Watch how people behave at work and you’ll know how their performance is measured. We see this in all industries. Look at insurance companies and their field staff, who you continually have conversations with about parts usage and paint times. Why do these conversations happen? Because these numbers are how estimators and appraisers are measured. You might see techs muscle through jobs quickly, creating some quality issues, or you might see them complain over who gets what job. Why? Because they’re measured by hours produced (efficiency).
In a large organization, you might observe that these measurements are actually diametrically opposed, where one part of the organization does something that has a direct negative effect on another part. For example, someone on the claims side needs cycle time results and someone on the estimatics side needs reduced cost. The claims side wants parts fast and pushes for OEM, and estimatics wants less expensive parts and pushes for aftermarket. The net result is that nothing positive is achieved.
The same thing sometimes happens in the body shop. Estimators are measured on gross profit, creating behavior that maximizes gross profit but perhaps diminishes the measurement for a different area. For example, the cycle time measurement used by the insurer is extended to allow for more volume to the business, or the quality measurement from the customers’ perspectives is diminished since they were disappointed with the amount of repair versus replacement of parts on their vehicles.
The truth is that this diametrically opposed behavior is common in many organizations. You’ve heard it said before: “Be careful what you wish for” or, more appropriately, “Be careful what you measure, because that’s what you’ll get.”
Profit Isn’t Profane
It’s most appropriate in these difficult economic times to look at the critical measurement of our businesses. And that is, of course, _____. What? What is it?
I’ll stop here for a second because it never ceases to amaze me how often business owners, managers or leaders hesitate to deliver the answer to what this “critical measurement” is. The answer is obviously cycle time, or revenue, or alternative parts usage. Or wait a minute, it’s labor gross profit. OK, enough playing, there’s only one correct answer: net profit.
Why is it so hard for most to admit that the critical measurement is net profit? It might be that some people are embarrassed to say it. Or maybe they feel that it carries some negative connotation, like they should be ashamed of their desire to make a profit.
Second, why is net profit the only possible answer? Because it’s the lifeblood of the organization! Everything we do is geared toward creating it.
Let me add a caveat here, though: The goal is to make money in a way that’s honorable or sustainable. Without sustainability, you’re wasting the time of all parties that interact with your organization. You’re only delaying the inevitable for your employees if you’re lying to your customers and yourself when you say, “Don’t worry, we’ll be there if anything goes wrong.” Also, you need to provide good things for your employees, customers and the community, like safe and satisfying work environments, solutions to your customers’ problems and service for the local community that supports you.
Clearly, we need the cash generated through profits to be able to provide these things. In fact, we’re required to make this profit. Pursuing any other objective is irresponsible.
Break It Down
In creating measurements, the trouble starts for most businesses in sticking to measurements that achieve the “profit” result they’re after.
So, what are the drivers of profit? Since the beginning of the Industrial Age, the thinking has been focused on controlling cost: “If we can widen the gap between our cost and our sales, the result will be greater profits.” While this statement is true, it begs the question, “Which costs can we control?” or “Which costs do we have the most control over and which don’t we?” The answer lies in dividing the problem up into smaller, manageable bits and creating categories such as goods or services sold and the cost of those goods, fixed expenses, and variable expenses. As the contents of these categories become more varied and larger, they get broken down into additional subsets. For example, cost of goods would be broken down into specific types, such as cost of used parts, cost of aftermarket parts, cost of stock parts, etc.
Once these cost categories are broken down, the business can individually manage these different areas and, as it grows, assign management of these areas to individuals, ultimately creating different areas inside the organization. These areas may then begin to create subsets of activity and management inside themselves with their own sets of measurements. When this happens (as it does in most organizations), how the heck will you know which measurements to move, and how will you know what might happen to other areas of the business if you begin to make changes? The answer is you won’t know for sure.
The next move, then, is to bring in the best minds to analyze the potential moves and estimate their outcomes. This is why we, culturally, get so hung up on making changes. To a fault, we feel like we need complete and thorough information, all the facts, before we can do anything. This phenomena is called “paralysis though analysis.” So we’re correct in trying to widen the gap between cost and sale, but that only seems to work on a very small scale, where one or two individuals have intimate knowledge of the situation. So why do most businesses continue to use cost- or activity-based accounting practices? Because most aren’t aware of a better way.
A Better Way
What might be a better way?
Start at the end. We’re looking for net, that’s the number. But measuring just this doesn’t give us any clues as to how we can improve it.
As I said, the problematic side of traditional accounting methods is that the relationship between all the different things we do isn’t clearly understood. Does something good or bad happen to the net if we improve the gross? Don’t just say something good because you don’t always know. What if improving the gross lowers the quality or increases the cycle time, which then drives the need to hire more administrative people to deal with customer concerns around these new issues? Maybe your net went down as your gross went up.
So maybe we need to go back to square one. What do we control and what don’t we control? We think of variable costs as things such as the cost of parts or the cost of labor, and we think we can control these things by buying smarter or managing smarter. We think of fixed costs as rent, taxes or insurance, and that we have less control of them. But is that true? Are these fixed costs really more variable than we think? For example, don’t these costs actually go down (as a percentage) as we increase our revenue? Don’t these variable costs remain the same (as a percentage) as revenue increases or decreases? So maybe the fixed costs are the variable costs, and maybe the variable costs are really fixed. Again, in most businesses, this thinking drives our behaviors. We attempt to control activities to widen the gap between cost and sale and create net. But can you see the danger in thinking this way? Couldn’t this thinking potentially drive a whole lot of activity that adds a whole lot of additional costs to the business, throwing the whole concept of creating net out the window?
Time Keeps on Tickin’
So where do you start? How about asking this question: “What is the one thing we absolutely do not control?” There must be one thing that we can’t change, so if we can find that thing, we can then build the rest of the business around it and account for it appropriately. So, what is that thing? It’s the clock on the wall!
So far, no one has figured out how to change time. We can’t slow it down or speed it up. The end of the week always comes exactly 10,080 minutes from the end of the last one. Everything else I have some level of control over, whether I want to admit it or not. Time is the starting point, so think in these terms: It costs me the same amount of money to operate my business every minute or every hour.
There are some exceptions in our industry, like the cost of parts or if you’re flat rate or the cost of some of your labor, but to be able to effectively improve the relationship between sale and cost, it would be simpler to standardize your costs to a per-hour basis. By that, I mean it’s easier to make a decision about moving to widen the gap when fewer things are involved.
With that said, in an environment where your costs are the same every hour (we’ve built around the uncontrollable), isn’t there really only one thing that we now can control? And that’s more than time – it’s our speed inside of time. If our costs are the same per hour, then the variable is the amount of time it takes us to generate the revenue, otherwise known as throughput.
Throughput is the rate at which we generate cash, or a measure of our speed (X dollars per hour or minute or day). As speed increases, the gap between cost and sale widens. In throughput accounting, management focuses on finding ways to go faster with the same amount of resources or cost, with a greater chance of making the right decisions that will widen the gap. In other words, decisions around speed will have the greatest effect. What’s more obvious is that it’s no longer the cost of a component that’s most important but rather the effect that component has in its relationship with or speed among its sibling areas, departments or steps of the business. Now we know for sure that if we increase the speed of our process, with these fixed costs per hour, the profit gap widens. This is a much more easily managed and effective situation.
Quality Improves, Too
What about quality? We all know the old adage, “Good, cheap or fast… pick any two.” Which means if you want it good and cheap, it’s not going to be fast; if you want it good and fast, it’s not going to be cheap; and if you want it cheap and fast, it’s not going to be good. But this thinking is wrong. In fact, the opposite is true.
What contributes to the quality of a job? It’s not the end product in the lot ready for delivery, it’s the way people worked to get the product in the parking lot. So, the definition of quality is doing the job right on the first try.
If you do every step of the job right on the first attempt, then the end result is exactly right…but also done faster. It had to be if I made no mistakes, had no redos, found every tool because it was located where it was supposed to be, found every part because it was ordered correctly and found all the information I needed right where it needed to be. That all adds up to less time. So you can only do better quality in less time, and taking less time results in better quality.
If a job is done faster, your cost to perform the work gets reduced. Throughput accounting says that your cost per hour stays constant. Increasing the product speed increases your gap between sale and cost, or reduces your cost per unit. If your cost is less, you may pass along a portion of the reduced expense to the customer. Isn’t that a more sustainable business model where all parties have a more desirable outcome?
At the end of the day, the work is done faster, improving quality and cost simultaneously. The customer gets the product faster and more correctly with value. The employee spends less effort to perform the work. Margins increase, allowing for greater profits to be shared and a more sustainable business. Costs go down for all, margins go up for all and quality of life improves for all. And here’s the exciting thing: It’s easier to do all this than work within today’s current preferred business model. Sounds too good to be true, but it’s not.
Heading Toward Lean
Throughput accounting alone won’t make your shop lean overnight, but it clearly illustrates the equation necessary to create a lean business model. It’s just simple math that points to a different way.
What else would be required now, by default, to take advantage of this equation? You would first need to build a system of connected and interdependent steps that would go faster once you improved how they relate to one another. This system would have to be built with the customer in mind so that the work performed is work the customer would pay for. The work performed would have to be consistent and not random so that it could be improved (go faster) as needed. Does this sound like a lean organization? You bet. If you look at lean backwards, from the desired end result to things needed to achieve it, it begins to make more sense.
Now’s the time to figure out how your business measurements drive you own behavior. Do you job cost every single thing on an RO? What’s the cost of that to you and your people in dollars, time and stress? What do you do with the data collected? What bottom-line effect does it have in net dollars compared to the expense of getting the information? How much time and cash do you spend creating and examining detailed financials to determine how to improve your business? Do you compare those financials to other shops’ financials? Does operating differently from shops that produce results do anything for your business? How much time do you have available anyway? Is this the most effective way to spend your limited time? Is this the right way for you and your people to behave?
I’m clearly going to be in the vast minority here when I say that I believe that this is the right way to look at things. Just look at all the companies offering software that supports the accounting practices I’m telling you are completely wrong. Look at all the consultants who preach exactly what I’m saying you shouldn’t do. Just look at all the organizations that support shops through collection and distribution of shop information around exactly what I’m saying you need to ignore.
But at the same time, look at how many of us are in real trouble today. And look at other industries that practice the same way and how they’re doing today. This isn’t experimental, far-out stuff. This is the thinking that has created industry leaders like Toyota, John Deere, Intel, Danaher Corp, Caterpillar and Southwest. It doesn’t have to be proven as a business methodology that works in collision repair – it works anywhere!
Developing a throughput mind is essential to successfully executing the Toyota Production System and creating a mandatory starting point. But it must make sense in your mind first before it has a chance to grow because it’s only there where it can be applied. It’s the thinking that’s different. A
Contributing editor John Sweigart is a principal partner in The Body Shop @ (www.the bodyshop-at.com). Along with his business partner, Brad Sullivan, they own and operate collision repair shops inside new car dealerships, as well as consult to the industry. Sweigart has spent 21 years in the industry and has done everything from being an independent shop owner to a dealership shop manager to a store, regional and, ultimately, national director of operations for Sterling Collision Centers. Both Sweigart and Sullivan have worked with former manufacturing executives from Federal-Mogul, Morton Thiokol and Pratt & Whitney in understanding and implementing the principles of the Toyota Production System. You can e-mail Sweigart at [email protected]