with Vistian Advice, as we are a member of Machinery Advisors Consortium. This webinar is part of the AED program related to various performance enhancing programs. We do this program several times and are associated with AED with several training programs, level two training for parts and service, as well as branch managers program. So this program is called Designing Your Service Department for Service Department. What you will learn out of this is ways that the best action plans optimize their flows for machines in and out of their bays, special tools to get to their technicians and other ways they manage their work orders. At the end of this webinar, you should be able to evaluate your service department, eliminate how the various time wasters of technicians, and to build a bridge between your service department and your parts department, how that is very important to increase the total effectiveness of the dealership. In the end, everything starts with the numbers, and of course, the desire of your dealership is to be profitable, but in the case of service, are you profitable enough? So it is important that we understand the context of service department within the total dealership. In this slide, you will see the various departments of the dealership. We have not put in rental department, which is important, but just parts, service, and whole goods. We are going to focus on the service department column where you will see the top line sales, in this case, a $20 million dealer, so $2 million in the service department. You see the cost of sales and the gross margin in service, and in this case, a model of expenses, which we will talk about later, where in this case, the objective is for the service department to provide 25% of the net profit of the dealership. If you look at that, that is one-third of the total dealership gross margin, which is 25% of the total dealership profit. I mean, that is the target, the 25% target, and that is up to half of the total net profit of the total dealership. So this service department is important, run to the right metrics, and that is why the question, are you profitable enough? Let's start with the reviewing gross margin and expenses with a target of 65%, and the best dealers exceed that, so the target of 65%, and it is important to remember that the gross margin in the service department is a function of the cost of sales. Cost of sales is technician salaries, so all other expenses apart from technician salaries, which are a cost of sales, are in the expense column of 40%. So that is the target, expenses not to exceed 40% of departmental sales. So we are going to dig deeper into the how many hours and the effectiveness of your dealership in terms of billing out payroll hours, because that target of 65% gross margin, and when you are selling technician hours, is important to realize how that time of selling hours, how you are managing time as a service manager. So we are going to take this apart into a couple of different components. First of all, looking at the hours that are assigned for work, so a typical technician working 52 hours a week, 40 hours a week is 2,080 hours a year. This is without overtime. Applied hours or application is hours of work that are assigned. So if you are not billing out 85% of your payroll hours, do you have enough work? Are you giving 1,768 hours of work to your technicians? So that is one factor in the payroll hours, is the amount of hours that you are applying and giving work for. The second factor in terms of hours is hours billed versus hours assigned. So we call this efficiency. So of the hours that are assigned to a technician, how many are sold or billed out? If your best technicians will bill out more than 100% of the hours that are assigned to them, the target is somewhere between 95% and 100%. If you are not achieving that, are you writing off hours? In other words, the technicians are doing the work, but you are not billing those hours out to the customer. So those two components of payroll hours are important to understand, application and efficiency. Both of those multiply to 85% productivity, which some people call recovery. That is the old term in our industry. So when we are looking at, assuming that you are billing out 85% of a technician's time, either individually or total for the department, and you are not making a profit in your service department, then you need to be looking at your expenses. And then we go back to this chart of the departmental by department of the expenses of a dealership. So here is a $2 million worth of service labor sold in the service department. The expense target is not to exceed 40% of the total revenue, so that is the 800,000 number. That gives an indication of your profitability of your service department to look at the expenses to make sure that it is below that 40%. If you get the 65% gross margin and your expenses are less than 40%, then mathematically your net profit will be at that target of 25% or more of the service department. So that is the profitability component. Again, just a reminder that the technician's salary is not an expense. And the way that we look at technician's salary is also to look at another concept, is the wage multiple and how those interact. So we are going to take and understand the wage multiple, revenue recovery, and total service labor. So in this chart, the top line is the revenue. So if your labor rate is $70 an hour and a technician is billing out 1,768 hours, then that technician will be generating revenue of $124,000. The cost of sales is the second yellow box. So assume that in this case that you are paying your technician $20 an hour and for 2,080 hours a year, that is the cost of sales of $41,600. Do the math on the right-hand side. There is the gross margin in dollars and in percent. The wage multiple concept is on the left-hand side. This is the relationship between what you pay your techs and what you charge your customers. So the target is 3.5 or better. So that is in this case, the 20 versus the 70 is 3.5. Now if we take that and look at that wage multiple and that interaction between each of the multiple and the revenue recovery, let's take three different cases. The first one that we just showed, which is wage multiple of 3.5, you have productivity or recovery of 85% of the hours achieves the gross margin of 66%. A second scenario would be charging out greater than the 3.5 wage multiple and the revenue recovery is at 85%. So in this case, the gross margin is much higher than the target of 65%, in this case, 74%. And we see the best performing dealers do get to that area of 70% plus in terms of gross margin in service with this type of interaction between the wage multiple and revenue recovery. More often, we also see the second case where the wage multiple is high but the revenue recovery is low. This dealership is achieving the target of 65% gross margin, in this case, 68%, but they're leaving money on the table. Are they making enough? The target of 85% is not being achieved, and so this dealership and scenario should be looking at how to improve technician efficiency. And that's the theme of this webinar, is how to improve the performance of your service department and to get peak performance. This chart number three, scenario number three, this dealership is not achieving peak performance. So let's be thinking about ways to achieve peak performance in the dealership and look at some other KPIs to look at to measure the other ways the dealership needs to look at to achieve peak performance. So looking at this, in the area of KPIs, the first two of this wage multiple and revenue recovery are two KPIs for your department, and you need to pay attention to both. One other point here, just kind of an aside, the last bullet on the right-hand side is AED has done a survey of dealerships and was released in January about the demand for technicians, and our industry needs technicians. And not having technicians is a big issue for many dealerships, and the AED survey of the demand was something like $2.2 billion worth of lost opportunity in our industry by not having enough technicians. This wage multiple gives you some way to talk about an opportunity to raise your wages that you pay in order to find better technicians and the best technicians. So chart number two, chart number three, the wage multiple is 4.5, well above the 3.5 target, and those dealers could reasonably increase what they pay their technicians and still stay within the 3.5 criteria for the wage multiple. So this is an opportunity to hire more and or better technicians when you look at this wage multiple. So that's what that point on the right-hand side at the bottom means. A higher wage multiple might give you the room to give raises to your best technicians and to attract additional technicians. So let's look at KPIs. These KPIs, key performance indicators, are other ways to judge the performance of your service department. So we've talked already about gross margin dollars and the percent. The additional ones that we'll talk about relate to sales contribution, which is also called sales mix. Return on assets, which is the best summary measure of a equipment dealership, is return on assets. We're in an asset-intensive industry, and how much money we make based on the assets that we have is a key measure. And absorption is the concept of absorbing the cost of the dealership through the parts and service department, and if you have rental as well. And especially in a cyclical industry, this is a very important criteria. We're now been on an upcycle since the bottoms of the 2008 and 2009, but through that period of since then, we've seen just how important absorption is for sustainability and growth of a dealership. So let's first look at service gross margin to make sure we're just stating again, for every dollar you sell, how much is left after you pay for the item you sold? That's the definition of gross margin. So the gross margin dollars divided into the service sales is your service gross margin. As I said, service cost of sales is the technician salary, and that guideline is over 60-65%. The best dealers get closer to 70%. How are the ways that you could, what you could do to increase that gross margin? How can you improve your amount that you bill out versus the amount that you pay? One of the most typical ways is to use a standard charge billing system, sometimes called a flat rate or job costing. So you give a technician a job that takes 10 hours, they do it in 9 hours, but you bill for 10 hours, you now have additional hour of labor, but one less hour of cost. So that is one of the best examples of improving your gross margin is using a standard charge billing system. Another way to improve gross margins that we see is tracking your gross margin daily by total and by technician. In other words, posting what is the gross margin that is being generated and looking at that and you evaluating that on a regular basis. I said posting, and I don't necessarily mean posting to the technician, but some dealerships are using a best practice of posting the efficiency of their technicians. But as a service manager, you should be tracking this gross margin daily for your shop and by tech so you can understand and see where your best technicians are exceeding the 100% efficiency, probably generating a high gross margin, coaching people to do work faster, and using the various systems to bill out more hours than they are actually paid. So that tracking, that good management is a key import of improving gross margin. Absorption is defined as the extent to which the dealer's total expenses are covered by the gross margin dollars from parts and service. So we give you the formula. You take the parts gross margin, the service gross margin, and you divide that by the total dealership's operating expense plus interest expense, which is something that you need to cover as well. So this guideline is that the parts and service department should cover 85% to 100% of the dealership's total operating expenses. If the dealership is 100% absorbed, that means that the whole goods department doesn't have to generate any gross margin dollars and the dealership can still pay all expenses. Said another way, dealerships that are 100% absorbed can probably generate capital because they, over and above their expenses, they are generating capital that can be used to grow the business. So absorption gives you better ability to withstand a downturn in the business. It also means a better ability to provide capital to grow the sales of the dealership because it's covering the expenses and then having a premium on top of the expenses, which means net profit. So absorption is an important concept. It comes back to parts and service department. Operating the service department at peak performance means generating higher gross margin dollars. And if you're managing the expenses of the service department as well as the other departments of the dealership, then you're going to be generating higher absorption and benefiting the dealership. So this is a good operating measure of a dealership, which is really starts at the service department and the extent to which the service department also helps sales parts helps the parts department as well. Return on assets. Again, as I said, return on assets is a best summary measure of a dealership. It represents the money that's invested by the owners or creditors of a business in the assets of a dealership. And these are all of the assets, buildings, trucks, inventory, whole goods, rental inventory, parts inventory, all those things that are either fixed assets, which are the things that stay the same, or things like inventory, which you buy to then sell. So of those assets they are using to produce a return for the dealership, the guideline is that you have 15% is the target of how much return on assets you should be generating for your dealership. Let's take an example just to understand how to calculate return on assets. So if the net profit of the dealership is $750,000, and remember the service department is 40% to 50% of that net profit, should be, if you've got $10,000 worth of assets, and again, fixed assets like buildings and vehicles and tools, and then your inventory assets, all that's within the $10,000, that division says that this example it's a 7.5% return on assets. If as a dealership you're not achieving that 15% return on assets, then you need to be looking at how I'm either going to raise the numerator, which is the net profit, or lower the denominator, which is reducing assets. Since the subject of this webinar is about service and peak performance, the concept this is about improving the service department. Remembering that in service you're selling time, that's the inventory that you have in the service department. I mean just to talk about assets, it's easy to identify the assets in the whole goods department. You have inventory that you buy from a manufacturer or you buy as a trade-in, you have that, you can see that on your lot, you turn around and you sell that, and you make a margin on that. Same thing on parts. You buy a part, you put it on the shelf, when you sell it, you make money on it. So those are both examples of inventory that you might have and turn around and sell. In the case of service, service inventory is actually time, the time of the technicians. But it's different, of course, because time moves on. So it can't sit on a shelf until it's time to be sold. You have to sell that hour now when the technician is ready to work. So in that aspect, the service inventory is time. It may not affect return on asset, but it definitely, the service gross margin that is generated through the service department definitely does by the extent to which service gross margin helps the total net profit of the dealership. So when we're talking about return on assets, there may not be a lot of assets related to technicians. There may be, there are assets, of course, related to the shop, the tools, the trucks, cranes, generators, welders, whatever, those are included in that, but the main part of service, technicians' time is not really an asset in this calculation. As we go through this, I'm going to stop at the end and ask questions. And so please, if any of the things that I've been talking about are unclear or you want to ask about, please remember those and we'll pose those at the end. So we're talking about KPIs, talking about service contribution, which is also called sales mix, which is, and the way this is defined is what percent of the dealership sales in total come from the service department? So the formula is shown, dollars of service sales divided by the total dealership sales. The guideline should be 10 to 15%. So that's a pretty easy calculation to make. If you're a service manager, in the example we used here, it's $2 million of revenue, it was a $20 million total sales, so that was a 10% of the total. Now, this is a guideline which kind of shows the importance of the balance in a dealership. Missing this guideline doesn't automatically mean poor performance, but it's something that you should be looking at relating to how the service department fits into the dealership. If you are less than 10%, that's likely an opportunity to increase the sales of service labor. And when you're looking at increasing service labor, there's some internal things you can do. Maybe your recovery, your efficiency is too low, and you're not billing out enough hours for your existing technicians. Or, that could be an issue, but maybe you don't have enough technicians, and you could afford to hire more technicians to increase the labor revenue from the sales of service labor. So, if you're not selling enough, the obvious fix is to market more parts and service sales reps, doing more work to sell the service capabilities that you have in your dealership, promoting your service department. So, this service contribution sales mix can come from several different things you should look at that contribute to the total revenue out of your service department. So, start with a guideline of KPIs. If you're not in that range of 10% to 15%, then look at, am I being efficient with my technicians? So, if they're not efficient, if they're not 95% to 100%, and that doesn't achieve 85% of the total, then look internally about how to make them more efficient. If you don't have an efficiency issue, and you're not billing out enough hours, it's probably you're not giving enough work for the technicians that you have, and so you need to generate more business through marketing. If both of those are true, you're efficient, and you have enough work for existing technicians, and you're still not achieving the guideline of 10% to 15%, then you need to be looking at, how do I go and generate more business, and I'll need to hire more technicians to be able to generate more service revenue. So, this service contribution number can lead to a lot of other different questions that we've just talked about in terms of how to achieve the KPI of service contribution and service. Now, service needs to be sold, and the trend in terms of growth of the sales should be increasing over time, just like your other departments. And it's important from a perspective within a dealership to think about selling whole goods, selling rental services, selling parts, but also selling service, and looking at the sales and growth of sales of the service department, just like all the other departments. So, the benchmark is to achieve a growth rate of 10% to 15% a year. Of course, the easiest way to do that is to raise the rates, your service rates, but you can also look at payroll hours that are on a work order. This comes back to the productivity and efficiency of a dealership, and are there ways to generate more hours of revenue on a work order? This is what I'm seeing more and more in our industry of doing inspections for a machine that may be under repair and providing other opportunities to sell more service labor over and above just the repair job that may have been the reason for bringing a machine in for service. So, the best performing dealerships look at growing their service revenue by adding more revenue opportunities and developing a methodology and a culture of looking at other ways to sell service revenue when their technicians are touching or working on a machine. So, those are some ways to look at improving sales growth and the trend in service. So, we've been looking at various KPIs, starting with the financials, starting with gross margin, productivity, efficiency, looking at absorption and contribution and sales growth, but let's just think about the fundamental thing that's happening in a dealership, and that is about selling time. Because that's the objective in the service department, is selling the time of a technician. So, this is an exercise we do in a lot of the training programs that we have related to service, and also when we're looking at the total branch, and that is a five-minute challenge. And the challenge is this, if you had to find five minutes that got wasted a day that you could bill to a customer, could you do that? Just small steps can lead to big results. In this case, just thinking about additional five minutes a day that can be billed out, and let's first talk about what the difference that that five minutes can make. So, 60 hours a day, 8 hours a day, 480 hours or minutes in a workday, so divide 5 into 480, that's about 1% of a workday is 5 minutes. If a technician is being paid 20,080 hours a year, that means for that time of that technician, because you're selling his or her time, 1% represents another 20 hours of billable time. Making the math easy, 100 hours is what they bill out, 20 times 100 is 2,000 per technician per year times the number of technicians that you have. So, that five minutes can add up, and this is all, assuming all the other calculations of expenses change the same, stay the same, to achieve that and drive this all to the bottom line. So, per technician, for your shop, what are the ways that you can increase the five minutes per day? Remember, you've already paid your cost of sales and the payroll, so you're already selling that five minutes, it doesn't affect your cost of sales. Ten technicians, that's $20,000 a year additional profit. So, as a takeaway from this webinar, is think about how can you find five hours per technician to bill out every day? What gets in their way? As a service manager, knowing the hangups and where there is dead time, start thinking about that and how that can improve and bill more, the $20,000 that we talked about. That can really improve your dealership. So, here's some ideas. We've got, how do they get on to their next job as technicians? The best performing dealerships have a service schedule board. It can either be physical, just a wide board, or all the work orders tacked on a wall. It can be real simple, or it can be electronic, and people can see that on a display or on a laptop. Good time management says, I want to have all of my jobs listed in one place. So, having a service board, and so everyone can see what their next job is, helps in terms of setting priorities, helps knowing what their next job is. And also, there's a psychological effect in that when technicians see that there's more work to do, they'll tend to work faster. The opposite is, when they don't see there's a lot of work, they tend to work slower. So, just simply seeing that there's work to be done and there's a next job will actually improve efficiency. Starting out in the morning is very important. Do they know what to work on when they come to work each morning? This schedule board is an example of saying they'll know right away where to get to work. And then they never have to wait for their next job, and so they're looking at planning ahead often from one job to the next. That helps saving that five minutes. Now, we have a picture on the right-hand side. This is a question of an all-hands meeting every morning. Some dealerships do this just to review what's going to happen during the day. But make sure that that five minutes or that short meeting is actually worth having. Are you actually using that wisely versus the time to bill out? If you're helping people improve their efficiency, if you're showing them a new way to use a tool to be more efficient, if you're showing them a new way to explain to the customer that you're billing out additional services, all those things can generate revenue and can be valuable. So, we're just questioning and managing your time. So, how they get to the next job will help. And thinking that through with schedule boards and the psychology within a shop is very important. How do they get their parts? This comes back to that bridge between the parts and the service department. Who looks up the parts? Is it a technician or someone in the parts department? And if it's a special order, who decides how you're going to order it and if it's going to be received? So, the best practices are for the parts department to do that in conjunction with the technician. But it's not absolute. But just be thinking about that time that a technician has spent looking the part, making sure that the special order part does go through a screening process, and then how the parts get delivered from the parts department out to the technician. Do the technicians come to the counter? Or the best practices is the parts department actually delivers the parts out to the technicians so the technicians can keep working and don't wander off course when they're on back and forth between their bay and the parts department. Again, not absolute, but the best practices are parts department delivers to the technician. So, that bridge between the parts and service department is a fruitful area for you to look at to see where to improve that bridge between the parts and service department. How about service tools? So, you have service tools, the various machines that are needed, and if the technician discovers he needs a special tool, do you have a nicely organized room where he can go in, look at an index, and go right to the shelf where that tool is? Is there the discipline to make sure that if that tool has been used by someone else, that you know where it is? And then they're in good shape and they're ready to go? The best practices are actually to assign the service tools to the parts department. Parts department is used to keeping track and having the discipline of keeping track of inventory, and so many dealerships will actually assign a part number to a tool, put it in that inventory at a penny, and actually post that part number to the work order when they're using a service tool so they can see where that part is, which helps them in track that tool and improves that productivity and efficiency by knowing where that tool is in the flow of a dealership. Again, five minutes a day, this type of discipline with service tools can really help to find that additional five minutes. How about clocking out for breaks? Many dealerships don't clock out anymore. They keep the clock running and they just manage their time as a break and make sure that all that technician time is built. Now, again, this is not absolute, but more and more we're seeing dealerships just not clocking out for breaks. As a corollary to this is also making sure they know when a job is done. For example, when the job is only done when the tools are put away, the paperwork is done, and the bay is cleaned up, ready for the next job. So the clock is continuing to run until the job is done. A good way to, as a service manager, is to look at opportunities for this five minutes is to walk through the shop and just see how things are operating and what things could be changed, looking for those opportunities, those bottlenecks, and various ways that things can be done more efficiently. Particularly in that bridge between the parts and service department, and because you can't manage what you can't measure, you might want to put a metric into place by looking at things like order fill. How often do the technicians, when they need a part, have the part available from the parts department? This is not over-the-counter parts fill. This is back-counter fill, fill of parts to the shop. There's no metric for that, but tracking that over time will give you some consciousness about building that bridge between the parts department and the service department. Another thing is are they returning the unused parts so they can be taken off of the work order, making sure they go back in inventory, taken off of the work order, and then be able to be sold or returned. That makes the job of both departments better. So this idea of building a bridge, good processes build good bridges, and we've given you some ideas of some good processes to do that. Having a short medium at the end of the day to just kind of wrap things up and seeing what problems came up, maybe anticipating the things that, what's going to be happening. This could be between the parts manager, service manager, maybe looking at a heads-up of what things that might be coming in terms of machines that are going to be coming in for repair. Building a bridge with a whole goods inventory manager, making sure that they know what parts are available for pre-delivery, making sure that all the attachments are there ready to be installed. Best dealerships will actually write up these processes into formal processes, making sure that no steps are missed and try to eliminate most but not all the emergencies. Try to keep things simple. When you're doing a process step, just list the key steps, who's responsible, how are you going to communicate to the person responsible, there is an action that needs to be taken. Do you have a dirt floor? This sounds kind of strange, dirt floor, but this actually happened. Dealership been operating for many years, was acquired by another dealership. The acquiring dealership thought the first dealership was so old that it had a dirt floor. They went in to that dealership and discovered that it wasn't dirt floor, it was actually accumulated dirt and hydraulic oil and other debris on top of an existing concrete floor, but the previous dealership never went around and cleaned up what they did and they just got used to working in all that, quote, dirt. They did not look and examine their processes, look at how to do things better, just lived with what they had. So they didn't have a dirt floor, they just learned to live with what was there. Do you have a dirt floor? Do you have cases of things that you have left unexamined that need to be looked at that you've let in place, processes that need to be looked at better so that you can do things better and more efficiently? It could be hygiene, it could just be appearance, it could be things that are in the way, it could be stuff that's stored around in the bays that gets in the way, just things that you can look at to try to improve the flow within a dealership. Find that five minutes a day, looking at things that can improve your KPIs, things that can really help you operate at peak performance. So my call to action is really think about this real story of a dirt floor and say if you have those in your own dealership. So that's a real story. It has meaningful importance for the subject, which is looking at peak performance of your dealership, of looking at things that need to be changed that you're used to because they are there. So let me stop here and see what questions there are from the audience. There are audience questions that you can pose on the left side. So if you would, type in any questions that you have where it says audience questions and we'll try to answer them. Okay, so this webinar takes material that is used within many of the training programs that AD, that Level 1 service, Level 1 parts, parts management, and these, this is, so some of these examples and concepts, if you want to dig in deeper, there's some excellent programs that AED offers for that. Now here is one question that Tom Schilling asked. His question is, do you have ideas or examples on how to use the whiteboard to schedule jobs or work? So one of the first things that I learned when I started in this industry, and I was working for a company at the time, and I spent 40 plus years in the company, and this was early in my career, was actually to go into the service department of a dealership and go to, walk through the service bays, but go and look for how work is scheduled. So that's the first thing I do is I ask a service manager, if I don't see it, is how you are scheduling work. But one of the last ones that I visited, there were actually whiteboard in the shop just outside the service manager's office, so all the technicians walked by the whiteboard. The service manager would go out to that board periodically during the day, update it with work that is assigned to technicians for not just today, but if the technicians got additional work that they might have for the next day. They might also have a second whiteboard that shows work that is in the queue, ready to be, but not assigned to a technician. These might things like inspections that can be done at the discretion of the dealership. They might be product update programs from a manufacturer. And if they're not assigned, it's important to actually have that visibility to what other work there's done. So for example, the benefit would be if you have that view of all the work that's there, if a technician is, or a warranty job is out in the country, most manufacturers don't pay for travel for warranty, but if you look on that unscheduled work board and you say, well, we actually have an inspection scheduled for somebody who's close to that warranty job, dealers actually group those together and do the warranty job and the inspection job on the same trip, and in fact, get your warranty travel paid for by the inspection travel. So that's an example of having the whiteboard and the value of that in a dealership and using it to help schedule and improve the cost of the dealership by picking up that warranty travel. But the example that Tom Schilling is asking about is it can be a whiteboard. I've also seen which would have all the jobs and have a column for each technician. You might have different colors depending on the urgency of the job. You might have another whiteboard that shows the unscheduled jobs. In other words, you can get a whiteboard system that can get either very simple or pretty sophisticated, but I've also seen systems used simply by using post-it notes on a wall or just thumbtacks with index cards, whatever system works for that dealership. But the trend is clearly to be doing things with more electronically. I'm seeing a lot of dealerships either buying off-the-shelf programs that are built into their business systems or separate or even designing their own systems using collaborative software like Google Docs. Are there other... Tom, I hope I've answered your questions. And if there are other questions, please pose them, anybody. If you do have other questions after this session or since this is being recorded and will be available and if you're listening to it after the session was first recorded, don't hesitate to work through AED or contact us and we'll be glad to answer any questions that you have. So the question is being asked, Rebecca, maybe, Rebecca, this is a good opportunity for you to take back and talk about finding other classes for training. Rebecca doesn't have, so, okay, we're going to, thank you for your time and attention and we're going to end the webinar right now. Thank you for your participation.

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