Maintain Your Service Department's Effective Labor Rate With Prepaid Maintenance

A franchised car dealership’s service operation is like a factory whose products are labor and part sales. Service managers are charged with maximizing the output and the ROI for both products. Discounting services may keep techs busy, but it does little to hold the effective labor rate (ELR).

Service operations consultant Mike Volkman of Service Department Solutions says service managers struggling to keep bays busy and maintain their set effective labor rate may benefit from a review of how a dealership’s “factory” needs to work to be most successful. Bay utilization at ELR begins by managing the correct inputs — advisors selling 40 hours of work a week at the standard door rate, and technicians available to execute that action.

If you have a tech out that day with no suitable replacement possible, some of that sold time doesn’t get sold. How customers experience your service also contributes to bay utilization.

A recent J.D. Power Automotive Analyst report indicated how:

• Customers with a satisfaction index score of 901 or higher made an average of 2.5 service visits to a dealer. Customers with a satisfaction index score of 600 and lower made an average of just 2.2 visits.
• At an average spend of $192, the difference between 2.5 and 2.2 visits per year for a dealer with 4,000 service customers is nearly $250,000 in lost revenue.

Each bay should generate eight hours of labor time per day. Ten-bay operations, therefore, should be producing 400 hours of labor time per five-day work week. Based on the prevailing rule of thumb that every dollar of labor sales should generate 85 cents in parts sales revenue, keeping bays active and producing add up to a tidy sum, of which 60% to 65% should be profit to the dealership, notes Volkman.

Service managers have several ways to improve scheduling, tech efficiency, parts sales, and other factors to drive more revenue through service operations — more than I have room to discuss here. The basic way to make these improvements, however, is by using scheduling tools in your dealership management system (DMS), or third-party software tools. Before that, though, first you should create a master plan for your shop.

Second, Volkman advises, forecast monthly bay opportunity and tracked utilization daily. Finally, base pay plans on advisor success at book hours at a specific labor rate. “If you’re generating more hours but giving away the ELR, it’s a wash,” Volkman stresses. One proven way dealers are finding to generate more hours while holding their effective labor rate is by selling new and used car buyers prepaid maintenance (PPM) services.

An example is the Lester Glenn Group in Toms River, New Jersey, which operates eight franchises at seven locations. “It’s always a challenge to keep everyone 110% productive every day, so this dealer-branded preventive maintenance service helps me fill my bays immediately, and creates opportunities for us to sell additional services,” says Kerry Monica, vice president of fixed operations.

“When we schedule customers owning this plan, I have a guideline for the average hours per RO [repair order] per car coming in that day”

The J.D. Power report also noted that customers who either prepaid for a maintenance package or bought a vehicle that included complimentary maintenance in 2015 made 88% of their service visits to dealerships in 2017. Those who had no prepaid or complimentary maintenance when they made their purchase in 2015, however, made just 75% of their service visits to dealers in 2017.

Monica schedules as much volume as a technician can handle in eight hours, but as many PPMs are lube, oil, and filter (LOF) and tire rotation services, PPM work is scheduled with the express staff: five C-level technicians, who handle 12 appointments per day per team member. Any more severe work identified typically is additional business that flows to the main shop.

Volkman says that’s smart. “There is no reason to bring PPM-driven work into the house if you cannot handle it, but if you can pass oil changes and other light work to less-experienced technicians to free up your main techs for production work, they can really turn time.”

“For the 60 customers we’ll see in our Hyundai store today with a PPM plan, half will buy another service up and beyond what they initially came in for,” Monica says. He notes these percentages are similar to all other Lester Glenn stores selling PPMs. About 70% of that upsell work is mostly additional customer-pay business, while 30% is warranty repairs, such as oil leaks and other non-maintenance-related business.

Although some dealers give away PPMs to stimulate retention, Lester Glenn charges for its plan, rightly believing that price connotes value, which encourages consistent plan usage. At Lester Glenn dealerships, plan holders return for three visits per year.

The three-year plan includes five LOF services, and the five-year plan includes nine. “We sell 1,100 cars a month here at Lester Glenn Hyundai, with 15% of buyers also purchasing our PPM. That is 165 PPM contracts a month — 2,000 contracts a year — and the rate is growing. With these plans we’re creating extra traffic to this service department — and that’s driving additional service sales, which equals extra hours for technicians,” notes Monica.

He says Lester Glenn Hyundai upgrades approximately 60 customers per month coming in for basic maintenance off the service drive into new and used replacement vehicles. “These are buyers we’ve retained through their commitment to use of our prepaid maintenance program,” Monica says.

Ryan Williams is president of Fidelis PPM, and is a 20-plus year veteran of the auto industry, having served in multiple dealerships as sales manager, F&I manager, and GM. You can reach him at ryan@getfidelis.com.