When the Sisters of Mercy founded St. Joseph’s Hospital in Phoenix, they didn’t do it for the money. But they still had this mantra: No Margin, No Mission. They knew that if they didn’t mark up the hospital services enough, the hospital would have to close its doors. There would be no money to pay overhead or to save up for big equipment purchases.
So by following this mantra they built one of the best hospitals in the country, including the prestigious Barrow Neurological Institute.
What Nuns Can Teach a Diesel Repair Shop
In a diesel repair shop, profit boils down to a simple formula: it’s whatever’s left after covering labor, parts, and overhead costs. If there is not enough left, you need to pull up quickly before you crash and burn.
In this article we discuss how profit should break down (and the levers that are in your control); how big the industry average repair order is; and how profitable the average repair order should be.
Diesel Repair Shop Profit Breakdown
If your shop is firing on all cylinders, your profit should be 35% of sales. Overhead should be 10%, labor 30%, and parts 25%. It’s as simple as that.
The cost of overhead should be no more than 10% of sales. Overhead means your rent, utilities, office staff, business insurance, office supplies, shop supplies, service truck costs (including maintenance and fuel), and so on. Any increase to overhead comes directly out of profit.
Levers You Can Pull
Avoid the temptation to throw bodies at problems in the shop. All this does is increase your overhead. Use tools to solve problems instead. The total cost of one $30,000 employee is about $3,000 a month. If you can find a $500 / month tool that takes the place of one employee, what should you do?
The cost of technician labor should be 30% of sales. This covers the hourly wage of your technicians, plus benefits and employer taxes. It also includes the cost of a service manager, service writer, and parts manager. If your technicians are less than 100% efficient, your labor cost as a percentage of sales goes up.
Levers You Can Pull
Let your technicians see their efficiency metric constantly. Put it on a scoreboard, in real time, and make it always visible. That way as they complete jobs throughout the day they can see how their actions directly impact their efficiency. (Read more about increasing technician efficiency.)
As an owner you also need to have real-time efficiency data so you can act on it and make mid-day adjustments as necessary. Funnel your shop data into a dashboard you can glance at any time you want. Don’t restrict yourself to having to be in the shop to see it. By having real-time data and acting on it, you have a direct impact on efficiency and on keeping labor at 30% of sales.
An alternative is to pay your technicians flat rate. They make what they bill. Their incentive will then be fully aligned with yours–bill hours. Efficiency problems take care of themselves.
The cost of parts should be no more than 25% of sales. Your parts manager’s job should be not only getting parts priced and to technicians quickly; but getting good deals on parts. As this number goes up, not only does it eat up your profit, it also sends more of your customer’s repair budget to your parts suppliers.
Levers You Can Pull
The parts manager has a direct impact on shop profitability by working to keep the cost of parts at or below 25% of sales. He needs to have this metric constantly visible in front of him on a scoreboard, in real time, so he can see how his actions impact it. (Read more about the value of a good parts manager.)
Give your parts manager the tools to negotiate with parts vendors. Let him see the full pricing history of all his parts. Let him run reports showing the volume he has has with each vendor, so when the Freightliner account manager comes by with free pens the parts manager can push him for better pricing.
Be deliberate about pricing your parts. Decide what kind of margin you need, and back into a parts pricing matrix. Then bake that matrix into your shop management system so you don’t have to think about it every time you sell a part.
For inventory parts, if you don’t use a markup scale then regularly evaluate what each part is priced at versus what it cost you. Use a shop management system that lets you easily see purchase history, find which suppliers are giving you the best pricing, and set them as the preferred vendor so you automatically order from them when you replenish stock. Leverage the preferred vendor status to get better pricing from the supplier.
Another lever is encouraging your technicians to fabricate or fix parts where appropriate. It will probably end up costing the customer less money, and you are able to charge labor hours where otherwise you’d be selling a low-margin part. That means more of the customer’s repair budget is staying at your shop, versus going to a parts vendor.
Diesel Repair Shop Profit on a Typical Job
The most common work order in the heavy duty repair industry comes in at about $800. This is both the median and the mean: it’s the most common and the average of all jobs.
What would the shop profit look like on a typical job? Let’s apply our percentages from above to the typical $800 repair order. Assume you charge $90 / hour and 8% for shop supplies. Our job would come in at 5 hours of labor, $300 in parts, and $37 in shop supplies.
If your overhead is reasonable, your technicians are at least 100% efficient, and you are keeping your parts cost down, you would make a profit of $280 on the job. Labor would cost you $240, parts would cost $200, and you would allocate $80 to cover overhead.
Anything outside firing on all cylinders will directly impacts what you make on the job, or if you make anything at all. That means your profit evaporates as efficiency drops under 100%, your parts manager isn’t able to keep costs at 25% or below, or if your overhead has creeped over 10%.
Diesel repair shop profit boils down to a simple formula. Reduce your overhead by putting the right tools in place. Pull the levers in your control to increase efficiency and decrease the cost of parts. Your reward is peace of mind and a healthy profit.
If your shop management software doesn’t give you the levers you need to make your shop profitable, it might make sense to request a demo of Fullbay. We can discuss your shop and see if the tools we’ve built would work for you.