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Productivity Watchwords For Today’s Business World

By Darryl Padgett

Any company with a service department is selling labor. If you have a repair facility and work on cars or trucks, or have a machine shop providing machine work on engines or transmissions, you are selling labor. If you rebuild components for the engine or transmission, you are selling labor.

In more accurate terms you are selling time. Knowing the cost of labor is probably the largest variable your company has. You do have selling cost for the parts department, but they are typically less variable. A part, such as a starter, may cost $50 today and six months from today may still cost $50.

There are many factors that go into determining your labor cost including paying overtime, but also your cost if that employee comes in late, or worse, if they do not show up at all. Because the cost of doing business is still there when a labor revenue producer doesn’t show up for work, the cost to operate the service department is shared by a smaller work force. In fact, your cost per hour actually increases.

You must pay attention to the way efficiency, productivity, and effectiveness manipulate your labor costs. If you sell parts, you may pay a dollar for a resale part and have a 25 percent overhead margin, which must be covered to break even. We may pay a technician $10 to $20 per hour, yet may have a burden cost equal to two-and-a-half to five times that amount per hour to break even. The burden cost takes into account all costs associated with labor. Each company has a different burden cost. It depends on your expenses, efficiency, productivity, and effectiveness. If you know these items as they relate to labor, you know what you must charge as an hourly rate to make a profit.

The truth is, many company owners do not know these numbers. This can be to your benefit because it makes available the opportunity to utilize information the competition doesn’t know – and when your competition isn’t paying attention to these numbers there’s no way to determine exactly why it is making or losing money. However, by knowing this information you will know in advance where and why you make money on labor; in essence you’ll be able to pre-determine your profitability. Some companies have just experienced back-to-back-to-back record years in profitability because they have a handle on these numbers.

Some companies will tell you they do not have a shop hourly rate. They charge a set fee for their labor operations, so a shop hourly rate doesn’t apply to them. But as I said earlier, any company with a service department is selling time by the hour and has a cost per hour.

You need to be consistent in the way labor is charged. If a certain labor operation takes an hour to complete and you charge $75, do you sometimes charge only $45 for a different operation that also takes an hour?

This is not to imply that if you provide a certain service with a higher value, you shouldn’t charge a higher rate. You may be the only company around that has the capacity or ability to perform this particular service. There are many companies that have recognized an operation they provide and charge accordingly (of course at a higher rate). This makes for much better returns on labor – take advantage of those opportunities whenever you can.

However, you still must know your company’s hourly cost to know when you are actually charging more.

How can you determine your shop’s effectiveness? If a company is 80 percent effective at billing hours and a certain operation takes one hour to complete, then you will base the selling price for the operation on 75 minutes not 60 minutes.

If a company is billing only 50 percent of the hours available to produce revenue, is it because the shop does not have a sufficient backlog of work to keep all technicians busy? Or is the shop billing 50 percent of the hours available, yet has an abundance of backlog? Each situation tells a different story.

The first company may need to look at spending more on marketing and sales to attract more business. The second may need to concentrate more on the internal workings of the company to bill more hours.

Productivity Scenario: Technician 1: Actual Hours 36   Billed Hours 30   Idle Time 3   Non-Billed hours 7   Hours Paid 40 75% Technician 2: Actual Hours 30   Billed Hours 25   Idle Time 5   Non-Billed hours 10   Hours Paid: 40 63%   Technician 3: Actual Hours 28   Billed Hours 27   Idle Time 1   Non-Billed hours 12   Hours Paid: 40 68% Technician 4: Actual Hours 38   Billed Hours 42   Idle Time 0   Non-Billed hours 0   Hours Paid: 40 105% Totals: Actual Hours 132 Billed hours 127 Idle Time 9 Non-Billed hours 29 Hours Paid 160 Efficiency: 96% Effectiveness: 79% Suppose the cost per hour for the company above is $35 per hour and the company sells labor for $52 per hour. To achieve a 26% Gross Margin on labor the company needs to charge $59.80 per hour (The cost per billed hour for the company is $44.30 based on a 79% effectiveness rating).

Terminology
Technician efficiency is how well each technician can perform a repair according to the time that has been allocated to complete it. For example, if you allocate one hour to perform a repair but the technician actually takes one hour and 15 minutes to finish the job, then the technician was 80 percent efficient for this operation. This is the amount of time billed divided by the amount of time it actually took to complete an operation.

Technician productivity measures how many hours a tech is spending on work orders. Productivity tells you how well a technician finishes a job according to the amount of time available to complete it. This is the actual hours spent on work orders divided by the hours available.

If a technician spends 35 hours on work orders in a week’s time and 40 hours are available, then the productivity rating is 88 percent. This is the amount of time actually spent completing labor operations.

Technician effectiveness is the ability of all technicians to bill hours for the company. It is the overall picture. If you paid all technicians 400 hours during a certain period and they billed out 300, then the company is 75 percent effective in billing hours.

It can be the hours between jobs that can be the most costly. A technician can perform a job in an hour that you bill for an hour and 15 minutes. But it may take another half hour of idle time until he or she starts on the next job. Or, the tech may spend 30 minutes on something that is necessary, such as shop clean up, but that is non-billed or non-productive hours.

Your effectiveness in billing hours tells you what you need to base your shop hourly rate on. It also tells you what the cost per hour is per billed hour based on your expenses and the effectiveness of your company to bill time.

What do these terms evaluate?

Efficiency: Evaluates the technician and the operation. What are the abilities of the technician to complete the task in the allocated time? How accurate is the amount of time that has been allocated to complete the operation. Is this the best technician to perform a particular operation?

Productivity: Evaluates the total amount of time that is spent on revenue producing activities. What amount of time is idle or non-billed hours? If an employee billed 30 hours on work orders and was paid 40 hours in the same period, then that employee was 75 percent productive.

Effectiveness: Evaluates the overall picture of the company. How many hours are actually billed to customers? This takes both of the above into account. It looks at all technicians, all actual hours spent on work orders and all billed hours. This tells you overall how effective the company is at billing hours.

During a labor revenue producer’s day he will generate four types of hours: actual hours, billed hours, idle time and non-billed hours. By knowing all four you will know your company’s effectiveness.

Actual Hours: The number of hours that a technician actually takes to complete a repair.

Billed Hours: The number of a technician’s hours that are billed to a customer.

Idle Time: The amount of time between actual paid repairs.

Non-Billed Hours: The number of hours technicians spend on activities or operations that may be necessary, but the company is not billing the customer for.

Hours Paid: The number of hours a technician is paid for working during the same period.