The collision industry has entered into the computer age begrudgingly and slowly over the past 20 years. Although computers and software now play a large part in our industry, it has taken more than a few years for the advantages that modern technology can provide to begin to really take hold and become a normal part of daily life in a collision shop.
Other industries have more openly embraced these technological advances, and consequently, have evolved more rapidly than our industry. Thankfully, in recent years, this trend seems to be changing somewhat and more shops are beginning to see and use more cutting edge technology. I am old enough to remember handwriting estimates on carbon paper estimate forms that most of you reading this have probably never seen. When computer estimating became available, I was a little leery about its future, and like most other shop personnel, I was reluctant to let go of my books, calculator and pads of paper. Boy was I crazy. I couldn't imagine going back to those "good old days" now.
Along with computer estimating came management systems that helped us run our shops more efficiently. Over the years these systems have evolved and improved into some of the most robust and user-friendly products available today. Part and parcel of this technology movement sprang a whole host of new buzzwords that most collision shops guys had never heard of. Batting average, cycle time, CSI and other strange terms echoed from the rafters at the 20 group and Collision Industry Conference meetings. We've all heard them and nodded in agreement when talking with other shop owners or managers about them, but do you truly understand what they mean, and how these key performance indicators (KPIs) can help your shop run better, more efficiently, and make you more money?
Those of you who have read my articles before know that I always talk about measuring to improve. Modern management systems allow you to measure many areas of performance with ease. If you don't have one, you can still measure your shops performance with regard to KPIs, but it will take more work. Unfortunately, developing spreadsheets and putting together numbers by hand can take time and effort. Most of us don't mind the effort, but the extra time is difficult to come by. As hard as it might be, devote whatever effort and time you have to get the basic baseline measurements taken. If you do not understand how to begin this project, email me at [email protected]
. I will be happy to help you.
However you do it, you must measure what you are doing today so that you can improve tomorrow. That's pretty simple.
Out of the many KPI categories available to analyze, what areas should you really be looking at? All KPIs are important, so I don't want to minimize any. However, I feel a handful are basic necessities: batting average (capture ratio), cycle time, average RO, repair vs. replace and gross profit percentage. Let's look at these basic metrics in more detail, so that you will be able to understand what each category means to the success of your shop.
Batting average
The KPI "batting average" refers to what percentage of estimates you write at your shop that turn into repairs. I don't know of any shops that make money from writing estimates. Mostly everyone I know makes money when an estimate turns into a job. I call it getting converted. Over the years, I have asked many estimators and managers about their batting average. Most of them confidently assume it is 100 percent. In reality, after gathering the proper data and running reports, it is usually closer to 50 percent. The accepted industry standard for this number is highly debatable, but I feel that shops should shoot for a conversion ratio, or batting average, of 75 percent. Again, this means that 75 percent of the estimates you write in your shop turn into jobs.
Why is this number important? Any increase in your conversion ratio is going to directly relate to an increase in jobs, which means an increase in revenue. Let's assume your average RO is $2,000, and you do roughly 50 cars a month at your shop (car count/RO count is another important KPI). You determine that your conversion ratio is 50 percent by manually tracking estimates. If you bump up your conversion ratio to 75 percent, you will increase your RO count by 25, and add $50K to your overall sales. All that by simply capturing what comes in the door on a daily basis. No additional advertising, no coupons, no specials, just good salesmanship.
An estimator's job is to get the keys, or capture the job, above all else. Unfortunately, most estimators are not very skilled in sales, so it's important you address this issue with proper training. Talk with your paint supplier – all of them have estimating training classes that focus on this area specifically.
Average RO
Severity is what it is. None of us can control the damage on the car. What you can control, however, is estimate accuracy. You can control the fact that you must charge for all you do whenever possible. If you install 10 clips on a car, make sure you charge for 10 clips. If you align a panel, charge for it on the estimate. Once you measure your average RO, you will then have a baseline that will allow you to take the steps necessary to increase it. In today's economy, it is more difficult to get work to the shop. When it shows up on your doorstep, you have to capture it and make sure you maximize the opportunity for profitability on every job. Small, incremental increases in average RO dollars will make a huge difference to your bottom line. Obviously, you have to be fair and maintain relationships and the guidelines of your DRP partners; however, it really isn't hard to increase your average RO by $10 to $20 just by making an effort to do so. If you fix 75 cars, and each one goes up by an average of $15, you will add about $1,200 to the bottom line every month. That's more than $12,000 a year.
If you have a management system, you will be able to run reports on this easily. If not, simply take your total sales and divide it by the number of cars you fixed. ($100,000 divided by 100 cars = $1,000 average RO) Look at each estimate very carefully as they are written, and try to get that extra $10 or $20 dollars on each one. It will make a huge difference.
Cycle time
Cycle time is a metric that is very important to insurance companies today. Consequently, it should be important to you. Generally, cycle time is the amount of time it takes for a shop to complete a repair. It usually is measured several ways – drop off to delivery, keys to keys, repair start to repair completion, drop off to start and several others.
The one metric that m.jpg?auto=format,compress&fit=max&q=45&w=250&width=250 "undefined")
ost companies look at is keys to keys. Obviously, the faster a repair is done, the less money it will cost the insurance company in rental car fees. In addition, studies have shown most customers are happier with the claims process if the repairs are done in a timely manner. Happier claims customers lead to new policies and renewals.
Faster repair times mean happier customers for the shop, and more referrals and repeat business from those happy customers. In addition, repairs done faster mean you collect your money faster. Smaller receivables mean better cash flow. Better cash flow means happy shop owners and happy vendors that get paid on time. Unless you sacrifice quality, which obviously you shouldn't, there is no downside to faster cycle times. Again, it's easy to measure and set a baseline with which to improve upon. Cycle time can be affected by poor scheduling, incomplete estimates, redo work, lack of help and several other correctable issues. Look at where your bottlenecks are and work to eliminate them.
Repair vs. replace
I believe that some of today's collision techs have lost the skill of being able to straighten damage. It is an art, which some techs just never get good at. That is unfortunate, since all shops retain a higher profit percentage on a repaired panel than they do on a replaced one. Do the simple math.
Generally, the average shop will retain 50 percent to 60 percent on labor operations they sell. When a shop sells a part, in most cases, the shop will only retain between 20 percent and 40 percent profit on that sale. It's obvious that selling labor will increase gross and net profit numbers.
Tracking this KPI is a little trickier, unless you have a management system. For a quick overview, look at your total sales in each category as a percentage of your overall total sales. I believe you should try to always keep your labor sales at or above 50 percent of your total overall sales. Keeping this number as high as possible will generally guarantee a higher gross profit number. In addition to making your shop more money, fixing a damaged part can often improve the cycle time of the repair simply by not having to wait for parts to arrive to start repairs. Longer cycle times increase cost and reduce customer satisfaction.
Are you starting to see how all of these KPIs are intertwined?
Just by measuring this KPI, you will heighten awareness of this metric in your shop. Because people are aware of it and know it is being measured, they will make a conscious effort to improve performance on their own. Everyone involved will benefit.
Gross profit
In my recent article on basic financials, I note the importance of gross profit (GP). To survive in this economy, it is imperative that you always keep your eye on your GP percentages, and continually work to improve upon them. GP is the amount of retained profit after all direct expenses are charged to the repair. It does not include heat, light, telephones and other costs of doing business. GP is only the profit earned on the cost of items directly involved in the repair, such as parts, labor sales, paint and material.
I recommend that you try to keep your gross profit percentages around 45 percent to 60 percent GP on every job. Maintaining this number will generally keep a shop running smoothly. It's an easy KPI to measure, and much like repair vs. replace, will improve just by keeping it top of mind.
Compiling these numbers may take a little time and effort. However, once you have them organized and begin the process of improving operations based on those numbers, you will truly be able to generate a substantially higher profit before you even work to get additional cars into your shop. Think of the greater profitability potential once you work to increase business and repair potential.
KPI measurement suddenly has started to look much more interesting, hasn't it?
