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

 

 

The 3 key performance indicators that tell you how healthy is your automotive business

When I ask a Workshop manager if his business is profitable I received a broad range of answers, from rising the shoulders and spinning globular eyes in a try of saying why do you ”torture” me with this kind of questions to a minimum 20 PowerPoint slides presentation in a try of saying I am in full control of the business.

If I would ask you the same question, what is your answer? Is it easy for you to offer a simple and accurate answer? What if I add another question: How sustainable is your profit?

In this post I’ll introduce the 3 key performance indicators – KPI’s – I follow every time I want to measure Workshop profitability and its sustainability.

It will be a mini series of five posts, this one designed to get you into the topic, by introducing the main KPI and by answering to two questions: why I follow it and how it is calculated. The second post will explain in details how measuring the main KPI help you to keep the full control of the business. The next two posts will show you how you can strengthen a pro-active and continuously improved business by measuring the other two KPI’s in real time. And the last posts will give you the big picture: how do you relate these 3 KPI’s and understand how the business is working.

The main KPI, Absorption rate is a comprehensive one and it can be followed on a monthly basis on two levels: Dealer and Workshop. Even though we are talking only about After sales, I prefer to measure the Absorption rate on both levels.

Why do I follow it?

There are three reasons:

1. The benchmark is easy to read: 100%. If the value is under the benchmark the Dealer and/or the Workshop either are running on loss, either the profit is not sustainable in the long run;
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.

How do I calculate it?

 

Where:

-          Gross profit on After sales means the gross profit made on labour, oils, small consumables and spare parts sold on a monthly basis

-          Dealer cost means monthly operating expenses for the whole Dealer: Workshop, Warehouse, Sales, Administration & Support

-          After sales cost means monthly operating expenses for Workshop, Warehouse and its Administration & Support

 All the needed data come from the P&L account and it is very easy to read.

  There is one way to go: make profit in a sustainable way!

 

Next in the series: Absorption rate, the most powerful tool to take control of your business