Tracking Lean Performance and Productivity
Most businesses track performance with accounting system financials. But body shops aren’t typical businesses. For us, the key number to know is the amount of resources required to produce a specific amount of value.
By John Sweigart
3/11/2010 11:08:48 AM
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What is your primary method for keeping score of your business performance? Like the rest of the world, it’s probably your accounting system, your financials. It’s the same way for everyone. Whether you’re in a 20 Group or just casually share information with friends, it always comes down to the same things: sales, gross profits, overhead costs, etc.
But there’s something about the process that’s a little misleading. You know what I mean. It’s when you hear someone talk about some number that sounds great, but you’ve been to that person’s shop, and so you really know the deal. You know the work is either questionable or the people are miserable or whatever. You know the shop is really not as good as the numbers sound, and in some cases, it’s the other way around – the numbers are worse than the shop appears to be. The point is that the business numbers we use somehow don’t always accurately reflect what we know about a business, maybe even our own.
By the Numbers
Financials have been used to keep score for businesses for centuries, and here’s what we know about scores: They’re used to indicate a winner or loser or position among a group. These scores are a snapshot of the past and inspire some sort of goal or target for the future.
But there are two potential problems when you look at numbers this way. First, since these numbers represent historical outcomes, derivations of these outcomes aren’t represented. In other words, how you actually calculated the number isn’t shown. This is like driving by looking in the rearview mirror – turning the wheel by noting where the car previously was, and hoping you don’t hit anything in front of you.
This is dangerous and inefficient, but financial folks are taught that this is exactly how you make changes to a business. Materials margins are too low, so let’s find cheaper paint (impossible to know if that’s a good decision).
Second, and most importantly, the system of scorekeeping used in the collision repair business has been borrowed from folks playing a completely different game.
When you look at the history of accounting, you’ll find that the need for recordkeeping came from the earliest businesses that had the primary function of either making or selling things. The recording systems we use today are primarily derived from these types of businesses, retail and manufacturing.
Let’s take a look at these businesses for a moment. In manufacturing, what’s important is 1) how much they can sell and should sell (predict sales), and 2) how much it costs them to make these things. In retail, it’s very much the same, just one level down the chain and closer to the end user: 1) how much can they and should they sell, and 2) how little can they pay for these things (costs of goods sold). Both businesses also have to deal with their overhead expenses.
When it comes to scorekeeping, these businesses look a lot like a simple math equation: A + B = C, or sale plus cost of goods = profit. In this scoring system, improving your position looks very much like changing one or both of the variables, sell more, cost less or both, so that the outcome (profit) is increased. It’s simple math, but there is a danger because how you go about changing A or B isn’t represented clearly enough to ensure it will always have a positive effect.
For these retail and manufacturing businesses, this model works. If you look at these businesses’ value propositions, you’ll see that they match. For these organizations, their “value” to the customer looks like their ability to provide the right goods in the right way, at the right time, for the right price.
Much of what you have to do here to effectively deliver this value is based on changing costs. The financial records these folks use look like revenue (by category), cost of goods sold (by category) and overhead costs, ending in remaining profits. Pretty familiar, right? In fact, this is exactly the same system we use in collision repair.
Who We Are
Now let’s look at who we are. First, do we make things? Second, do we sell things? Well, kind of, I guess, but we are not a retailer. We only sell the things we must purchase (parts, paint, etc.) to be able to do what we do, which is fix cars. So unlike a retailer or manufacturer whose success stems from improving the ability to sell more and pay less, our improvement comes from cultivating our ability to fix. In that, we have quite a few different things that are critical to our success.
Whereas a retailer must market to consumers to convince them to buy its product, we’re in an “as needed” business. The entire service business, in fact, is based on this principle. We can’t predict the demand because it’s caused by many different factors. We honestly don’t know what the conditions that cause accidents will be like next year or even next month. In fact, for nearly every one of us, the entire revenue we’ll take in next month is tied to consumers who don’t have a clue they’re about to get into an accident. We’re in a prepare and respond business.
It’s true that great marketing can better prepare us for work that may come in, but as many shops have shown and many marketing people know, getting all that volume to the door does not directly lead to better business performance. In many cases, things only get worse. The real key is to improve our capability to fix, and that doesn’t necessarily mean fixing more cars but fixing them more efficiently.
So how does this tie in to financials and scoring? The point to consider here is this: If you’re using a scoring system that’s designed for retailers and manufacturers, and you’re neither a retailer nor a manufacturer, how can you possibly get any better or win?
What’s the right way? It’s hard to say. Truthfully, no one has yet created financial recording methods that specifically apply to the service industry, let alone ours (on a largely accepted scale). Just as important to note is that financials shouldn’t be used to create improvement anyway because they don’t show you the real problem. The profit and loss statements and balance sheet formats that exist today and are used by most of us are wrong and worthless in our business. Stay tuned for another article from me someday on what the future of collision repair accounting looks like.
Personal Productivity Index
Let me introduce you to a productivity index I’ve created. I define it
as “the amount of resources required to produce a specific amount of
value.”
Start by figuring out your amount of resources. This includes all the things required to perform the “fixing.” I define that as:
• Cost of labor (Payroll + Benefits + Employer Taxes)
• Cost of Tools/Equipment Used
• Cost of Energy Consumed (specifically in the fix area)
• Cost of Space Used (fix area)
This is not just cost of labor but the true amount of cash spent to be
able to provide the value that your customer is requesting. The reason
you must include tools, energy and space is because you could improve
your “productivity” by purchasing new equipment or using more energy
and space, but in the traditional measure of labor GP as a reflection
of productivity, these costs would be missed and the real cost would be
hidden. The opposite is also true: Labor costs could increase, or
energy costs decrease, or any combination and productivity could
improve.
Next, define the “Value” produced. Again, the thinking says “fixing the
car” is what we’re paid for or where the customer sees our value. So
total sales or revenue is not the important measure. If they pay us to
fix the car, then really what they’re giving us is cash for our “fix”
labor plus a handling fee for buying the parts, materials and sublet
we’ll buy and pass on to them. Again, because we’re not retailers, our
customers don’t come to us to buy parts materials and sublet, they come
to us for our ability to fix their cars. These other items are just
coincidental and need to thought of that way, as long as you believe
our value is in our ability to deliver the right repair at the right
time for the right price. All this really does is put your thinking in
the right frame of mind so you can focus on improving your business.
Here’s the math for measuring value:
Total labor sales = Labor sold + profit from parts, sublet, materials
The last piece is pulling this all together in a simple workable
format. The measure calls for a specific amount of resources for a
specific amount of value. How do you specify? Start with value. There’s
a relationship between an amount of labor your produce (call it an
hour’s worth or a specific dollar amount) and the amount of parts,
material and sublet profit (on average) associated with that unit. For
example, for every $100 worth of labor, you may have 20 cents of parts,
sublet and materials profit. You can easily figure out your number, but
it becomes a factor that the labor unit is multiplied by (in the prior
example, 20 percent).
Here’s an example:
Cost of Resources
Cost of Labor (full) – $1,500 day
Cost of Tools – $400 day
Cost of Energy (shop) – $200 day
Cost of Space (shop) – $400 day
Daily Total – $2,500
Value Produced
Labor sold today – $3,000
Profit (parts, materials, sublet) factor 20% – $600
Daily Total – $3,600
Value (minus) Resources / Value = Profitability Index
$3,600 - $2,500 / $3,600 = 30.5%
So what does this number do? Well, it’s a little like the old GP
number, but it includes a lot of the old overhead costs that better
reflect what it costs to get the work done. It takes the focus off the
top-line sales number which, because of the largely variable mix of
parts sales on jobs or by seasons, is not a good indicator of
profitability.