News: AAA Says Record Number of Americans Will Hit the Road Over July 4 Holiday
Our industry has focused on gross profit issues for far too long. The key to success lies in the way we work, not in what someone else is doing to us. It’s time we shift our focus to ‘fixed’ costs — repairing more cars with the same ‘fixed’ cost or repairing the same amount of cars with a lower ‘fixed’ cost.
It’s NACE time again. For most of us who attend, that’s meeting upon reception upon going all in with a king high flush against an old lady who just made her full boat. Hopefully, I don’t run in to her again this year, and hopefully the rest of us don’t simply repeat all of last year’s discussions. In particular, the problems and solutions to our industry’s waning financial results.
When it comes to these financial discussions, it seems that almost all of them never get past gross profit.
We’ve always considered the cost of goods sold to be the variable costs of the business. And since they’re “variable,” we’ve attempted to move the variation in our favor. Because the other costs that fall below the gross profit line have always been categorized as “fixed costs,” we rarely look there for answers.
This is the problem. We’ve categorized things backwards.
Reality is that what we’ve considered to be our variable costs, the things we measure gross profit against — cost of labor, cost of parts, cost of materials, etc. — are costs that are fixed. They’re fixed by the people who sell us parts, by the wages that our competitors are willing to pay and by the paint and materials vendors. And the sale side of the equation is fixed by the customer. The labor rate, the materials rate and the price of the parts we purchase are all based on what the customer is willing to pay.
If you don’t believe me, just try to charge your customer more for the things you sell – or just charge more than your competition. It’s a tough fact to face and I’m not happy about it either, but we no longer control the price of collision repair. As in any other commodity business, the consumer does.
You can argue that you’re not a commodity (and some are special enough not to be), but the majority of us have very little differentiation. Don’t get me wrong, working at the gross profit level helps. It’s just that we now have very little control over it. Where we should be spending our time, what can differentiate us from the rest — and our area of greatest opportunity — is the “fixed cost” side.
Fixed, Yet Variable
Consider for a moment your “fixed” costs. They’re called fixed because they’re usually the same amount each month, and for the most part, you can’t get rid of them. Yet these “fixed” costs are, in reality, the most variable costs you have.
How so? Add up all of your fixed costs …
- Property/casualty/liability insurance
- Office expenses
- Office/management salaries/wages
- Equipment costs
- Building maintenance
- So on and so on …
Let’s say, for example, these all add up to $30,000 per month. Now look at your total revenue. We’ll say that you repair 50 cars per month (2.2 per day) and that equals $90,000 (50 cars @ $1,800 apiece). The “fixed” cost per vehicle repaired is $600, or 33% of the sale.
What happens when you begin to increase the rate at which you repair vehicles? Let’s say you move from 2.2 per day to 3 (67 vehicles per month). Not a big jump, a little more than half a car per day. The “fixed” cost per vehicle repaired is now $447 per car. (That’s $153 additional cash per vehicle into your business or $10,250 per month). So as a percentage of your sales, your “fixed” cost per car is now 25%.
Looking at it this way, you can see that what you used to call “variable” costs (the cost side of gross profit) is really the “fixed” costs; even if you fix more cars, this percentage of cost per unit stays the same. Adversely, the “fixed” costs are truly the most variable costs of the business. More cars fixed, less cost per car and much greater return on your time invested.
Here’s my whole point: Too many of our conversations center around gross profit issues – i.e. “How do we get more money to fix a car?” or “How do we pay less for items?” You could continue to get another point or two of margin, to a point, but across time, improvement here comes very slowly. I’ve heard it said too many times that, “At these prices, I can’t make any money” and “There’s just not enough left to pay the overhead.”
And the conversation stops there.
Focusing on “Fixed”
So why are we not talking more about these fixed costs, especially since working here clearly produces a hell of a lot more profit than anywhere else? Two reasons:
- Because, as in the scenario above, increasing the rate of vehicles we repair requires more vehicles and, in many markets across the country, they just aren’t there.
- If we did have more vehicles to repair, we’d most likely increase these “fixed” costs at the same rate (or greater) as we increase production.
So the natural, comfortable progression for most is to continue to talk about problems above the overhead line of a financial statement. But financial success is determined by all costs, both costs of goods sold and overhead. It’s the whole thing that counts, and we do have control over all of it.
So what’s the answer? It lies in figuring out how to either fix more cars with the same amount of “fixed” cost or fixing the same amount of cars with a lower “fixed” cost. How is this done? It’s a matter of becoming more efficient in how your entire business operates. Not in improving tech efficiency or equipment utilization in a vacuum, but in improving how all of the pieces work together.
For example, if a technician becomes more efficient and can produce more labor, does it do you any good if the rest of the business can’t also produce this extra work at the same rate? Does the technician hand you the profit dollars gained through the efficiency improvement, or does the customer give it to you when the vehicle is complete? Does the frame rack manufacturer hand you the profit dollars made by loading and unloading the rack faster, or does the customer give it to you when you deliver the car? Is this efficiency actually still around (in cash) once the customer pays the bill?
Your product must travel through each step of your business process before you get to squeeze out any profits. One good (efficient) step and one bad (inefficient) step = two inefficient steps. You gain nothing.
You must begin to get more out of your entire current system, and the only way to do that is to have all the pieces work together better. This is possible because you’re not using your current business model at its maximum potential – none of us are. Is every piece of equipment you own being used for its designed purpose all day long? Does every employee produce the work you hired him for all day long? How many spraybooths do you really need, or do they sit empty at times throughout the week? How about your frame racks and measuring? How about office personnel? Do you staff and equip for the peaks or the valleys? How can you get the maximum out of your resources and still keep the customer satisfied? How do you do this and keep your employees satisfied?
These are the questions we all need to be asking and answering.
Creating an Efficient Process
This is where production thinking such as “lean” comes into play. It’s focusing your time on creating a better overall process, not trying to maximize individual pieces of performance. Today, there are many proven methods and examples of success that we can all learn from. It’s frustrating to see how so few of us are working on these and other methods of improvement.
I guess there’s some good to be gleaned from this lack of focus, which would be the increase in the rate of shops going out of business. It’s sad to say, but the reality is that we’re all not going to survive the next few years. My sincere hope is that most of us do, but things clearly aren’t going to be easy. The scary part is not in the shop closings, but in who will be the collision repairers of the future if we don’t create the differentiator. It’s great to cheer for the underdog, but history shows us that the little guy rarely wins.
Keep all this in mind if you’re attending NACE, along with the definition of insanity: doing the same thing and expecting different results. It’s time to start looking for and talking about new solutions. Let’s get something done this year.
We can take control of our future, or we can let someone else dictate it. The key to success lies in the way we work, not in what someone else is doing to us. It’s all in our hands.
For those of you who’ve been reading these articles and asking questions, keep going. For those of you who haven’t yet started down the “lean” path, let me suggest that, in addition to my articles, you read, “The Machine That Changed the World” by Jim Womack & Dan Peters (a great starter).
As always, feel free to call or e-mail with questions. Good luck, and until next time …
Contributing editor John Sweigart is a principal partner in The Body Shop @ (www.thebodyshop-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 collision repair 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 closely 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].