Business Profitability Explored
Knowing the value of just one hour of your shop’s cost allows you to understand and calculate the exact price of a setback.
Most of us have heard for our entire lives that, ‘Time is money.’ The trouble is, very few have any idea how to quantify this saying into facts & figures to help our businesses. One of my great mentors once asked me a question that I had no idea how to answer.
“Greg, do you know your business’ cost per hour?”
Of course, I answered, ‘Nope.’ Then he started asking for some data and we did the following calculations.
Let’s say we have a shop that produces $1,000,000 per year in gross sales. Now let’s take the 52 weeks in every year multiplied by the average 40-hour work week to equal 2,080 working hours. With our example shop that produces $1,000,000 per year in gross sales, let’s divide that figure by our 2,080 working hours to equal 480.77. Rounding up, each hour this example shop is open for business has a dollar value of $481—or, this shop is burning $481 per hour! Let’s say we have a $2,500,000 per year shop; they are burning $1,202 per hour. A $5,000,000 shop is burning $2,404 per hour. A $10,000,000 shop is burning $4,808 per hour! I bet some of you are saying to yourself right now, ‘This is some crazy stuff, but what does this even mean?’
The most valuable commodity that we have inside of our shops is time! Let’s say we have a car scheduled to leave today and one of our technicians just now discovered a broken tab on a headlamp during reassembly. This car is dead in the water. Now several admin folks must stop what they are doing to fight this fire that was just discovered. A new headlamp needs to be ordered, a customer needs to be called with the surprise of bad news, photos need to be taken, another invoice will need to be scanned and received, another supplement needs to be sent, etc. We have all been there of course, but what’s the cost? We need to understand that every shop has an imaginary conveyor belt running through each of our departments: Drop-off, pre-wash, check-in, blueprint, parts-waiting, parts mirror-matching, body, prep, paint, build, detail, QC, ADAS calibrations, delivery, cash in the bank. This conveyor belt is carrying cash, that’s right cash!
Our shops are really money printing machines. What’s the cost per hour? As my mentor taught me, ‘Cost is even more than numerical.’ When this conveyor belt must stop, the business suffers financial loss and the employees are frustrated with themselves and each other. The worst part is, we have a customer at the end of this machine that must now wait even longer to get their car back. Problems inside our shop are more expensive than most any of us even begin to realize.
So, how do we combat our money conveyor belt from stopping? In lean manufacturing there is a simple tool in the Root Cause Analysis (RCA) toolkit called the ‘5 Whys.’ This tool is used for understanding and solving problems. In the case of the broken headlamp found in the build department, we would start the ‘5 Whys’ process with everyone involved like this: 1. Why did we find a broken headlamp in the build department? Answer: It was overlooked when the car was taken apart in dismantle/blueprint. Question 2: Why did dismantle/blueprint overlook it? Answer: The broken headlamp was found by the technician, but the estimator didn’t know it was broken and put the lamp with the other R&I parts. Question 3: Why did the technician and estimator have a communication breakdown? Answer: The job had to be hurried through dismantle/blueprint after sitting for three days after the scheduled drop off date and the customer was wanting an update. Question 4: Why did the job sit for three days after dropping off? Answer: Too many cars had been scheduled to be dropped in one day and this job was at the end of that line. Question 5: Why were so many cars dropped off that day? Answer: There is no real level scheduling system.
The 5 Whys process is not about finding someone to blame, but rather fixing our system. In the coming months, we will discuss level scheduling, blueprinting, etc., and how they need to work together as an ecosystem. Now, please take time to figure the cost per hour for your shop. Once you have this figure, make it big, bold and visible for all to see just how expensive problems are when cars must stop. As soon as we start focusing on really fixing our system, rather than just the daily firefighting, our conveyor belt can run faster with less effort, stress, frustration and at a much higher rate of profitability.
Article Credit to Fenderbender.
Have you spent the time calculating the exact cost per hour of your shop in order to be able to calculate how much rework project cost your business? Do you think this can be a powerful took to use in your business? Let us know in the comments below. Also, if you found our content informative, do like it and share it with your friends.
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