Absorption rate – the most powerful tool to take control of your business

In my last post I presented you how to calculate the Dealer and Workshop Absorption rate and why do I follow this figure. Do you remember I mentioned three reasons to follow it:

1. The benchmark is easy to read: 100%.
2. It shows if the Dealer can survive a major crisis and for how long;
3. It gives a good image about the business focus: getting more revenue or lowering costs?

In this post I’ll present in more details my last two reasons because I want you to understand why this KPI calls for action as well as it gives a very good image about the business.
Before I start to dig in, have you measured your Dealer & Workshop Absorption rate for the first five months of 2013? Are you over 100%? If yes, congratulations, you run a healthy and sustainable business! If no, what do you think and feel about your business? You might have a profitable business. Is it easy for you to keep it this way every month?
Now, with the figures in front of you, let’s dive in and see what you can find about your business, more than what you are aware of.
Basically, for the Dealer level, if the After sales gross profit, Workshop and Spare parts, covers all the Dealer costs, then your Absorption rate is over 100% and this means that even though you don’t sell vehicles you can survive and still make profit. How long you can do it? This depends on how much over the 100% level is your Absorption rate or, in other words, it depends on how strong have you built the After sales business.
At the Workshop level, we apply the same philosophy: if the Labour + oils and small consumables gross profit covers all After sales costs, the Absorption rate is over 100% and this means that Workshop operations are independent from spare parts sales. The gross profit on spare parts becomes net profit.
If the value of the KPI is lower than 100% I attributed this to two main causes: pricing and capacity utilisation. In this post I’ll take care about pricing. For capacity utilisation I’ll present you two more KPI’s in the next post.

How do you rate the labour? There is a clear paradox when it comes about the labour rate elasticity: on one hand every customer asks about the labour rate and is sensitive about it, on the other hand this is where you, as a Workshop, can make the difference. In the Workshop there is no other area where you compare oranges with bananas like comparing labour rates. Because everything is related to the end customer costs with maintenance & repairs. It doesn’t matter how much you charge per hour for exchanging a clutch disk, but it does matter how many stops, especially the unplanned ones and how big is the customer’s downtime.  What are you doing to increase the customer’s uptime and to help him to have only planned stops? Of course this is the ideal world, where customers come to the Workshop only with the Maintenance occasions. How close are you to this ideal? I met one Workshop that is over 90%.
The answer to the last question is included in the Workshop Absorption rate, because we added oils and small consumables in the calculus. Which is the only planned customer’s stop? The maintenance! That’s why every Workshop is, in this scenario, aware they should perform as much maintenance as possible and not be cheap with exchanging  o-rings, gaskets, screws etc.
So, if you are below 100% of Absorption rate, I ask you to look on:
-          Labour rate: do you stay with the market or you find a way to promote your quality?
-          Maintenance jobs percentage from the total performed jobs: our customer expects to come to the workshop only for maintaining their vehicles. What is your strategy to fulfil this expectation?
-          Is your spare parts pricing and sales strategy in line with the two above strategies?  

By the next time when I’ll talk about capacity utilisation, leave your comments on what actions do you intend or you already implemented to increase your Absorption rate.

 

Next in the series: 2 proven ways to make profit in your Workshop