Dealer Insights - July August 2014 - 7 Ways to Boost Service Area Profits and Efficiency

Published: Jul 1, 2014
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With gross profits on new automobile sales declining for the first time in five years, many dealerships are looking for ways to recapture some of these lost profits. Your service department is one of the first places to look.

Service departments have traditionally been a source of added value for dealerships that run efficient operations. For example, the gross margin for U.S. domestic auto dealerships’ service and parts departments was 65%, compared to just 7.2% for their new vehicle sales, according to Auto Team America’s 2013 Automotive Industry Guidelines.

The technological sophistication of today’s new vehicles gives dealerships an added advantage in the service area, since many independent mechanics lack the skills or diagnostic equipment to work on them. To make money in your service department, though, you must ensure that the department is running smoothly. Here are seven ways to boost your service department efficiency and profits:

1. Reduce your operating costs. In other words, increase the gross margin on work performed in the department. Set aggressive goals for gross margins — aim for 70% or higher. Also keep a close eye on such metrics as your effective labor rate, technician efficiency, advisor productivity and overall shop proficiency. Strive for constant improvement in each area.

2. Review and benchmark your operating metrics regularly. Metrics tell little by themselves — benchmark them against other dealer service departments to see how you stack up. Talk to your accountant. Accounting firms that specialize in dealership operations generally have this information and can provide guidance. Also compare your metrics to your previous quarters and years.

3. Leverage technology to your benefit. While there’s a cost to buying the latest automotive diagnostic and repair equipment, such technology can enable you to serve customers faster and more efficiently, thus boosting your profits. One example is a point-and-click electronic vehicle inspection system that guides technicians through the process of documenting their findings. This technology eliminates sloppy, time-consuming and error-prone manual processes, such as handwritten or typed inspection results and recommendations.

4. Always prepare proper documentation and obtain customer authorization. Taking shortcuts when it comes to repair estimates and authorizations usually isn’t wise. Before any work begins, the customer should sign a formal estimate that itemizes all parts and repair methods. If you need additional parts or service hours, have the customer authorize those changes in writing, too.

5. Re-examine your technician and service advisor compensation plans. If you don’t have some kind of performance-based bonus plan for technicians, consider creating one. This can boost technician productivity and efficiency — and lower turnover. Also take a fresh look at your service advisor incentive comp plan to ensure that it’s generating additional service business that’s efficient and profitable for your dealership.

6. Review your rates and charges at least once a year. This includes your hourly labor and warranty rates. Conduct market research to find out the rates of other dealer service departments in your area and then adjust yours, if necessary, to remain competitive. In general, you don’t want to charge significantly more, or less, than your competitors are charging.

7. Provide high-quality, friendly and efficient service. Take an objective look at every aspect of the service you provide — through the eyes of your customers. Are customers greeted promptly and courteously when they walk through the door? Are their problems diagnosed accurately and efficiently? Are repairs done right the first time? All of these qualities will lead to more satisfied repeat customers and higher profits.

Dealer Insights - July/August 2014