Managing Your Service Department for Profit

Managing Your Service

Department for Proﬁt

An NADA White Paper

TABLE OF CONTENTS

THE SERVICE MANAGER’S JOB ……………………………… 1

Service Manager Position Summary …………………1

PROFIT ………………………………………………………… 2

Retaining Gross Proﬁts ………………………………… 2

The Service and Parts Relationship and Proﬁtability … 3

Proﬁt Centering …………………………………………4

Fixed Absorption ………………………………………6

Service Pricing Techniques …………………………… 6

Repair Order Analysis ………………………………… 9

NADA Actual Service Analysis ………………………… 10

Facility Utilization ……………………………………… 10

The National Automobile Dealers Association (NADA) has prepared this white paper to assist its dealer members in being as efﬁcient as possible in the operation of

their dealerships. The presentation of this information is not intended to encourage concerted action among competitors or any other action on the part of dealers

that would in any manner ﬁx or stabilize the price or any element of the price of any good or service.

Managing Your Service Department for Proﬁt

An NADA White Paper

Managing Your Service Department for Profit An NADA White Paper 1

THE SERVICE MANAGER’S JOB

The dealership service manager has a big job. NADA

Job Descriptions, available through HR Dealership

Fundamentals at nada.org, provides an all-inclusive

job description, intended to be modiﬁed according

to each dealership’s needs. For our purposes, we’ve

divided job responsibilities into three categories; some

duties may well ﬁt into more than one category. We’ve

included customer contact responsibilities that may

not involve direct contact; the customer’s primary

link to the service department is the service advisor,

whose activities are supervised by the service manager.

Service Manager Position Summary

Runs an efﬁcient and proﬁtable service department

through productive stafﬁng, customer retention, cost

controls, achievement of objectives and maintenance

of service records. Ensures that the daily inventory

of technicians’ time is consistently sold to service

customers.

Duties and responsibilities may include the following:

Proﬁt-related

• Forecasts goals and objectives for the

department and strives to meet them.

• Prepares and administers an annual

operating budget for the service department.

• Ensures that all customers are given fair

estimates on costs and time required for

repairs and maintenance.

• Develops and implements a marketing plan

that promotes new and repeat business.

• Maintains reporting systems required by

general management and the factory.

• Monitors and controls the performance of

the department using appropriate reports,

tracking systems and surveys.

• Understands and ensures compliance with

manufacturer warranty and policy procedures.

• Monitors warranty repair orders for sales and

hours relative to expectations.

• Prepares pricing guides and maintenance

menus for frequent labor operations.

• Attends managers meetings.

Productivity-related

• Directs and schedules the activities of all

department employees.

• Maintains high-quality service repairs and

minimizes comebacks.

• Conducts periodic spot checks of completed

jobs for thoroughness and quality.

• Understands, keeps abreast of and complies

with federal, state and local regulations that

affect service operations, such as hazardous

waste disposal, OSHA, Right-to-Know, etc.

• Ensures that customers’ service ﬁles are up-

to-date and readily available for reference.

• Monitors technicians’ daily productivity

reports and corresponding payroll records.

• Facilitates and/or conducts technical

training and sends employees to appropriate

training schools as needed.

• Monitors and follows up on parts orders with

the parts manager to ensure availability.

• Ensures the proper care, storage and

inventory of special tools.

Managing Your Service Department for Profit An NADA White Paper 2

• Keeps abreast of new equipment and tools

available and recommends purchases.

• Informs repair technicians of time

allowances on each repair order.

• Accounts for all documents; ensures that none

are missing and all are processed correctly.

• Maintains a safe working environment.

People-related

• Hires, trains, motivates, counsels and

monitors the performance of all service

department staff.

• Strives for harmony and teamwork within the

department and with all other departments.

• Handles customer complaints immediately

and according to dealership guidelines.

• Serves as liaison with factory representatives.

• Establishes and maintains good working

relationships with vocational and technical

schools to enhance personnel recruitment

activities.

• Establishes and maintains 24-hour follow-up

with all customers to conﬁrm satisfaction

with the service experience.

• Establishes and maintains good working

relationships with customers to encourage

repeat and referral business.

• Holds weekly department meetings.

• Ensures that the work areas and customer

waiting areas are kept clean.

• Maintains a professional appearance.

From a management perspective, then, all of the

service manager’s functions center on controlling

and optimizing proﬁt, productivity and the utilization

of personnel while maintaining the highest possible

degree of customer satisfaction.

Your mission as department manager is growth—in

all three categories:

• Proﬁt

• Productivity

• People

Let’s examine the “three P’s,” starting with proﬁt.

(This white paper was excerpted from NADA’s A

Dealer Guide to the Three Ps of Effective Service

Management: Proﬁt, Productivity, Personnel. The full

publication is free to members at nada.org.)

PROFIT

As service manager, your ﬁrst objective is to earn

a high net proﬁt. The net allows you to provide the

best training, equipment, facility and beneﬁts for

your employees, plus all the perks that aid customer

retention. To earn your best net, you have to know the

gross proﬁt necessary to arrive at the net. Then you

can establish the number of labor hours you need to

sell to get to the gross and ﬁnally the net.

Retaining Gross Proﬁts

Start with your dealership’s ﬁnancial statement.

Analyze the service department’s labor-only sales and

grosses. Divide your gross by your sales to determine

your gross proﬁt as a percentage of sales. Divide each

category by the total to determine what percentage

of the total that category provides.

According to NADA 20 Group guidelines, representing

ﬁgures achieved by the top 25% of the most proﬁt-

able NADA 20 Group dealers, the service department

should strive for 72% or higher gross retention in

every category. Even a small increase in your gross

can have a dramatic impact on the dollar sales you

need to arrive at your desired net proﬁt.

Your customer-pay labor (car, truck and other) should

account for 60% of your total labor sales, with warranty

and internal contributing 40%. And your adjusted

cost of labor—the difference between the number of

hours you pay your technicians and what you collect

from your customers—should be as low as possible.

Cost of labor affects the gross signiﬁcantly.

Are you holding 72% of your gross? If not, look into

your cost of sales and the percentage of your sales

from each category. Do not discount internal labor

sales; all sales should be charged at retail.

Managing Your Service Department for Profit An NADA White Paper 3

The Service and Parts Relationship and Proﬁtability

The service manager needs to foster an excellent

working relationship with the parts manager and

parts department. Service and parts are mutually

dependent. Service needs parts in order to repair

and maintain vehicles for customers and for the

used-vehicle department. Thus a portion of the dol-

lar amount of every service sale is a parts sale. Parts

needs service because the service department is the

parts department’s best customer. You can prove

that for yourself, using your ﬁnancial statement for

any month.

Except for counter and wholesale sales, parts

sales come from the service department. In the

average dealership, 70% to 80% of the parts

department’s business is generated by service sales

patterns—and thus 70% to 80% of parts’ potential

for proﬁt comes from service sales.

The most successful dealers retain the following

percentages of their gross parts sales:

• Repair orders 41%

• Repair orders (body shop) 30%

• Counter retail 41%

• Warranty 28+%

• Internal 41%

• Wholesale 25%

Overall, the parts department should be running at

about 38% gross retention. If your parts department

is not holding its gross, chances are the problem

lies in internal, warranty and/or counter retail sales

retention. Usually, internal sales—parts sold to the

used-vehicle department—are the problem. They

should be treated exactly the same as retail sales;

as with internal labor, do not discount internal parts

sales. Counter retail problems may be traced to dis-

counting or high sales of such accessories as coffee

mugs, key chains, etc. If the percentage is low on

warranty parts, the parts department may not be

stocking sufﬁcient parts. As we noted above, moni-

toring parts orders to ascertain availability is one of

the service manager’s responsibilities. The service

Category Labor Sales $ Labor Gross $ Gross Proﬁt as

% Labor Sales

% Total

Customer car

Customer truck

Customer other

Warranty

Warranty other

Internal

NVI/Road ready

Adj. cost of labor

Total

Parts Department Sales and Sales Distribution, Month to Date

Category Sales in Dollars Percent of Total

Repair order $ %

Repair order body shop $ %

Counter retail $ %

Warranty $ %

Internal $ %

Wholesale $ %

Total department (MTD) $ %

Managing Your Service Department for Profit An NADA White Paper 4

manager also must track labor sales lost due to lack

of parts; the parts manager needs to know what to

stock. The parts manager can run a “Repair Order

Fill Rate” report from the in-house computer system;

the parts department must also track all lost sales.

Finally, let’s consider the parts-to-labor ratio. Using

the data from your dealership’s ﬁnancial statement,

extract the ﬁgures for parts sales in each category

(customer, warranty and internal), and do the same

for labor sales. Your parts sales divided by your labor

sales gives you the parts-to-labor ratio.

Parts cost about the same everywhere; labor rates can

vary dramatically. You should aim for the following

parts-to-labor ratios:

• Customer-pay: 80 cents parts/labor (for

every dollar of labor, you should sell a

minimum of 80 cents of parts).

• Warranty: Expense per unit repaired should

be equal to or less than the zone average.

• Internal: 80 cents (assuming retail charges;

certiﬁed used vehicles increase the parts/

labor ratio).

Obviously, the service manager cannot control the

parts department. It is to the advantage of both de-

partments that their managers understand how one

department affects the other, and work together to

the beneﬁt of both.

Proﬁt Centering

Use your ﬁnancial statement to subtract your total

expenses from your total gross and ﬁnd your net proﬁt.

In general, successful service departments should net

20% after absorbing their share of administrative or

indirect expenses.

A 20% net is deﬁnitely achievable. Like a small

increase in gross, a small decrease in expense can

have a big impact on sales needed to achieve your

best net.

As a rule of thumb, personnel expense (which may

appear on your statement as personnel, variable, or

selling expense) should amount to 45% -50% of the

gross. All other expenses should be 25% -30% of

the gross. Manufacturer-speciﬁc ﬁgures are available

to 20 Group members in NADA 20 Group Operating

and Expense Proﬁles.

If your department expenses are higher than 80% of

your labor gross, look ﬁrst at your gross retention. If

you are holding 72%, you need to focus on maximiz-

ing grossing potential. Are you selling all the hours

you have available in service? If not, then look at

lowering expenses.

Common expenses needing tighter controls include

shop supplies, policy work, uniforms and parts wash-

ers. These may seem to be small costs, but they may

be eating up more of your gross than you imagine.

Expense Category Dollars % Service Labor Gross Proﬁle Dealers

Department gross $Total gross 100%

Variable expense

Selling expense

Personnel expense

Semi-Fixed expense

Fixed expense

Unallocated expense

Dealer’s salary

Total expenses

Net proﬁt $Gross less expenses 20%

Managing Your Service Department for Profit An NADA White Paper 5

Shop Supplies

Your cost for shop supplies should be a negative

number. Shop supply expenses need to be passed

along to the consumer.

If your dealership is located in a state that permits

you to charge the customer for shop supplies, you

need to do so. Establish a ceiling, then charge the

customer 5% to 12% of the total labor charge, not to

exceed that ceiling. Customers’ shop supply charges

should reﬂect proportional amounts of ﬂuids, etc.,

that are used for their vehicles.

If you are located in a state that prohibits charging

the customer for shop supplies, you must charge sup-

plies out as parts. If the customer is charged for the

whole “part,” he or she should be given the whole.

You also need to control and monitor your techni-

cians’ usage of shop supplies. Open a repair order at

the parts counter for each technician each month to

track usage. Record, review and correct as necessary.

Systematize Shop Supply Control

Here’s how one 20 Group dealer controls shop sup-

ply expenses:

1. The parts manager controls the purchase

and issuance of all shop supplies. All shop

supplies are charged to a parts inventory

account when purchased.

2. The parts department keeps a record of

all supplies during the month, with a

technician’s initials by each item issued.

3. The service manager reviews and approves

all supplies during the month. Then they

are charged to the shop supplies expense

account. The recap form below is used

Policy Work

The service manager needs to control and moni-

tor policy work, which should not exceed 2% of

your gross.

Having made that statement, we need to step back.

You need to retain your customers in order to make

your grosses. So ﬁnd out what the customer thinks

is a fair adjustment. Discover what will make your

customer happy, short of giving away the store. Then

empower your service advisors to make decisions,

with the understanding that excess policy work will

need to be offset by additional labor sales.

Uniforms

Your service uniforms are an inexpensive yet effective

form of advertising. But you shouldn’t be paying for

them when they are not being worn. Tell the company

that supplies your uniforms that you don’t want to

pay for uniforms during technicians’ vacations. The

company may be willing to adjust your bill to keep

you as a satisﬁed customer.

Parts washers

Find out the terms of the service contract for your

machine, and hold the service company to the con-

tract. Often, service representatives—who are paid by

commission—will come to your shop at more frequent

intervals than you contracted for, and charge you for the

extra visits, explaining that the machine works better

with more frequent cleaning. You may want to extend

the intervals between cleanings. Better yet, look into a

Technician Shop Supply Recap

Technician Name Technician Name Technician Name

Date Item Cost Initials Date Item Cost Initials Date Item Cost Initials

Total Total Total

Managing Your Service Department for Profit An NADA White Paper 6

nonhazardous, water-based cleaning system that will

wash the parts while your technicians work on vehicles.

Fixed Absorption

Service and parts are considered the regular—or

“ﬁxed”—sources of income, whereas the sales de-

partments are considered variable sources of income.

Fixed absorption is the ability of ﬁxed operations

(service and parts, and body shop if you have one)

to absorb—cover—the entire dealership adjusted

overhead expense. Adjusted overhead expense is

total dealership expense less those expenses that

are directly attributable to the sale of new and used

vehicles—commission, delivery and policy.

Absorption, important in any vehicle sales curve,

becomes even more crucial when vehicle sales slide.

Variable income ﬂow is reduced, but expenses in-

crease. The more of the debt load that you can take

off the variable operations, the easier it is for them

to sell vehicles. You should aim for high ﬁxed absorp-

tion, the closer to full absorption—100%—the better.

If service and parts could generate sufﬁcient gross

to cover all dealership expenses, every vehicle sale

would produce pure proﬁt. NADA 20 Group guide-

lines, which include used-vehicle gross in the formula

below, recommend 100% absorption. Few dealers

are able to achieve 100%. Some specialists in ﬁxed

operations proﬁtability tie absorption rate to customer

retention: If you have a 70% customer retention

level, they say, you can expect 90% or better ﬁxed

absorption. On a national level, ﬁxed absorption at

this writing is at a poor 59%. NADA Academy, bas-

ing its guidelines on the experience of the top 20%

of dealers who are successful in all ﬁve dealership

departments, recommends 75% absorption, with or

without a body shop.

To calculate your absorption percentage, use the ﬁgures

from your ﬁnancial statement in the following formula:

Gross Proﬁt

(Parts Department + Service Department + Body Shop)

÷ Adjusted Dealership Overhead Expense

= Absorption Percentage

If your absorption is low, examine your grossing pat-

terns. Service should be holding 72% of gross; parts

should be holding 38%, and body shop should be

holding 65% on labor, 30% on parts.

If you are holding gross in all these areas, examine

your expenses.

As noted above, the adjusted overhead expense

is the total dealership expense less new and used

commission expense, policy expense and get ready/

delivery expense. These are variable expenses, to

which some manufacturers add ﬂoor plan interest

and advertising. Floor plan interest and advertising

are not under the control of ﬁxed operations, but if

your ﬁnancial statement includes them with variable

expenses and they are out of line, you may be in the

position of absorbing the costs of aged inventory

and the advertising intended to move it. Advise your

general manager or sales manager.

Service Pricing Techniques

Pricing Service Jobs

As service manager, you need to utilize your human

and facility resources to the maximum possible level

while providing value that exceeds customer expecta-

tions. To do so, you should establish pricing policies

that do not necessarily conform to a predetermined

labor rate, but which compete with locally available

prices and still retain adequate proﬁts.

You need to learn what your customers will pay for the

many different service operations performed in your

marketplace. Services fall into three broad categories:

1. Competitive

2. Maintenance

3. Repair

Since most repairs require higher skill levels than

non-dealer competitors employ and therefore could

be considered captive, you need only shop a few of

the more commonly performed operations, such as

strut replacement and transmission overhauls.

Most customers don’t leave dealership service depart-

ments to have complicated repairs done somewhere

Managing Your Service Department for Profit An NADA White Paper 7

else. For the most part, they turn to non-dealership

service outlets for maintenance and competitive

work. And they leave, for the most part, because they

perceive dealership prices to be higher. Sometimes,

dealers’ prices are higher, because they have been

setting prices according to their proﬁt goals (cost-plus-

markup percentage) rather than their marketplace.

In the real world, the question is not, “What price

must I charge to make my proﬁt?” It is, “What price

is my customer willing to pay?”

By shopping your competitors to determine what they

are charging, you can stay in touch with the market

and ensure that your customers are receiving good

value. If you can change the customer’s perception

that your prices are higher, you can begin the process

of winning them back and keeping them.

When you shop your competitors, note whether they

give a price on two-wheel alignments. Dealers typi-

cally quote on four-wheel alignments. You need to

quote on the two-wheel alignment, then upsell in

the service lane if the customer needs a four-wheel

alignment.. And how about your price for installing

pads? Dealership service departments tend to quote

on two services—installing pads and turning rotors—

instead of one. Give your price solely for installing

pads; you may not need to turn rotors, anyway, unless

there’s a problem.

Remember, when a customer questions price, it is

a good sign. It’s a buying signal. And it gives you

the chance to explain the value of the service you’re

providing. A fair price is not enough. Superior service

is not enough. Your customer needs to perceive your

good service and price as good value. You don’t have

to have the lowest prices in town to deliver value.

Pricing Service Labor

Most customers don’t know—and don’t care—what

labor costs your dealership. They just want a fair

price. You need to price labor at what it’s worth,

realistically, rather than as a response to what your

technicians think they should be paid.

Brieﬂy, you have four options for pricing labor:

1. Clock-hour rates. Customers pay an

established hourly rate for the actual time

spent by each technician working on their

vehicles.

2. Flat-rate hours. Customers pay a uniform

hourly charge for an operation’s time

standard according to a ﬂat-rate manual.

3. Job pricing (or menu pricing). Customers

pay a labor charge based on the prevailing

charges for similar operations at competing

service facilities in their market.

4. Variable labor rates (also called multi-level

ﬂat-rate hours). Customers pay one of several

hourly rates, based on skill or market

category, for an operation’s time standard

found in a ﬂat-rate manual.

Robert Atwood of NADA Academy suggests that the

fourth option, variable rates, is the key to becom-

ing competitive. Variable labor rates based on the

complexity of the jobs can match technician skills to

particular jobs—utilizing your labor pool efﬁciently—

and enhance the competitive stance of your service

department. Again, do not charge a lower rate for

internal work than you charge for retail work; your

technician’s time and the service bay cost the same

regardless of the customer.

Variable labor rates can be approached according to

skill level alone or according to market categories

that encompass skill-level considerations.

With skill-level rates, the hourly price is normally

based on the traditional A, B, C or D skill codes. This

method allows you to charge more for jobs requiring

highly-skilled, higher-paid technicians and less for

jobs requiring lower-skilled, lower-paid technicians.

Skill code A receives a high market price, skill code

B an average market price on the high end, skill code

C an average market price on the low end, and skill

code D a low market price.

Market category rates allow you to establish three

separate labor rates, basing the per-hour labor price

on the type of labor—competitive, maintenance or

Managing Your Service Department for Profit An NADA White Paper 8

repair. This method allows pricing to meet prevail-

ing market conditions—and you can still assign your

technicians to the various jobs according to their skill

levels. Further, work performed on one vehicle may

be divided among all three rates, depending on the

services needed.

Atwood recommends the market category approach

to variable rates; once you establish rates, you may

decide to post a dollar range (for instance, $35-$85

per labor hour) in your shop. He offers the following

rate considerations:

• Competitive labor comprises those services,

limited in number, that you have chosen

to be competitive in. Competitive labor is

charged at a low hourly rate for the most

competitive services in the marketplace:

– Lube, oil and ﬁlter changes

– Alignments

– Wheel balances

– Tire rotations

– Any market-driven, price-sensitive

maintenance items as required to

maintain your competitive posture

• Maintenance labor is deﬁned as any

work that the manufacturer recommends

or requires. Including common but less

competitive services, maintenance labor is

priced at a moderate hourly rate that usually

averages out at or above your target or

posted rate. Maintenance labor services are:

– Manufacturer’s required maintenance

services

– Automatic transmission services

– A/C service

– Emission control services

– Injector services

• Repair labor, which comprises every other

service your department provides, is priced

at your most expensive hourly rate. Repair

labor involves the least competitive, most

specialized operations, such as:

– Electronic engine control diagnosis and

adjustments

– Electrical malfunctions and other wiring-

related problems

– Accessory repairs and replacements

– A/C compressor overhaul

– Engine overhaul and other internal engine

work

– Fuel injection calibration

How do you go about instituting a variable labor rate

structure?

Suggested Steps for Setting Up Variable Labor Rates

Step 1. Conduct a repair order analysis of your

customer-pay work to determine your effective labor

rate (ELR) and work mix by category (competitive,

maintenance, repair).

Divide your sales in each category by the hours billed

in that category to ﬁnd your ELR.

Step 2. Establish your competitive rate at or near the

LOF rate (which you determined by shopping your

competition). Even though your other competitively

priced maintenance work will carry a higher labor

rate effectively, it is your LOF rate that contributes

the most to your competition. Establishing a lower

competitive rate will give you a slight cushion.

Establish your maintenance rate at or above the

existing warranty rate. The maintenance rate is the

“target” rate for your department and should never

be lower than the warranty rate. All of your mainte-

nance work should be priced with this rate in mind,

especially the mileage interval services reﬂected in

the owner’s maintenance schedule.

Establish your repair rate at $8 to $10 above the main-

tenance rate or at an amount equal to the maintenance

rate plus twice the deﬁcit—a negative “Difference”

shown on your RO Analysis Recap Sheet—whichever

amount is less. (If your maintenance rate is $55, for

example, and your Recap shows a shortfall of $4.50,

set your repair rate at $9 above the maintenance

rate, or $64.)

Step 3. Monitor the movement. Consider your new

variable rate schedule as a trial. Once your rates take

hold and you continue to monitor your work mix and

Managing Your Service Department for Profit An NADA White Paper 9

ELR trend, you may ﬁnd that time and inﬂation will

allow you to shrink the gap between your maintenance

and repair rates. Your deﬁcit should decrease; if it

deepens, it may be necessary to increase the repair

rate slightly to offset the shortfall.

Additional Guidelines

Thorough RO analysis every month (see Driven guide

Repair Order Analysis on nada.org) will demonstrate

if your service department’s performance is consis-

tent with goals and guidelines. These are guidelines

pertinent to the present discussion:

• Percentage competitive and maintenance

sales: 60%, collectively

• Percentage repair sales: 40%

• Cost of sale (COS): 30% or lower

• Average cost per ﬂat-rate hour (FRH): Equal

to or less than average technician pay

• Total ROs: 14-18* per service advisor per day

• Total FRHs: 40-50 per service advisor per day

• Average ﬂat-rate hours per RO: 2.2-2.5;

high line 3.0

• Percentage menu sales: Upsell 30%

• Percentage one-item ROs: 10%-15%

• Model-year mix: New-vehicles still under

warranty should comprise 50% of your work

mix—upsell maintenance

* Note: The number of ROs is not as crucial as the work involved. Your

department may thrive on more work from fewer ROs. Sell needed

service (i.e., technician time), not lines on the dispatch sheet.

One Way to Devise a Variable Price Structure

There are many methods of creating variable price

structures that will work for your shop in your mar-

ket according to your work mix and the skill levels

of your technicians. One 20 Group dealer, intent

on achieving service gross percentage at or above

72%, switched from an across-the-board ﬂat rate

for all customer-pay work to a pricing grid. But the

grid, based on a graduated labor rate that increases

with the number of FRHs an operation pays, had

some problems. Diagnostic work, for instance, of-

ten paid a single hour, generating a relatively low

labor rate; yet in many cases it could be performed

only by the highest skill level (i.e., the highest-paid

technicians). On the other hand, replacement of an

automatic transmission pays a high number of hours,

thus generating a higher labor rate—but generally a

medium-skill technician can do it. Furthermore, a

local transmission shop could buy the same rebuilt

transmission from this dealer’s parts department and

perform the repair for several hundred dollars less.

So the service department instituted a four-tiered

pricing system:

1. Competitive items = brakes and shocks: $XX

per FRH

2. Maintenance items = belts, hoses and fuel

ﬁlters: $XX plus $5 per FRH

3. General repair items = engine replacement,

suspension work: $XX plus $12 per FRH

4. Specialty work = driveability, electrical,

passive restraints : $XX plus $32 per FRH

After three months of using this structure, this ser-

vice department increased its effective rate 18%.

Customer-pay gross percentage for the third month

was 74.19%, and total labor sales gross percentage

was 72.98%.

Repair Order Analysis

As you know, the repair order is the single most im-

portant piece of paper in the service department. The

RO is the ticket—the work that yields sales that, in

turn, yield proﬁts. Service managers should examine

ROs daily, ensuring that they are complete, that pric-

ing is accurate, and that service advisors are selling

needed service as well as taking orders.

On a monthly basis, analyze the ROs to determine

what needs to be improved and what actions you

should take to do so. Try to analyze 100 ROs each

month—100 ROs per service advisor per month

would be even better—comparing your department’s

performance against guidelines. With your eye on the

goal—to maintain an effective labor rate that always

exceeds your target—and your ongoing RO analysis in

hand, you can do minor tweaking with major results.

You should also review computerized reports on a

daily basis to monitor the ELR, which will ﬂuctuate

depending on the work mix. You want to manage

the sales effort to minimize one-item ROs—as the

count of one-line items decreases, your hours per RO

Managing Your Service Department for Profit An NADA White Paper 10

increases—and maximize the use of menus, pricing

guides and controlled work mixing scheduling.

NADA Actual Service Analysis

Calculate your monthly labor sales potential using a

month’s actual performance:

1. Divide your total labor sales for the month by

the total hours billed. The result is your ELR.

Labor Sales ÷ Hours Billed

= Effective Labor Rate

2. Multiply total technicians by total time. The

result is the number of clock hours available.

Number of Techs × Hours/Day ×

Working Days/Mo. = Clock Hours Available/Mo.

3. Multiply available time (clock hours) by your

ELR to arrive at your labor sales potential.

Available Hours/Mo. × ELR

= Labor Sales Potential

How does your actual total (dollar amount labor sales

in #1 for the month compare with your potential total

for the month (labor sales potential, #3?

Relevant ﬁgures from your NADA Actual Service

Analysis will be useful in computing your facility

potential and utilization, below, as well as techni-

cian productivity.

Consider Offering Free Maintenance Inspections to

Every Service Customer!

Here’s an idea to cut down your one-line items: Offer

a ﬁve-to-10 item “Free Maintenance Inspection”—not

a safety inspection, which can expose the dealership

to liability—as a courtesy to every customer who

comes into the service drive. Print up a form listing

the items you’ll check and, if the customer agrees

to your no-obligation service, give the form to the

technician. After completing the inspection, the

tech should discuss items needing service with the

service advisor, who will show and explain the form

to the customer. (If the customer must leave the car

without waiting, give him or her a copy of the blank

form to take along, and call with the results.) The

customer expects feedback, and upselling becomes

easier. Chances are, the customer will authorize ad-

ditional work, as the vehicle is already in the service

department, rather than have to schedule another

service appointment. Should the customer decline,

the service manager should call and attempt to save

the sale. Pay your technician three-tenths of an hour

or the rate determined for the upsell, whichever is

greater. The tech thus has an incentive, you have the

opportunity to increase your hours per RO, and the

customer receives needed service.

Facility Utilization

Achieving your labor sales potential requires using

your service facility to its maximum potential. With

your NADA Actual Service Analysis in hand, calculate

your facility potential with this formula:

No. Bays × No. Days × No. Hours ×

Effective Labor Rate = Facility Potential

In the formula above, use your total number of

service bays, excluding the wash and undercoat bays.

The ﬁgure for “days” is the total number of days in

a particular month that the service department is

open. “Hours” are hours per day that the service

department is open.

To calculate the extent to which you are actually mak-

ing use of your facility, compare your actual total labor

sales for the month against your facility potential:

Actual Labor Sales ÷ Facility Potential

= Facility Utilization

To compute your potential facility utilization, compare

your labor sales potential against your facility

potential.

Labor Sales Potential ÷ Facility Potential

= Potential Facility Utilization

Your facility utilization, optimally at 100%, should

be at least 70%.

If your facility utilization is lower than 70%, you may

want to answer two questions:

1. Are too many bays assigned to one

technician? (The transmission technician

Managing Your Service Department for Profit An NADA White Paper 11

and the engine technician may use two or

three bays. All other technicians should be

given a lift and share a ﬂat stall—i.e., one

and a half stalls per technician.)

2. Do I need to hire additional technicians in

order to maximize facility utilization?

(This white paper was excerpted from NADA’s A

Dealer Guide to the Three Ps of Effective Service

Management: Proﬁt, Productivity, Personnel. The full

publication is free to members at nada.org.)

ACKNOWLEDGMENTS

NADA would like to acknowledge Robert Atwood, NADA Academy instructor, for his assistance in the prepa-

ration of this white paper.

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