“Trust me, they are,” Doornbos says. “They email back immediately saying, ‘Hey, you forgot the attachment!’”
That’s indicative of the culture Doornbos has built as general manager of four Dytech Auto Group locations in Michigan, which pull in an average annual revenue of $1.5 million each. Monitoring KPIs at his shops isn’t just some daily task—it’s the lifeforce of daily operations, the blood that pumps through the shops’ veins. It’s not enough to meet the industry average for Doornbos’ team. His managers want to push beyond and improve profitability year over year.
But let’s just back up for one second. Doornbos didn’t achieve an average tech efficiency of 120 percent, an overall gross profit margin of nearly 60 percent and a net profit of nearly 15 percent by simply plugging numbers into a spreadsheet—it’s the result of understanding the KPIs crucial to his business’s profitability; of setting the proper benchmarks for those measurements; of crafting a cohesive system for compiling and tracking those numbers altogether; of educating his team on why all of that is not just important, but also essential to the shop’s profitability.
That KPI mentality was reflected over and over in the inaugural 2018 Ratchet+Wrench Industry Survey, which was sponsored by OEC. Of the 446 shop operators that filled out the 81-question survey, 77 percent of them claimed to track routinely track KPIs (a big increase from 68 percent in the 2017 Ratchet+Wrench Shop Performance Survey). And when asked what impact KPI measurement has on their businesses, the responses overwhelmingly told the same story:
It is crucial and necessary.
If I had not started to track my numbers, I would be out of business right now.
It keeps you constantly focused on the important areas of the business so you can set goals, measure progress, and triage any problems as soon as they arise.
So Ratchet+Wrench sought out these passionate survey respondents (which included Doornbos) to find out which KPIs are essential to their success and how they get buy-in from their teams. What follows is a four-part guide for monitoring KPIs and a statistical breakdown of what numbers are driving the most profitable shops from the 2018 Ratchet+Wrench Industry Survey.
1. Determine the KPIs Essential to Profitability
Night and day.
That’s how Robert Ohlmann describes how much everything has turned around from where his shop started to the $1.9 million operation that exists today.
“The shop's financials are night-and-day different from the time we did not track [KPIs] until now,” he says. “It helps me know where we are and where we need to adjust our numbers to get the results we are looking for. It helps manage employees from the front of the office into the shop.”
As a third-generation owner of Tony’s Brake & Alignment in Louisville, Ky., KPIs weren’t a “thing” when Ohlmann, at just the age of 26, took over the shop in 2006 from his father, who had only tracked billed hours since the early 1990s. Despite being armed with a productive team and a solid customer base, Ohlmann struggled for those first few years not knowing what exactly was holding his shop back—much like many of last year’s survey respondents (See Sidebar: “A World of Difference for Independents”).
That was until he learned about a KPI that has now become the No. 1 day-to-day measurement of success at his shop: productivity.
While productivity is a KPI most shop owners know about, it remains one of the least tracked, according to the 2018 Industry Survey (See Sidebar: “The Lagging KPIs”). As simple as the measurement is (hours billed divided by hours clocked), for Ohlmann, it was a foreign statistic. And understanding that productivity was a signifier of profitability was the first step he had to take toward what is now a comprehensive system for KPI tracking.
There’s no magic formula or silver bullet for knowing which KPI will start to put your shop on the right track—but the only way to find out is to start measuring, Ohlmann says. To help, Ratchet+Wrench put together a breakdown of the KPIs that are driving the most profitable shops (See Sidebar: “The Essential KPIs”).
A World of Difference for Independents
In last year’s Shop Performance Survey, independents lagged far behind MSOs and franchises in terms of tracking KPIs. Just 64 percent of independents did it routinely, while 96 percent of MSOs and 100 percent of franchises made it a habit. This resulted in a vast gap between indies and bigger operations when it came to profitability.
While independents are still behind in the 2018 Industry Survey, they closed the gap quite a bit. Seventy-eight percent of independents reported routinely tracking KPIs, just short of franchises (85 percent) and MSOs (90 percent). As a result, here are the percentage of independents that hit the following numbers in the 2017 and 2018 surveys, respectively.
Annual Revenue Above $1 million: 33%
Average Repair Order Above $400: 50%
Overall Gross Profit Margin Above 50%: 45%
Gross Profit Margin on Parts Above 50%: 38%
Gross Profit Margin on Labor Above 60%: 55%
Net Profit Margin Above 15%: 44%
Annual Revenue Above $1 million: 46%
Average Repair Order Above $400: 57%
Overall Gross Profit Margin Above 50%: 62%
Gross Profit Margin on Parts Above 50%: 48%
Gross Profit Margin on Labor Above 60%: 65%
Net Profit Margin Above 15%: 44%
The Lagging KPIs
Of the survey respondents who claimed to routinely track KPIs, there was still a fair percentage that indicated certain shop measurements are falling to the wayside. For each of the following KPIs, here are the percentage of respondents not tracking them:
Gross Profit on Parts Sales: 5%
Overall Gross Profit: 7%
Gross Profit on Labor Sales: 11%
Net Profit: 15%
Technician Productivity: 16%
Technician Efficiency: 18%
Effective Labor Rate: 23%
The Essential KPIs
Of the 446 survey respondents, 43 percent reported an annual revenue of $1 million or more. Here are the KPIs those shops are mostly likely to track:
Overall Gross Profit: 99%
Gross Profit on Parts Sales: 98%
Net Profit: 95%
Gross Profit on Labor Sales: 95%
Technician Productivity: 95%
Technician Efficiency: 94%
Effective Labor Rate: 87%
2. Determine the Proper Benchmarks
No matter what KPI you’re tracking, Doornbos says to not get caught up with setting the initial benchmark—in fact, you can “pick it out of thin air,” he says.
“You just need something to motivate these guys,” Doornbos continues. “It’s not set in stone. You just need a number to start working with and build around.”
While you can start by measuring yourself against industry averages (See Sidebar: “The Average Benchmarks”), discovering which KPIs drive up profitability should start with a conversation with your team to find out what’s holding them back and where they see flaws in the system, Doornbos says. Once you nail down those holes, you can set the proper benchmarks to fill them.
When Ohlmann learned about what productivity measures and then explained it to his team, shop culture shifted. Suddenly, with a back-and-forth conversation brewing each day about productivity, the percentage started to near 80 percent, which is now the team’s goal. As technicians became aware of billing more hours and effectively utilizing their time on the floor, the numbers that seemed stubbornly stuck in place at one time—gross profit margins on labor and parts and average repair order (ARO)—started to climb.
After Ohlmann experimented and discovered productivity fueled his team, this led to an increase in efficiency and effective labor rate—which is one of the least-tracked KPIs, yet one of the biggest indicators of high profitability (See Sidebar: “A Strong Effective Labor Rate”). By measuring these numbers in relation to one another, ideal benchmarks for raising productivity crystallized.
Similarly, Dytech Auto Group (owned by Jim Dykstra, who also heads the well known Dykstra’s Auto Service chain) discovered that raising hours billed per repair order would in turn drive up the operation’s less-than-ideal ARO—this is key because, on average, many of survey respondents reported high car counts but low AROs (See Sidebar: “What’s Behind a High ARO?”). By having those conversations with his managers, Doornbos and his team began to discover much smaller factors that needed to be measured and benchmarked, such as proficiency, digital inspection drop rate and effective labor rate. As a result, gross profit margin on parts and labor and, of course, overall sales started to climb, consistently increasing year over year since he took over as general manager to a combined $6 million today.
There are plenty of numbers, such as productivity, efficiency and gross profit percentages, that aren’t exactly affected by your region. However, you should consider your market for other numbers. Depending on your target demographics and region’s vehicle make-up, that’ll tilt the numbers one way or another. If you’re a specialty shop that targets European makes, your target ARO will be significantly different than a Ford specialty shop. So be mindful and realistic with your benchmarks, Doornbos says.
The Average Benchmarks
In the 2018 Ratchet+Wrench Industry Survey, 43 percent of shops reported an annual revenue of at least $1 million. For some benchmarks to weigh your shop against, here are the ranges where most of those shops fell in each of the following KPI categories:
Closing Ratio: 50–59%
Average Repair Order: $400–$599
Overall Gross Profit Margin: 50–59%
Gross Profit Margin on Parts: 50–59%
Gross Profit Margin on Labor: 60–69%
Net Profit Margin: 10–14%
Posted Labor Rate: $110 or more
Effective Labor Rate: $90 or more
A Strong Effective Labor Rate
Both shop owners featured in this article credit a high effective labor rate to their standout profitability. It’s a simple calculation that tells you the actual amount of money you receive from the customer for an average hour of work. Yet, 28 percent of the 2018 Ratchet+Wrench Industry Survey respondents fail to track it.
For those that do, there’s a pretty even split between shops with effective labor rates above and below a benchmark of 90 percent Percentage-wise, here are where each of those groups fell in the following categories:
Effective Labor Rate Below $90
Annual Revenue Above $1 million: 37%
Average Repair Order Above $400: 42%
Overall Gross Profit Margin Above 50%: 41%
Gross Profit Margin on Labor Sales Above 60%: 55%
Posted Labor Rate Above $110: 24%
Effective Labor Rate Above $90
Annual Revenue Above $1 million: 64%
Average Repair Order Above $400: 68%
Overall Gross Profit Above 50%: 48%
Gross Profit Margin on Labor Sales Above 60%: 72%
Posted Labor Rate Above $110: 66%
What’s Behind a High ARO?
A high average repair order (ARO) is obviously a goal for which every shop should strive. But as both Robert Ohlmann and Mark Doornbos discovered, there’s a lot that goes into achieving a higher mark. For Ohlmann, owner of Tony’s Brake & Alignment, it meant closely tracking closing ratios (which now sits near 70 percent). And for Doornbos, general manager of Dytech Auto Group, it meant driving the number of billed hours per invoice (the benchmark is 2.4 hours). As a result, both shops have driven ARO above $400 for annual revenues that each exceed $1.5 million.
So, on average, what’s behind a high ARO? After comparing shops that have AROs above and below $400, here are the ranges where those two groups fell in each of the following KPI categories:
ARO Below $400
Sales Closing Ratio: 70–79%
Average Monthly Car Count: 300 or more
Percentage of Sales Dedicated to Marketing: 1–2%
Posted Labor Rate: $90–$99
Effective Labor Rate: $80–$89
Efficiency: Less than 80%
Productivity: Less than 80%
ARO Above $400
Sales Closing Ratio: 60–69%
Average Monthly Car Count: 100–149
Percentage of Sales Dedicated to Marketing: 3–4%
Posted Labor Rate: $110 or more
Effective Labor Rate: $90–$99
3. Develop a System for Tracking KPIs
Once benchmarks are set, ensuring those numbers are hit is perhaps the most strenuous part, Doornbos says. Because they’re not something you check once in a while—KPIs are a daily endeavor.
While management systems, digital inspection software and accounting programs all track KPIs from different segments of the business, developing your own centralized location to manage those numbers requires time and cooperation with your team.
Both Doornbos and Ohlmann pull all of their numbers out of their management systems and QuickBooks and plug them into their own shop spreadsheets. By determining how KPIs affect one another through their employees’ performances and what benchmarks are achievable, they are able to develop graphs and equations that, over time, gauge whether their businesses are moving forward.
Doornbos has several spreadsheets that track his operation’s performance on a daily basis, including a chart he sends out each day to his service managers at each of Dytech’s four locations (See Sidebar: “A Spreadsheet for Tracking Sales Daily”).
A Spreadsheet for Tracking Sales Daily
Of the factors his managers can control each day, Mark Doornbos, general manager of Dytech Auto Group, has determined that a combination of ARO (listed as “Actual Average Invoice” in his spreadsheet), car count, gross profit margin on parts and billed hours per invoice are the key factors in maximum profitability. Maximizing all of those categories ensures the shops hit an average daily sales goal of $5,776. At the end of the month, each category is averaged, and the managers can see if they’ve hit their benchmarks and moved closer toward their quarterly sales goal.
4. Incentivize Your Team
Doornbos’ spreadsheet system bleeds into the most crucial part of KPI tracking: the reaction.
It’s one thing to know your numbers—it’s another entirely to make decisions based on those numbers. By keeping his team in the loop daily, Doornbos and his managers can have real-time conversations about any problems or issues and exchange insight and strategies to ensure benchmarks are being hit each month.
To help with hitting benchmarks, Doornbos has incentivized his team with a quarterly bonus program. As the team watches its progress day by day through the spreadsheets, it also tracks how close it gets to the monthly sales goal. If it surpasses the goal? That carries over into the following month, when the team will try to inch even closer to the quarterly sales goal.
Ohlmann sets weekly goals and bonuses for his service managers, which are based on overall sales and productivity. Through a system very similar to Doornbos’, Ohlmann creates an Excel sheet that details the manager’s bonus program and everything he or she must do to achieve bonuses for the week. The same goes for service advisors, who receive weekly bonuses based on sales, ARO, hours per repair order and overall gross profit.
His technicians, who are paid hourly, also receive weekly bonuses for hitting productivity and efficiency benchmarks. He prints out a sheet from Labor Profit Management (utilized through NAPA TRACS) for technicians so they can see how they’re performing each week and how it affects the shop’s overall profitability.
“[It] shows everybody’s numbers so it’s very transparent for the technicians,” Ohlmann says.