicle retailed fell from $199 in 2011 to $148 in 2012. I have heard dealers talk about routinely netting $1,500 and occasionally as high as $3,000 two decades ago. So why has the net profit per vehicle gone down so low? There are several reasons, and understanding them can provide us insight as to how dealers can change the way they do business to adapt and thrive under these conditions.

One factor driving lower profits is consumers with more options and more information. Consumers have easy access to vehicle pricing and can quickly compare between dealerships. A dealer who is hesitant to negotiate with a consumer may well find that consumer walking out the door and off to another lot.

Another factor is the economy, which still really hasn’t recovered since the 2008 recession. A down economy means tighter access to money and fiercer competition. Informed consumers are certainly willing to take advantage of this, frequently playing competitive dealers against one another to secure the lowest possible price.

The final factor is the higher cost of inventory. We are still emerging from a market where late-model used cars are in short supply, which has kept prices relatively high (though slowly declining.) And there are still all the costs associated with securing inventory at auctions: buy fees, travel costs, reconditioning, and time spent researching and buying these cars.

So with customers, competition and inventory sourcing all squeezing margins, what can dealers do?  Dealers clearly need customers – in fact, most dealers now depend on a higher volume of customers, since margins are slimmer. And there’s not much dealers can do about their competition, other than lowering prices to beat them (leading to even thinner margins.) All that remains is inventory, but the optimal approach to inventory sourcing varies between dealers, depending on the vehicles they sell and their customer base.

The challenge dealers are faced with is how to inexpensively and efficiently research and acquire the vehicles they need. Fortunately, there are several solutions that offer dealers visibility to inventory availability and pricing from all across the country. They can identify other shops that regularly have the units they need and establish trading partnerships. Dealers using these solutions get access and market insight from a much larger pool of vehicles than they can find anywhere else.

As long as a dealer is looking for cars and is comfortable with buying and selling them online, there is a better approach to inventory sourcing. Big franchise dealers can get all the Fords or Nissans or other makes they want. Small independent dealers can find moderately-priced cars located nearby.

To find the solution that’s right for you, there are some questions you need to ask yourself:

  • How quickly do you need or want to meet actual demand?
  • How large is your customer base?

Once you’ve answered these, you can easily narrow down a sourcing solution to compete effectively with your ever-increasing competition and grow your profits.

UV Training

Permanent link to this article: http://blog.ncm20.com/2013/10/why-used-vehicle-profits-are-falling/

Rick James

F&I Department 5-Step Process to Improve Gross Profit/Unit

percentAs a former dealer and now a faculty member for the NCM Institute, I know that every franchised new vehicle dealer is looking to impact the bottom line profitability of their dealership, and no department can impact the bottom line as quickly as the Finance & Insurance department.  This requires discipline; putting in place the necessary steps to improve F&I average gross profit per unit to capitalize on every opportunity.

Your F&I Manager, equipped with compliance and product knowledge, should make sure the following steps are in place to maximize his or her opportunity with each customer.

  1. Ensure a smooth Sales-to-F&I handoff.  This requires the sales department  to be properly trained to endorse the products and perform a proper turnover to the F&I department.  To accomplish this, conduct a short sales meeting—with full cooperation of the Sales Manager, of course.
  2. Before the customer enters the business office, a customer interview is conducted.  Introduce yourself, verify the customer’s information and ask questions that will serve as the basis for your formal presentation, gleaning additional information such as how long they typically keep their vehicles or how many miles per year they drive.
  3. Next comes the formal presentation in the business office; start with a well-prepared base statement.  A good base statement should review the Business Manager’s responsibilities, the dealership’s commitment to take care of its customers, and confirm they’ll get a thorough review of all their choices and options and that the paperwork will be fully explained to them.
  4. Use an F&I Menu to ensure the customer has the opportunity to see all available products with the same presentation and with the proper disclosures.  The F&I Manager should have the customer sign the menu and keep it as a permanent record for the deal jacket.
  5. Use a good operating report in the F&I department.  The report should provide data on finance penetration, warranty product penetration, reserve earned, and average gross profit per unit.  This type of reporting will hold the department accountable for gross profit and will alert management if any unwanted trends or issues are developing.

These five steps are sure to improve your F&I department gross profit and your dealership’s profitability.  Take the time to make sure your F&I and Sales Managers understand these steps must be implemented as part of your store’s sales process.  The  experts at the NCM Institute can provide the training necessary to help you implement this and other management best practices designed to maximize your dealership’s profitability. Give them a call at 866.756.2620 or visit them online at www.ncminstitute.com.

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Permanent link to this article: http://blog.ncm20.com/2013/09/fi-department-5-step-process-to-improve-gross-profitunit/

Robin Cunningham

Are Your Managers Guaranteeing Profitability at Your Dealership?

guaranteeHi again from the training room floor…this is Robin Cunningham from the NCM Institute.  That’s a pretty strong word, GUARANTEE, but our participants do it every day in our NCMi® classes.  After initial introductions and within the first half hour each Monday morning, we introduce them to the Guarantee of Action (GOA) process.  Accountability Management is one of the cornerstones of our curriculum and PLAN YOUR WORK, AND WORK YOUR PLAN is the first of The Six Primary Elements of Effective Accountability Management.

So we show them a sample completed template of a GOA that describes how a dealership intends to put daily work plans into place for the salespeople and how that is going to help them sell more cars.  A GOA has several components in order to help GUARANTEE the success of the idea.

We ask that the idea be described and then quantified.  We have all heard the saying that “ideas are a dime a dozen.”  And we certainly agree.  So the quantification part is where our students initially struggle and require some extra coaching.

In the Salespeople’s Work Plan idea, the quantification scenario was as follows:  they would produce no less than 21 incremental units per month, which, at no less than a $2,750 PVR “all in” gross, and an overall incremental expense of no more than 35%, will result in a monthly Net Profit Improvement (NPI) of $37,537 (21 x $2,750 x 65.0%).

Then we asked them to continue with the Three-Point Detailed Corrective Action Plan which starts with identifying the responsible parties involved in guaranteeing the plan.  In this case it was the GM, GSM, Sales Managers, BDC/CRM Manager, and Sales Consultants.

Then the plan is further detailed with planning elements:

Planning Element 1:  BDC/CRM Manager Accountability.  Generate work plans each morning (Monday-Friday), and issue them to the salespeople at the start of their shift.  Collect all work plans at the end of the shift.  Verify that a manager has signed off on each assigned task, update all the tasks in the CRM, and transfer all “out-of-market” and “bought elsewhere” prospects to the GM’s work plan.

Planning Element 2:  Sales Consultant Accountability. Complete all tasks on the work plan before the end of the daily shift, and turn completed work plan in to the sales manager.

Planning Element 3: Sales Manager Accountability.  Review each task on the work plans of each sales consultant on his/her shift, and sign off when completed; list and confirm all the appointments set on the Appointment Log and the Customer Welcome board.

Each participant creates approximately two GOAs per day per 2½ – to 4½-day class.  They keep a copy, NCM keeps a copy and most importantly, the sponsoring dealer or GM gets a copy sent to them to help ensure the most efficient transfer of all of critical ideas the participants learn, so they have the highest possible chance of being fully integrated into the dealership culture.

Each of these GOAs has the potential to add very significant increases to dealership profitability, and yet we make sure they are conservative and very well thought out.

Earlier in the year we were working with a large dealership group focusing on their used vehicle departments.  It came to light that they were wholesaling a very high percentage of older used cars that were very definitely “retailable” if they expanded their comfort zone on keeping some older, higher-mileage cars.  Going from wholesaling 43% of total used vehicles sold down to 25% (which is an NCMi Best Practice) at one of the stores resulted in retailing an additional eight units per month.  So the quantification was something like this:  We will retail eight additional used vehicles per month (rather than wholesaling them).  8 x $2,800 front/back per month = $22,400 per month/$268,800 per year.  Plus that extra 72 vehicles reconditioning at $825 per car @ 50% fixed gross added an additional $3,300 per month/$39,600 per year, not including additional Doc. Fee income.  So, they could generate $308,400 additional gross profit, just from keeping an additional eight wholesale vehicles per month (that were going to some other source) for them to retail.

So when our students leave our NCM Institute classes, they truly are in a position to realistically GUARANTEE their dealerships’ increased profitability.  Relatively small ideas done well can make dramatic improvements in your bottom line.

So the next time you are talking with your managers about improving profitability and they tell you it’s going to get better…ask them if they can GUARANTEE it!

Service_Man_Courses

Permanent link to this article: http://blog.ncm20.com/2013/07/are-your-managers-guaranteeing-profitability-at-your-dealership/

Garry House

2013 New Year’s Resolutions for the Service Manager

Happy New Years from NCM AssociatesSince it is that time of year, here are some ideas for commitments you may wish to make for 2013. As you’ve heard me say many times, “If you measure it and then scoreboard it, performance will improve!” Many of you are probably measuring and scoreboarding some of the following key performance indicators, but I doubt if any of you are measuring all 11 (a “lucky” number) of them:

  1. Actual flat rate hour Productivity per Technician against objective on a daily, weekly, monthly, and YTD basis.
  2. Actual Flat Rate Hour Sales per Advisor against objective on a daily, weekly, monthly, and YTD basis.
  3. Actual Customer-Paid Effective Labor Rate per Advisor against objective on a daily, weekly, monthly, and YTD basis.
  4. Number of Menu Sales Opportunities per Advisor on a weekly, monthly and YTD basis.
  5. Actual percentage of Menu Closes per Advisor against objective on a weekly, monthly and YTD basis.
  6. Actual Number of Multi-Point Inspections (MPIs) Performed per Technician against objective on a weekly, monthly and YTD basis.
  7. Average Number of MPI Hours Recommended per Technician per MPI against objective on a weekly, monthly and YTD basis.
  8. Actual percentage of Recommended MPI Hours Closed per Advisor against objective on a weekly, monthly and YTD basis.
  9. Actual percentage of One-Line Customer R.O.s per Advisor against objective on a weekly, monthly and YTD basis.
  10. Percentage of First Service Visits (for both New and Used Vehicle Customers) That Show, against objective on a monthly and YTD basis.
  11. Percentage of Next Appointments Set Per Advisor against objective on a weekly, monthly and YTD basis.

What do you think would happen to your service department gross profit (and resulting net profit) if you could achieve incremental improvement in each of these key performance areas throughout the course of 2013?

If you’re wondering how you’ll find the time to perform this administrative task, here’s an idea for you. Each one of these key metrics involves the sale of additional hours, correct? And the sale of additional hours always involves the sale of additional parts, correct? So why not ask the parts manager to lend a hand in accomplishing the task of gathering and posting this important information?

Guidance like this is what we provide on a routine basis in our many NCM Institute service management training programs. Consider attending How to Increase Customer-Paid Gross Profit in YOUR Service Department coming to Orlando in January, or use our recorded webinars on various service management topics and do your own in-house training!

1 1/2 day training for uv and service managers

Permanent link to this article: http://blog.ncm20.com/2013/01/2013-new-years-resolutions-for-the-service-manager/

Robin Cunningham

Is Raising Your ELR the Right Solution for a Lackluster GPM?

phoneThis is a story about a phone call I received several months ago from a service director who had recently attended our NCM® Institute class, Principles of Service Management I. Although not her real name, I’m going to call her “Debbie” throughout the remainder of my story.

“How can I help you today, Debbie?” I asked. “Well, my dealer principal and I have identified a major area of opportunity in my department. Our GPM on customer-paid labor sales is well below the NCM Benchmark® average, and we’re also significantly below our 20 Group average. We need to raise our labor rates, and I’m looking for some guidance.”

I then took a look at her group’s composite and reviewed the “Service Sales and Gross” and “Service Department Expenses and Profit” pages, and I said to Debbie, “I see what you’re talking about. Your GPM on customer-paid labor is at 62.66%, and that’s without question exceptionally low, but let me point out a couple of things.”

“First, your average monthly customer-paid gross profit is one of the highest in your 20 Group. Second, your departmental net profit retention is the third highest in your group. Finally, your departmental operating profit is the highest in your group. Are you sure you want to risk that level of performance, just to improve a metric like GPM? Remember what I told you in class…you can’t eat metrics such as GPM…you can only eat Net Profit! I need to have you slow down a little, Debbie.”

“Also remember that I said GPM is a function of three independent things. First is your Effective Labor Rates (or ELR), that’s what we normally consider it to be the low hanging fruit…but sometimes it isn’t! That’s why we need to consider the other two variables. As you’ll recall, the second variable is our Cost of Labor Sales (or COS). That’s determined by our mix of technicians, their pay rates, and the way we dispatch our work. And the third variable is our Discounting Policies and Practices. Have you taken the last two variables into consideration?” I asked.

“I’m way ahead of you, Robin,” she responded. “I have. Like a lot of dealerships, our technician mix doesn’t very closely match our business mix. We’re way too heavy with master and journeymen technicians, and we are trying to do a better job of dispatching the right jobs to the right technicians, but as you’ve said, that’s not easy with our current technician mix.

“Debbie, I can already hear your next question forming…Have you considered adopting a Variable Flat Rate Pay Plan?”   

She answered, ”yes, we have. But we’re not ready to take that step yet. When you look at the Technician Productivity section of the composite, you’ll see that our technicians are averaging slightly more than 220 flat rate hours per month. That exceeds your NCMi® guideline of 200 flat rate hours per month. We’re afraid that if we implement a variable flat rate pay plan today, our technician productivity will suffer and we may lose some techs as a result. So to clarify my answer…Do we understand the Variable Pay Plan concept…? Yes! Do we like the idea…? Yes! Are we prepared to adopt it today…? No!

I then asked Debbie if she had been tracking her customer-labor discounts, and she quickly replied, “Of course! As soon as I got back from the Service Management class in Kansas City, I met with my controller and we began a process to sub-account for and track discounts. And, WOW, that was an eye-opener! We learned a lot and implemented a lot of quick-fixes. We now believe we have our labor discounts under control and expect to be able to maintain current discounting levels. And my advisors’ average productivity is fine at close to 800 flat rate hours per month, so I don’t want to hamper that productivity by messing around with our budgeted and managed discounting policy.”

“OK, Debbie,” I responded. “You obviously got some important take-aways from the NCMi Service Management training you attended. So let’s tackle the challenge of how and how much to raise your customer-paid labor rates….”

Robin CunninghamRobin Cunningham is an instructor for the NCM Institute’s classroom and web-based training programs, specializing in General Sales Management, Service Management, Used Vehicle Management, and General Management curriculum. A former dealership owner, Robin has served on several local, state and national dealership associations and councils during his career.

 

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Permanent link to this article: http://blog.ncm20.com/2012/12/is-raising-your-elr-the-right-solution-for-a-lackluster-gpm/

Garry House

Corrected: Service Incremental Improvement Metrics

On May 8th of this year I published an Up to Speed article titled “Did You Ever Look at Your Service Gross Potential THIS Way  In that article I stated that NCM Institute (NCMi®) research showed that, on average, with the proper departmental structure and processes, every incremental customer-paid labor dollar produced should result in approximately $1.25 in fixed gross profit, which should then result in approximately $0.875 in Retained Net Profit.

Unfortunately, my statements were inaccurate, and based on the positive example recently set by Hyundai and Kia, November is a good month for admissions of guilt.

Fortunately for me, however, and unfortunately not for Hyundai and Kia, the inaccuracies I supplied to you in May significantly understated the benefits you should derive (with the proper departmental structure and processes) from producing each incremental customer-paid labor dollar. When I made those bold statements back in May, I didn’t provide any supporting information for you to review. Not so, in this article!

The following chart displays a recent pro forma developed with an NCMi attendee. The “Current” columns of the chart display the current average year-to-date (YTD) monthly performance of the attendee’s service department. The “Projected” columns display the service department’s potential performance, if, in fact, the attendee is able to effectively implement and execute the NCMi recommended processes to which he is now committed:

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Note that in this example, the ratio of Incremental Gross Profit Improvement (IGPI) to Incremental Labor Sales Improvement (ILSI) is 1.531. This means that for every incremental customer-paid labor dollar we sell, the resulting fixed gross profit is $1.53. Also note the ratio of Net Profit Improvement (NPI), at a 70% retention level, to Incremental Labor Sales Improvement (ILSI) is 1.072.  This means that for every incremental customer-paid labor dollar we sell, the resulting Net Profit Improvement is $1.07. These incremental improvement metrics are obviously very significant…and they are 22% higher than those that I presented to you in May.

If you believe you have opportunities for improvement in your customer-paid business, maybe you should consider jump-starting your service department in 2013 by attending one of our upcoming NCM Institute training programs for service managers in December and January:

How to Increase Customer-Paid Gross Profit in YOUR Service Department – San Diego, Dec. 8-9 and again in Orlando, Jan. 10-11

Managing Your Customer-Paid Service Pricing Strategy – Webinar at 1:00 p.m. EST on Thursday, Dec. 13

Principles of Service Management I – Kansas City, Dec. 17-19

Principles of Service Management II – Kansas City, Dec. 19-21

If you prefer a private, in-dealership training or consulting program, we can help with that, as well. Call Brandiss, Kara, or Cassie at 866.756.2620 for details on any of these programs.

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Permanent link to this article: http://blog.ncm20.com/2012/11/corrected-service-incremental-improvement-metrics/

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