On Your Mark ... Get Set ... Go!: Benchmarking - BodyShop Business
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On Your Mark … Get Set … Go!: Benchmarking

Are your employees living up to their potential? Is your shop? One way to be sure is to use benchmarks. Benchmarking allows you to compare your business’ performance to other businesses so you can discover where opportunity exists.

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The No. 1 question I’m asked in nearly every shop I visit is, "How are you doing?" The No. 2 question is, "Where did your comparisons come from?"

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They’re asking me about my benchmarks. What is benchmarking? It’s simply a comparison of how well your shop performs compared to other shops.

Every year I’m fortunate to visit as many as 100 collision shops across North America. This encompassing exposure gives me a much deeper insight as to what a collision shop owner can achieve if he really puts his mind to it. And since most shop owners can’t visit 100 shops every year to see how things are done, benchmarking allows you to compare your performance to see where opportunity exists in your organization.

Benchmarking Basics
Benchmarking can get complicated. First, there are more than 30,000 shops in the United States, and I know you don’t want to be compared to all of them. So we have to decide and agree on which shops you should be compared to.

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There are several ways to do this. We could compare your shop to others in your market, but that’s not really a good idea. Trying to judge yourself solely against the other shops in your market would be like judging the movie career of Tom Hanks based soley on "Bosom Buddies."

If you’re going to benchmark against other shops, it’s best to look for like-size shops in other regions. By doing this, you’ll greatly increase your chances of learning a new way to do business. You also want to make sure you’re benchmarking against shops that have the same labor-production capacity as your shop and have market conditions similar to what exist in your market. For example, a shop with 15 stalls in St. Johns, New Brunswick, will have different market conditions (snow, heavy rust, etc.) than a 15-stall shop in San Antonio, Texas. While both shops have the same capacity, their peak periods will occur at different times of the year. The peak period for San Antonio might occur in the summer, while St. Johns might peak in the winter.

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Also be wary of "industry standards for performance." First, I know from experience that many of these numbers are a small sampling, not a true representation of the entire industry. Second, it’s usually difficult, if not impossible, to determine the identity of the shops in the survey.

Know Your Mark
Rule No. 1 in benchmarking: Know who you’re benchmarking against. Our company has developed a collision benchmarking system that utilizes three different sets of data. This helps to verify that our benchmarking goals are in tune with the industry as a whole and are achievable by the "average" shop. We accomplish this by running three separate performance measurement databases.

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Our Web site has a Financial Performance Analysis, where shop owners can plug in their performance and get a print-out showing how they compare to our benchmarks. It also converts their performance to dollars and shows them, if they hit a particular benchmark, how many additional dollars this would bring to their business.

We also have a performance analysis for dealership collision shops and another for independent collision shops. These analyses annually compare 250 to 300 independent shops and a similar number of dealership shops. This is a sufficiently large enough sample to represent what’s going on for the industry.

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We then compare the performance of the top 35 percent of this group to the industry average groups, and this tells us what performance is achievable for the average shop and for the above-average shop. By the way, we set our benchmarking goals at the above-average level. Why? Because we believe that if you set your goals high, even failing to achieve the highest level will put you above average.

What to Benchmark
If you’re going to begin benchmarking your shop’s performance, it’s important to decide which shops you want to benchmark against and what level of performance you want to shoot for.

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I suggest that if your shop isn’t at average levels, then average should be your first goal. Once this is achieved, then you should raise the bar.

Next, you need to decide which performance areas you’ll benchmark. Don’t make the mistake of focusing on only one or two key items, such as sales and net profit. Both of theses numbers can be skewed rather easily. The best way to improve performance of any shop is to benchmark all of the key business systems that contribute to performance. The following is a list of items we benchmark in every shop we work with:

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• Labor sales
• Parts Sales
• Sublet Sales
• Material Sales
• Direct Cost of Labor Sales
• Parts Cost of Sales
• Material Cost of Sales
• Sublet Cost of Sales
• Total Sales
• Total Gross Profit on Sales
• Dollar Value of Estimates Sold
• Dollar Value of Estimates Not Sold
• Dollar Value of Estimates Written
• Estimate Closing Ratio
• Support Salaries
• Semi-Fixed (Variable) Expenses
• Fixed Expenses
• Net Profit as a Percent of Gross
• Individual Technician Performance
• Total Shop Hours Produced
• Facility Potential
• Facility Utilization

If your focus is limited to one or two of these items, you’ll never achieve the full potential of all your assets. If you can achieve the same performance level in every category that the top 35 percent of U.S. shops are doing, I promise that you’ll achieve success beyond your wildest dreams.

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Benchmarking Your Operating Costs
By now you’re probably wondering what the benchmark goals are and how you can measure them in your shop. I’ll share them with you, but remember that these figures describe the best of the best, and while you may be exceeding this level of performance in one or two areas, the key to true success is to achieve this level of performance in every category.

What follows are our benchmarking goals for operating costs:

• Labor Sales should make up at least 40 percent of your total shop’s sales. For example, on a $1,000 repair, $400 should be labor sales.

• Direct labor cost is the hourly amount you pay your technicians to produce labor, plus any bonuses. We don’t count fringe benefits in our calculation in order to compare "pure" numbers. Fringe benefits vary too greatly around the country to be of any value in this calculation. The direct hourly cost provides a good number for comparison. Our benchmark is for direct labor cost not to exceed 35 percent of labor sales. In this case, it shouldn’t cost more than $35 to produce $100 in billable labor.

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• Parts sales should make up approximately 47 percent of total shop sales, so a $1,000 repair order should include approximately $470 in parts.

• Parts cost of sales shouldn’t exceed 62 percent of parts sales. This would produce a 38 percent gross profit on parts sold.

• Materials sales should be approximately 8 percent of total shop sales. This would be $80 in materials sales for every $1,000 of total sales.

• Materials cost shouldn’t exceed 65 percent of materials sales, producing a 35 percent gross profit on materials sales.

• Sublet sales shouldn’t exceed 5 percent of total sales.

• Sublet cost of sales shouldn’t exceed 80 percent of sublet sales, producing a 20 percent gross profit.

If you achieve all of these sales and cost of sales benchmarks, your shop will produce 48 percent gross profit on sales.

For example:

 

Sales

Gross

Labor

$400

$260

Parts

$470

$179

Materials

$ 80

$ 28

Sublet

$ 50

$ 10

Total

$1,000

$ 477

$1,000 ÷ 477 = 48 percent gross profit on total sales

The key to maximizing your facility’s potential is to maximize every sales opportunity. Comparing the total number of estimates sold to the total number of estimates written (this gives you your closing ratio) isn’t enough. To truly benchmark your sales performance, compare the dollar value of estimates written to estimates sold and to estimates not sold. The spread (difference) between these three numbers shouldn’t exceed 10 percent of the dollar value of estimates written.

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For example:

Average dollar value of estimates written

= $1,500

10% over $1,500

= $1,650

10% under $1,500

= $1,350

In this example, the average dollar value of estimates sold and estimates not sold should be no greater than $1,650 or less than $1,350. Anything outside this range would indicate a weakness (opportunity) to improve sales of estimates. By the way, our benchmark for estimates sold is seven out of 10 estimates written, or a 70 percent closing ratio.

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It seems everyone constructs his or her financial statements differently, thus making if difficult to compare one shop to another. We recommend that our clients separate their shops operating expenses into three categories:

1. Support salaries. (This also includes the technicians’ benefits.) This includes the owners, managers, estimators, clerical and any other non-labor-producing salaries.

2. Semi-fixed or variable expenses. This includes all of the expenses that vary by month based upon usage. These are items such as electricity, heat, telephone, advertising, policy adjustments, etc.

3. Fixed expenses are those that occur every month at a fixed amount, such as rent, depreciation, garage liability insurance, etc.

To benchmark expenses, we compare them to the gross profit income as a percentage of the gross income. Our benchmarks are personnel expenses at 40 percent, semi-fixed expenses at 25 percent, fixed expenses at 15 percent and net profit at 20 percent.

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From our previous example of $477 gross income, it works out like this:

Gross

$ 477

40% Personnel

= 191

25% Semi-Fixed

= 119

15% Fixed

= 72

20% Net

= 95

Total

$ 477

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Determining Your Shop’s Potential
Once you have your operating-cost systems in line with benchmarks, then you want to make sure your facility is producing at its fullest potential. Since facilities themselves don’t produce labor (only technicians produce labor), we need to benchmark facility potential by first benchmarking technician potential. Our benchmark for individual technician production is 1.5 billed hours for every hour available to work for metal technicians and 2.0 billed hours for every hour available to work for painters. This works out to a proficiency of 150 percent for metal work, 200 percent for paint work and an average of 170 percent for the whole shop. (I see shops all over the country with technicians producing more than this, and it’s been my experience that — for the most part — when technicians are producing better than the benchmarks, they’re doing it with a pencil instead of with their hands. I think most of you know what I’m saying here.)

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Once you establish benchmarks for the technicians, then you can set benchmarks for a facility. To calculate this you need to know how many stalls one technician needs. We find that our top group has a ratio of two stalls for each (one) technician. Using this ratio, we calculate facility potential using the following formula:

 

# of stalls

12

÷

# of stalls/tech

2

=

# of techs (who could be employed)

6

x

# hours worked/day

8

=

# of hours available/day

48

x

Potential hours billed/day

170%

=

Potential hours to sell

81.6/day

x

# of working days/month

21 average

 

Potential # of hours available

1,714 monthly

x

Shop’s labor rate

35/ hr.

=

Shop’s monthly labor potential

$59,990

Once you calculate your shop’s potential, calculating the shop (facility) utilization is simple division:

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Actual labor sales $36,000 per month

÷ Potential labor sales $59,900 per month

= Facility Utilization 60%

The benchmarks for top performing shops is 100 percent facility utilization.

Hitting Your Mark
Once you begin to understand benchmarking, it becomes easier to understand how focusing on sales, with no regard as to which category is generating sales, might increase sales but decrease gross — thus a net true gain of zero is possible. Along similar lines, focusing on net or reducing expenses without any regard to maximizing facility potential might reduce your operating cost at the expense of additional potential sales.

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To effectively benchmark, it’s important to look at all of the different systems that make up a collision repair business: marketing, sales, production, expense control and personnel utilization. Top performance will not — and cannot — be achieved until all of these systems work together to support each other and the business as a whole.

This article was written by Larry Edwards, C.M.C. Edwards is a certified management consultant and president of Edwards & Associates Consulting, Inc. in Harrisburg, N.C. Edwards & Associates specializes in body shop management consulting for both dealerships and independent body shops. You can reach Edwards & Associates at (800) 979-9904.

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