Calculating Car Workshop Labour Efficiency

Automotive

The clock is ticking

‘Time is money’ in bodyshops and service workshops. Essentially, these operations buy and sell the time of panel beaters, painters and technicians. A service workshop, for example, might buy one hour from a technician for £10 and sell it to a customer for £40, and make a profit of £30. (These figures are, of course, notional).

Buying and selling the time of productives is, or should be, the major source of revenue and profit in bodyshops and service workshops. Profits from the sale of spare parts; oils and lubricants; paint and materials; and sublet and sundry are all subsidiary to the buying and selling of productives’ time. If you don’t sell time, you don’t sell any of these other things.

Just as you would take great care when buying and selling a spare part, you have to pay equal attention to buying and selling productives’ time – or even more so, because you cannot ‘stock’ productives’ time. In other words, if you don’t sell their time today, you cannot sell it tomorrow.

Time for sale

So once time is gone it’s gone, whereas a spare part will still be in stock. So it is a good idea to know how much time you have for sale. This would seem pretty simple. If you have six productives, and they are there eight hours every day, surely you have 48 hours for sale? Well, no, you don’t.

For a start, productives might be in the workshop for eight hours every day, but they don’t work on paying jobs for eight solid hours. For example, a customer could come back with a car that you serviced yesterday and complain that it keeps stalling. It will then be necessary for a productive to rectify the problem, and of course you cannot charge the customer for that. If it takes two hours, then you only have 46 hours left to sell, in our example.

Time sold

To complicate things further, you can actually end up selling more than 48 hours. Imagine, for instance, that a vehicle manufacturer’s standard time for a major service is two hours and you quote the customer on this basis. If your technician completes the service in one hour (unlikely, we know) then you will still charge the customer for two hours.

If this happened all day long, you could sell 96 hours less the four hours you could have sold if one of your technicians hadn’t spent two hours spent rectifying the engine stalling problem. (It’s four hours because you are selling two hours for every hour worked in this example.) So if your productives could halve the standard times all day, that’s 92 hours sold rather than 48 hours.

Three measures of time

What we are talking about here is the three kinds of time available in a bodyshop or service workshop:

Attended time – this is the time that panel beaters, painters or technicians are in the workplace available to work.

Work time – this is the time they spend actually working on jobs that, at the end of the day, a customer pays for. Clearly ‘work time’ does not include any time spent rectifying problems, or anything else they do that does not have a paying customer at the end.

Sold time – this is the time that you charge customers for. It could be the time quoted on an estimate for an insurance company, or a menu-priced service.

You could say that ‘attended time’ and ‘work time’ are both ‘real’, because you can almost see them. You can see when a productive is in the workshop, and you can see a productive working on paying jobs. What’s more, you can measure ‘attended time’ and ‘work time’ using a clock.

On the other hand, ‘sold time’ is not ‘real’. You can’t see it, and you can’t measure it using a clock. But at the end of every day you can add up all the time you have sold to customers from your job cards or invoices.

How fast and how long

If you measure attended time and work time, and add up sold time at the end of the day, you can then see how fast and how long your productives have worked during the day.

How fast they have worked is sold hours divided by work hours. In our example, that’s 92 hours sold compared to 46 hours worked, or 200% expressed as a percentage. That is, your productives are working twice as fast as the standard time.

How long they have worked is work hours divided by attended hours. In our example that’s 46 hours compared to 48 hours, or 95.8% expressed as a percentage. That is, your productives were working on paying jobs for 95.8% of the time.

Labour efficiency

What we have just worked out as percentages are two ‘labour efficiencies’:

Productive efficiency tells you how fast productives are working compared to standard times, or the estimate in the case of a body repair job – how many sold hours they produced compared to the work time it took them to produce these sold hours.

Labour utilisation (sometimes called ‘selling efficiency’) tells you how long productives worked on paying jobs compared to the time they attended the workplace.

As formulae, productive efficiency and labour utilisation are calculated like this:

Productive efficiency = (Sold Hours/ Work Hours) x 100%

Labour utilisation = (Work Hours/Attended Hours) x 100%

Overall labour efficiency

There is one other measure of labour efficiency and that’s called overall efficiency. This is a simple combination of productive efficiency and labour utilisation, and comes from multiplying them together:

Overall Efficiency = Productive Efficiency x Labour Utilisation

Or, another way of looking at overall efficiency is as sold hours divided by attended hours:

Overall efficiency = (Sold Hours/Attended Hours) x 100%

How labour efficiency affects profit

Obviously you will make more profit if you can squeeze more sold hours from the hours your productives attend. We have already said that if you buy one hour from a service workshop technician for £10 and sell it to a customer for £40 you will make a profit of £30. But if you bought one hour from the technician and then sold two hours, you will make much more profit – £70.

It is equally obvious that if you buy one hour from a service workshop technician for £10, and then the whole hour is expended rectifying a come-back job for which you can make no charge, you have lost £10. Less obvious is that you have lost the opportunity to sell two hours (in our example), and thus lost the opportunity to make a profit of £70.

So the reason for measuring time in a workshop, and then calculating the labour efficiencies, is very clear. It’s all about profit. And if you don’t measure time and calculate the labour efficiencies, it is absolutely certain you will not maximise profitability because you will not know:

How fast your productives are working as a team and individually, and whether they could work faster if they were better trained or had better equipment

How long your productives are working as a team and individually, and how much time they are wasting on work that customers aren’t paying for.

How time is measured

The most basic way of measuring time in a workshop is by using a ‘clock’ which stamps time on a ‘clock card’ for attended time and on the job card for work time. The times are then correlated manually on a ‘daily operating control’ sheet, and the labour efficiencies calculated.

However, computers have largely superseded this basic method, with the ‘clocking’ carried out using barcodes or magnetic swipe cards. The computer then completes all the correlations and calculations instantly.

Typical labour efficiencies for the Top 25%

In recent years, the labour efficiencies achieved by bodyshops and service workshops have fallen from what would have been considered the ‘norm’ a decade ago. The reasons for this are complex. However the top 25% of franchised dealer bodyshops and service workshops are still achieving reasonable levels of performance, typically:

For a bodyshop, productive efficiency averages 106%, utilisation 88% and therefore overall efficiency is 93.3% (106% x 88%)

For a service workshop, productive efficiency averages 115%, utilisation 92% and therefore overall efficiency is 105.8% (115% x 92%)

For 40-hour attended by a productive in a week, these translate as:

For a bodyshop – 40 hours attended, 35.2 hours working on paying jobs, and 37.3 hours sold or invoiced to customers

For a service workshop – 40 hours attended, 36.8 hours working on paying jobs, and 42.3 hours sold or invoiced to customers.

Why service workshops are usually more labour-efficient than bodyshops

bodyshops are clearly less efficient, but why? Firstly, jobs move between productives in a bodyshop – starting with strip, then panel, then preparation, paint, refit and valeting. Usually this means moving the vehicle physically around the bodyshop, which is far less efficient than the straight in a bay, job done and straight out situation of a service workshop. The result for bodyshops is a lower labour utilisation than for a service workshop.

Productive efficiency in bodyshops used to be higher than for service workshops, because sold hours were negotiated with insurance assessors – so-called ‘opinion times’. A bodyshop might get 20 hours for a job and the productives would finish it in 15 work hours, achieving a productive efficiency of 133%. Nowadays, the times in a bodyshop are set by computerised estimating systems with virtually no room for negotiation or ‘opinion times’.

service workshops, like bodyshops, have seen standard times fall, too. But their customer base is millions of motorists rather than a dozen insurance companies, so service managers can set whatever times they want – within reason, and of course, subject to competition.

Lost time

Obviously it would be great if you could get away with just paying technicians when they are working on paying jobs, but you can’t. What you actually pay them for is attendance, or ‘attended time’, and they don’t ‘work’ on paying jobs all the time they are attending.

The difference between attended time and work time is ‘lost time’, which is also called non-productive time – the few hours every week that technicians are paid for when they are not working on paying jobs. Three common things that make up lost time are rectification of faulty work (‘come-backs’), collection and delivery of cars, and cleaning and maintenance.

In addition to paying for lost time, you might pay bonus and overtime, and you pay for technicians’ holidays, sick leave and training. Then there is the employer’s contribution to National Insurance, and the cost of any perks technicians receive such as pension or health insurance contributions.

It’s tempting to throw all of these payments into the cost of buying the technician’s time in our example and calculate what you might see as the ‘real’ profit. If you did, the cost of buying the hour would probably be around £13, and therefore the profit falls to £27.

Accounting for time

The facts presented so far would seem to make calculating the profit when buying and selling technicians’ time quite simple. Apparently all you have to do for any period – a day, a week, a month or a year – is add up all your labour sales and subtract all your technicians’ costs (including basic, bonus, overtime, holidays, sick, training, perks and National Insurance) to arrive at your profit on labour.

You can, but it is far better to identify all your technicians’ costs separately in your management accounts, because you can then see how much you are paying them for not working. And by separating these payments to technicians, you can look more closely at the effects of labour efficiency on your operation, whether it is mechanical servicing and repair or body repairs.

The following example shows the traditional format for the management accounts of a service workshop or bodyshop. Here we have taken the results for one technician over 12 months, assuming basic pay of £12 per hour and hours sold out at an average of £60 per hour. Additionally, we have assumed that the technician attends 44 weeks per annum and 40 hours per week, working 37 of those hours with lost time of 3 hours. As a result of the technician’s efforts, the workshop sells 42 hours per week (or 1,848 sold hours per annum from 44 weeks x 42 hours), and this is achieved without any overtime or bonus pay.

Management accounts

Labour sales 1,848 hours sold @ £60 = £110,880

Less Technician’s pay for 1,628 work hours @ £12 = £19,536

Technician’s bonus pay (all bonus pay entered if earned) = NIL

Technician’s overtime pay (all overtime entered if earned) = NIL

Gross profit on labour sales (Labour gross profit) = £91,344

Direct expenses

Technician’s pay for 132 hours of lost time @ £12 = £1,584

Technician’s pay for hols, sick & training (40 days of 8 hours) @ £12 = £3,840

Technician’s National Insurance and perks = £3,744

Direct profit on labour sales = £82,176

Labour gross profit

In this traditional form of management accounts, then, the cost of the technician is divided up into no less than six lines. The first three lines appear straight after labour sales, and consist of all pay made to the technician for actually producing work that is then sold to a customer. This includes pay for ‘work time’, and all bonus and overtime pay. Accountants call these the ‘cost of sales’.

By subtracting these three lines from sales, you end up with the gross profit made from buying and selling the technician’s time – usually called the ‘labour gross profit’. The labour gross profit is often expressed as a percentage of labour sales, which in this example comes to 82% (£91,344 divided by £110,880 expressed as a percentage).

The remaining three lines appear in the direct expenses section of management accounts along with the cost of non-productive salaries, apprentices, consumables, courtesy cars, advertising, etc. The idea, as we have said, is to identify what you pay technicians for not working. In this example, the total cost of the technician is £28,704 per annum, and £9,168 is for not working. That is nearly one-third, and a far from unusual proportion!

Dividing up the technician’s pay

The way some of the technician’s pay is divided up is self-evident – bonus, overtime, holidays etc, and National Insurance and perks. That just leaves the technician’s basic pay, which is divided up according to ‘work time’ and ‘lost time’:

In our example we know the technician attends 40 hours each week and works 37 of these hours, which means that the technician works for 1,628 hours in a year (37 hours x 44 weeks), which at £12 per hour is £19,536.

That leaves three hours of lost time each week, or 132 hours per annum (3 hours x 44 weeks), or £1,584 at £12 per hour.

In fact, this split corresponds to one of the measures of efficiency we discussed earlier – labour utilisation. Labour utilisation is ‘work hours’ divided by ‘attended hours’ expressed as a percentage, or 92.5% in this case (37 hours divided by 40 hours). The split in the management accounts allocates 92.5% of basic pay as the cost of doing the work. The remainder (7.5% of basic pay) – corresponding to the technician’s pay for lost time – is allocated as an expense.

It should now be clear that labour utilisation has a direct bearing on how much gross profit is effectively produced from selling the technician’s time, and what is paid to the technician for not working.

Calculating labour sales

In our example, the workshop sells 42 hours per week as a result of the 37 hours the technician actually works out of the 40 hours attended. We have already seen that the labour utilisation here is 92.5% (37 hours divided by 40 hours). The productive efficiency can also be calculated as 113.5% (42 sold hours divided by 37 work hours), and the overall efficiency is 105% (42 sold hours divided by 40 attended hours). All these formulae were covered earlier.

The labour sales in our example are calculated by multiplying the sold hours in a year (1,848 hours) by the labour rate of £60 per hour. In full, this calculation is as follows:

Annual labour sales = 1 technician x 40 attended hours per week x 44 weeks attended per year x 105% overall efficiency x £60 per hour labour rate = £110,880

Increased productive efficiency

Now we can have a look at what happens to the profit on labour sales if labour efficiency increases. Let’s say our technician still works 37 hours out of 40 hours attended, but works faster (i.e. is more productive) and achieves 43 sold hours. The utilisation is still 92.5% (37 work hours divided by 40 attended hours), but the productive efficiency has increased to 116.2% (43 sold hours divided by 37 work hours) and the overall efficiency has also increased to 107.5% (43 sold hours divided by 40 attended hours). The effect is as follows (and we have assumed again that bonus and overtime are ‘nil’):

Labour sales

1 tech x 40 att. hours x 44 weeks x 107.5% overall efficiency x £60 per hour = £113,520

Less

1 tech x 40 att. hours x 44 weeks x 92.5% utilisation x £12 per hour = £19,536

Gross profit on labour sales (Labour gross profit) £93,984

Direct expenses

1 tech x 40 att. hours x 44 weeks x 7.5% lost time x £12 per hour = £1,584

Technician’s pay for hols, sick & training (40 days of 8 hours) @ £12 = £3,840

Technician’s National Insurance and perks = £3,744

Direct profit on labour sales £84,816

A small increase in productive efficiency – just about three percentage points – has resulted in an extra annual profit on labour of £2,640.

Improving labour utilisation and productive efficiency

So far, we have explained how to measure time in a service or body repair workshop, how labour efficiency is calculated, and how management accounts are designed to highlight the sources of labour profit. We have shown how productive efficiency affects profitability. Next, we look at the effects on profit of improving labour utilisation, and then both productive efficiency and labour utilisation at the same time.

Increased labour utilisation

Taking the same example discussed earlier, let’s improve labour utilisation by assuming that our technician manages to work 38 hours out of 40 hours attended instead of 37, while leaving the productive efficiency the same (113.5%) as in the original example. This means that utilisation goes up to 95% (38 work hours divided by 40 attended hours), and even if the productive efficiency is the same at 113.5%, then our technician will produce 43.1 sold hours (38 hours worked x 113.5%). That is, the technician’s overall efficiency has increased to 107.8% (43.1 sold hours divided by 40 attended hours).

The effect on labour profits is then:

Labour sales

1 tech x 40 att. hours x 44 weeks x 107.8% overall efficiency x £60 per hour = £113,520

Less

1 tech x 40 att. hours x 44 weeks x 95% utilisation x £12 per hour = £20,064 Gross profit on labour sales (Labour gross profit) = £93,456

Direct expenses

1 tech x 40 att. hours x 44 weeks x 5% lost time x £12 per hour = £1,056

Technician’s pay for hols, sick & training (40 days of 8 hours) @ £12 = £3,840

Technician’s National Insurance and perks = £3,744

Direct profit on labour sales = £84,816

The improvement, from one extra hour worked per week, is £2,640 in a year.

Do both!

But what would happen if both utilisation and productive efficiency improved at the same time? That is, the technician still attends 40 hours, but works 38 hours at the improved productive efficiency of 116.2% (from Part 2) thereby producing 44.2 sold hours (38 work hours x 116.2%) and hence an overall efficiency of 110.5% (44.2 sold hours divided by 40 attended hours). The calculation looks like this:

Labour sales

1 tech x 40 att. hours x 44 weeks x 110.5% overall efficiency x £60 per hour = £116,688

Less

1 tech x 40 att. hours x 44 weeks x 95% utilisation x £12 per hour = £20,064

Gross profit on labour sales (Labour gross profit) = £96,624

Direct expenses

1 tech x 40 att. hours x 44 weeks x 5% lost time x £12 per hour = £1,056

Technician’s pay for hols, sick & training (40 days of 8 hours) @ £12 = £3,840

Technician’s National Insurance and perks = £3,744

Direct profit on labour sales = £87,984

The improvement is £5,808, multiplied by (say) seven technicians is a sizeable £40,656 extra profit per annum.

This shows how significant for profitability only relatively small increases in labour efficiency can be. However, labour profits can also fall just as significantly if labour efficiency falls by an equally small amount.

Hidden lost time

If small improvements in labour efficiency translate into big improvements in labour profits, but any slight reduction means big falls in profit, then you need to know what levers to pull to make sure you are on the side of big profits. So what’s the secret? Or is it about managing the minutiae?

There’s no secret. The trick is managing every aspect of a workshop. Managers have to do everything they can to make sure technicians, panel beaters or painters are working as fast as possible for as long as possible. In other words, you must do everything to minimise lost time, and provide your productive staff with every means to support faster working like training, power tools… and even placing certain jobs with productives who are the most experienced. If you have a clutch job, then give it to the clutch expert.

But there is one secret worth knowing, and that’s ‘hidden lost time’.

As we have shown, lost time is a killer. But then lost time, if it’s measured at all, is usually about the most obvious elements such as rectification of faulty work, collection and delivery of cars, and cleaning and maintenance. However, there is a lot more lost time hidden away within jobs. Technicians may seem to be working hard, but too often they may be waiting for spare parts at the back counter of the stores. Or a technician may be waiting in line to use a piece of equipment like a wheel alignment rig.

The outcome of ‘hidden lost time’ is a fall in productive efficiency, but labour utilisation is unaffected because you haven’t measured the losses. But, as you have seen, the effect on profits can be huge. So apart from attending to the obvious and direct influences on labour efficiency, which affect how fast technicians work (productive efficiency) and how long (utilisation), workshop managers must also attend to anything that can slow them down when they are supposed to be working.

Source by Charlie Oakham

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