WE HAVE SO MANY CARS, BUT WHY AM I MAKING LESS MONEY?
ONSITE INVENTORY! Let’s say you’re a shop owner, whose shop has three weeks of drivable work scheduled out. You also have non-drives onsite waiting to get in. What happens when a customer who we will call Mr. Smith, shows up needing his car repaired right away? He threatens he will find another shop if you can’t start on his car within a few days. If you tell your CSR’s, ‘Just grab the keys and we will figure it out.’ Shame on you, you need to be grounded, and your phone taken away from you for a month!! If that’s you, STOP IT!! What you have just done, is told all your other customers that have their cars on your property and everyone else waiting on your schedule, that Mr. Smith is more important than any one of them. Also, what type of message are you sending to your staff as their leader? It’s ok to lose a job and you’re going to have to just get over that, again get over it! Not that we would wish bad on anyone, but if Mr. Smith can walk right down the street and find another shop to start on his car tomorrow, it’s unlikely that his repair experience will be stellar in the end.
Ok, back to ONSITE INVENTORY. The more cars you have onsite, the more ‘Things’ you are going to have to manage! Those ‘Things’ can be file folders, RO’s that need opened and closed multiple times in your computers, storage for car keys, manage safe places to park all those cars, if glass is broken out the more interiors to protect, more customers who want to be updated and who sometimes are the nut jobs that check on their car every single day, manage insurance checks from their insurers bogus photo estimates, rental car Co’s wanting updates, insurer phone calls and on and on.
So, let’s use our example shop metrics: Gross Sales per year = $3.3 mil. Billed hours per day = 100 hours. Avg RO billed hours per car = 30. Cars repaired an Avg per day = 3.3. Cycle time = 18 days. So, how to figure onsite inventory. Take the cars repaired per day at 3.3 X Cycle Time of 18 days = Approx. 60 cars of Onsite Inventory!!! How many cars should our example shop ideally have onsite?? Look at it this way, the longer your cycle time, the more cars you WILL have onsite.
On the flip side, if our example shop could lower their cycle time down to just 10 days, the math would be 10 days X 3.3 cars per day = 33 cars onsite. It’s as certain as the sun rises. I know of shops the size of our example shop RIGHT NOW, that have 70-90 cars onsite! At my shop my current data shows, we produce 63-69 cars per month with our daily throughput goal of 104 billed hours, at 32 avg billed hours per RO or 3.2 cars per day. Our average severity is $5,000. If my onsite inventory gets over 29+ cars (excluding totals), let me just say, ‘We get really busy!’
My current inventory sweet spot is to stay around 22-23 cars total front to back with a 7-day cycle time. A 7-day cycle time right now is very tough, with the current parts procurement issues of course. For shops with 18+ working days of onsite inventory, it becomes very hard to achieve a high net profit. I understand that someone reading this may be the exception, but it won’t be the rule.
Why you ask? Well as a rule, the average shops Admin Overhead Cost with this type (18+ days) of ongoing onsite inventory, is usually in the 13-17+% of Gross Sales. This is due to the additional admin personnel, needed to manage all those ‘Things’ we’ve talked about earlier. If most shops could cut their onsite inventory in half, they would likely need 1-3 less admin people, depending on their shops size. Side note: The higher your admin cost, the lower your net profit. The lower your admin cost, the higher your net profit.
Another extremely important point, when we have so many cars to process. We feel pressured to move the cars thru the system as fast as possible and leave $ on the table with very poor estimating. As shop owners, we are ultimately responsible to rid our shops of old school methods, that are just full of dumb wasteful non-value adding activities. Sacred cows need slaughtered and to make higher profits than most of the shops, we must do things differently to the majority of the shops.
So, here is a rip the band aid off short term fix, for too much onsite inventory. You may need to just block off 1-3 weeks of your schedule for ANY new incoming drivable work. At the same time for a long-term fix, for starters you MUST have a level scheduling system going forward. We will also be working on ways to lower Cycle Times, as we move forward. We will finally start on Blueprinting, and this is another crucial component to lower Cycle Times. Yeh!!