You did better, but ... ; service department performance.

You did better, but . . .

NEED SOME good news? Consider this: During 1985, implement dealers initiated programs that substantially reduced their shop losses. Analysis of the data from the 1985 National Farm & Power Equipment Dealers Assn. Cost of Doing Business Study shows the

The improvement came about because of an increase in gross margin and a reduction in overhead expenses. Shop gross margin (sales less shop wages) increased from 42.7 to 45.2 per cent. This increase was due solely to lower wages.

Average 1985 shop sales were identical to 1984 sales. Wages were down by an average of more than $4,000. The number of shop mechanics did not change. Therefore, these savings were because of either a reduction in hours, a lower average hourly rate, or a combination of both.

The CODB study does not provide enough specific information to make this determination, but correlated data suggest that hours worked and wages both were down. Sales revenue remained constant despite the fewer hours because shop rates were increased.

The shop's share of indirect expenses for the average dealer was down over $9,000. The reductions were widespread. Decreases of more than 10 per cent were shown in the categories of interest expense, bad debts, depreciation and taxes--except real estate. No overhead expenses had any measurable increases.

The improvement in margin dollars and reduction in expenses are very positive signs in the dealers' continual effort to reduce shop losses. The impact of the $52,000 in shop losses is brought into clearer focus when dealers took at the net loss on operations. This averaged about $32,000. One could make a good case that this figure would be in the black if the shop could cut its losses in half.

While dealers have made strides to reduce shop losses, there are at least two points that need further attention. The billing efficiency (hours billed divided by hours worked) has not changed measurably over the last five years. It has continued to hover around the 65 per cent mark. Dealers should strive to increase this percentage, for this indicates only five of every eight hours are being billed.

Every percentage point increase means about $2,700 in additional revenue for the average dealer. There are no additional expenses to be deducted, so this money goes directly to the bottom line. A 10-point improvement would wipe out half of the shop losses. This could be accomplished by billing out one additional hour per day.

Dealers still need to look at shop rates. The average increase in customer shop rates over the past five years has been averaging about 4 per cent per year or about $1. Internal rates have gone up even less. Increases have been 2 per cent per year, which translates to an average increase of 35 cents per year. An additional dollar increase in the customer and internal shop rate would increase annual shop revenues by nearly $7,400 for the average dealer.

These two statistics indicate that a profitable shop is not a pipe dream. A realistic billing efficiency and an equitable shop rate are the ingredients. If dealers will pay attention to these two key indicators, then shop profits will be a reality.

Table: Gross Margin on Shop Sales