Many industry experts teach shop leaders that the best way to ensure profitability is through the “job costing” method. Job costing is a process of observing each individual repair jobs’ profit centers (labor, parts, materials, etc.) to ensure it fits a pre-determined framework of expectations (for example, 60% labor gross profit or 25% parts gross profit). This practice is wise, but it doesn’t tell the whole story, nor does it always ensure the shop makes any real profit to the bottom line at the end of the month. Due to this way of thinking, some shop owners may turn away work if it doesn’t fit into this framework and possibly jeopardize an opportunity to optimize their profits.
Now before you readers grab your pitchforks to come after me, please understand that I am only asking you to challenge your beliefs for a moment and consider another way to look at this. Like I said, it is wise to know what gross profit dollars you are making on a per job basis, but you may also want to look at “through-put dollars”. Through-put is the rate at which the overall system generates money. Through-put means you focus on the entire system’s profitability (global) instead of focusing only on a certain job or department’s profitability (local). Changing your thinking to global is so important because far too many shops continually step over dollars to pick up a dime.
Gross Profit $ = Total sales minus direct costs (what we paid for the parts, materials, tech labor etc.)
A person may argue that it is the sum of each individual repair jobs’ profitability that leads to the global profitability, but that’s not entirely accurate as it relates to through-put. Unfortunately, higher gross margins can sometimes come with unintended consequences such as increased overhead costs and diminished workflow. A good example of this is a shop that chooses a high-margin replacement part from an unreliable vendor or a part that may have a questionable fit and finish. The part in this scenario may yield the shop a higher gross profit as a percentage, but let’s stop to think about the true costs involved if this part doesn’t show up on time or doesn’t fit properly. Another example (that bugs the heck out of me!) is a shop waiting an extra two or three days to save $50 on a used fender in order to please their insurance partner, instead of getting the new OEM fender that is in stock right down the street! You can’t take gross profit percentages on unfinished vehicles to the bank, but you can take through-put dollars, so keep those cars flowing!
A Better Way
A more global mindset brings into perspective that once your gross profit dollars earned are equal to your overhead expenses for the month being measured, any additional gross profit dollars will drop straight to the bottom line. For example, many shops don’t truly become profitable until after the 25th of the month when the gross profit finally matches or exceeds the total overhead cost (break-even). Assuming a shop has the capacity to produce it, even repair work you may have once considered less profitable with the job costing method becomes quite beneficial to the bottom line!
Global thinking came into focus for me when I first read Eli Goldratt’s book, The Goal, and began to understand the “Theory of Constraints”. It came further into focus when I began working with highly profitable shops in areas of the country (and world) where the labor rates were considerably lower than the rest of the country. It helped me realize that shops that focus on through-put really can make a lot of money, even when the labor rates are suppressed in their market. These businesses design efficient systems that keep cars moving through their system and focus on getting through-put dollars into the bank quickly to meet their break-even point knowing the rest is then gravy!
Almost every business that is world dominant right now focuses on constantly producing higher quality work at a lower cost. The only way this is possible in the collision repair world is to concentrate on not only consistently repairing vehicles correctly using OEM procedures but also paying careful attention to avoid and eliminate disruptive activities that can impede global workflow. Sometimes these negative activities are unknowingly created using a local job-cost mentality.
Clearly, given the choice, I would always choose to take in the most profitable work over lower margin repairs, but let’s get real. If you have additional capacity at your shop and are already meeting your break-even each month, perhaps thinking of global efficiency instead of local “job costing” could add significant dollars to your bottom line!