Introduction
As we approach the new year, there is no better time to press reset on your dealership and start inspecting what you expect. Taking a snapshot of where you currently rate as it comes to industry standard metrics gives you a great place to focus your efforts to improve in the new year.
As a manager, you should ensure that you have 3-5 Key Performance Indicators (KPIs) to measure every aspect of your dealership including: overall, service advisors, technicians, parts, body shop, etc. Each employee should know which metrics they will be evaluated against to determine if there are successful in their role. If they don’t know which metrics are important and where they should be, how can they determine if they are doing their job acceptably and more importantly, if they are improving.
It is a good idea to create a leaderboard somewhere in the dealership (preferably not where customers can see it). Creating a little competition is good for your team especially if you offer some incentives for outstanding employees. It also reinforces what KPIs you value for your teams.
Although we have included target benchmarks for each KPI, keep in mind that specific benchmarks may vary based on the dealership size, location and business model. These are just guidelines for you to base your current performance.
1. Average Repair Order (ARO)
The ARO represents the average amount of money a customer spends on each service visit. The ARO is a reliable indicator of both customer spending patterns and the effectiveness of upselling or cross-selling strategies. A higher ARO generally signifies that customers are not only coming in for specific services but are also opting for additional recommended maintenance or repairs. This not only contributes to increased revenue but also reflects positively on the service department’s ability to communicate effectively with customers about their vehicle’s needs.
Calculation
ARO = Total Revenue Generated / Number of Repair Orders Processed
Benchmark
An ARO of $300 to $500 is considered typical for many dealerships
2. Labor Dollars Per RO (LDPR)
This metric provides insights into how effectively the service department is utilizing its labor resources to generate revenue. A higher LDPR indicates that the service department is effectively maximizing revenue from each repair order. On the other hand, a lower LDPR may suggest potential inefficiencies in labor utilization or a need for better pricing strategies. LDPR is closely tied to profitability. By optimizing labor dollars in relation to the number of repair orders, the dealership can enhance overall financial performance. Monitoring LDPR allows management to identify areas for improvement, whether it’s streamlining processes, improving technician efficiency, or adjusting labor rates. If your dealership has an express department, it is best to measure it separately from main shop.
Calculation
LDPR = Total Labor Dollars / Number of Repair Orders Completed
Benchmark
Aim for a labor dollars per RO in the range of $150 to $200
3. Effective Labor Rate (ELR)
ELR represents the true value a dealership is extracting from its labor resources during the service and repair processes. ELR directly reflects the financial health of the service department. A higher ELR indicates that the dealership is maximizing revenue per labor hour, contributing positively to the overall profitability. Monitoring ELR helps identify areas where operational efficiency can be improved. Whether it’s streamlining workflows, enhancing staff training, or optimizing scheduling, a focus on ELR encourages continuous improvement in the service processes. If the ELR is lower than industry standards, it may signify that the dealership is not fully capitalizing on its labor resources. Understanding the effective labor rate helps in setting competitive yet profitable labor rates that align with market conditions and customer expectations.
Calculation
ELR = Total Labor Revenue Total Labor Hours Billed
Benchmark
Target an ELR to be within 80-90% of the door rate
4. Additional Service Request (ASR) Closing Percentage
This metric is a key indicator of our team’s effectiveness in suggesting and closing additional service opportunities when a customer brings in their vehicle for a specific issue. The ASR Closing Percentage essentially measures the success rate of converting recommended services into actual service orders. A higher ASR Closing Percentage signifies not only your team’s ability to identify additional service needs but also their effectiveness in communicating the importance of those services to the customer. It reflects your commitment to vehicle safety, customer satisfaction, and the overall health of the vehicles we service.
Calculation
ASR Closing Percentage = Number of Additional Services Sold / Number of Services Recommended x 100
Benchmark
ASR Closing Percentage typically falls in the range of 20% to 40%
5. Premium Services Percentage
This metric calculates the proportion of premium or higher-margin services, such as specialized repairs, performance upgrades, or premium maintenance packages, in relation to the overall service revenue. In essence, it measures the dealership’s success in promoting and delivering higher-value services. It directly impacts the financial health of the service department by contributing to higher revenue and profitability. When a significant portion of services rendered falls into the premium category, it enhances the overall financial performance of the dealership. Also, a higher Premium Services Percentage often indicates customer trust and satisfaction. It suggests that customers not only choose the dealership for routine maintenance but are also opting for additional, often more lucrative, services.
Calculation
Premium Services Percentage = Number of Premium Services Sold / Number of CP ROs x 100
Benchmark
Your target Premium Services Percentage should be greater than 30%
6. Inventory Turns
This KPI represents the number of times the entire inventory of parts is sold and replaced within a specific period, typically a year. A higher inventory turnover ratio signifies that the department is effectively selling and replenishing parts, minimizing the risk of obsolete or overstocked inventory. This efficiency is vital in optimizing cash flow and reducing holding costs. A healthy inventory turnover is also an indicative of a responsive and customer-focused service department. It means the dealership can promptly fulfill service orders, reducing wait times for customers and enhancing overall satisfaction. By aligning the supply of parts with actual demand, a dealership can avoid tying up resources in slow-moving or unnecessary inventory, ultimately leading to a more streamlined and cost-effective operation.
Calculation
Inventory Turns = Cost of Goods Sold (COGS) / Average Inventory Value
Benchmark
Commonly accepted benchmark for Inventory Turns is around 12 times per year
7. Utilization Rate
Utilization Rate calculates the percentage of time that technicians spend working on vehicles compared to their total available work hours. In simpler terms, it evaluates how effectively the service department is utilizing its workforce and facilities. A high Utilization Rate indicates that technicians are consistently engaged in productive work, maximizing the department’s capacity to service vehicles. This not only enhances operational efficiency but also contributes to increased revenue as more service appointments can be accommodated.
Calculation
Utilization Rate = Total Hours Worked on Vehicles / Total Available Work Hours x 100
Benchmark
A Utilization Rate of 70-80% is considered healthy and efficient
8. Efficiency Rate
The Efficiency Rate is a key metric that measures how effectively the department utilizes its resources to complete service tasks within a given time frame. It provides insights into the productivity and effectiveness of the service team. A high Efficiency Rate suggests that the team is performing efficiently, completing tasks in a timely manner without compromising quality. On the other hand, a consistently low Efficiency Rate may indicate issues such as underutilized resources, inefficient workflows, or the need for additional training. By analyzing Efficiency Rates, the service manager can identify bottlenecks, allocate resources more effectively, and streamline processes to improve overall operational efficiency.
Calculation
Efficiency Rate = Total Labor Hours Works / Total Standard or Expected Hours x 100
Benchmark
A good benchmark for Efficiency Rate typically falls in the range of 70% to 80%
9. Gross Profit Margin
Gross Profit Margin is the percentage difference between the revenue generated from services and the cost of providing those services. It directly reflects the efficiency and profitability of the service operations. A healthy Gross Profit Margin indicates that the department is effectively covering its costs and has room for growth. It’s not just about revenue; it’s about how efficiently that revenue translates into profit after accounting for the costs associated with providing services. Monitoring and optimizing Gross Profit Margin is fundamental for the financial health of the service department, helping to identify areas for improvement, cost management, and ensuring sustained profitability in the long run.
Calculation
Gross Profit Margin = (Total Labor – Labor Costs) / Total Labor x 100
Benchmark
A good benchmark for Gross Profit Margin typically ranges between 70% and 75%
10. Net Profit Margin
Net Profit Margin represents the percentage of revenue that remains as profit after all expenses are deducted. The main difference between Net Profit and Gross Profit is that Net Profit removes all expenses incurred by the dealer including labor and overhead where as Gross Profit is limited to subtracting labor only. Net Profit Margin provides a clear indication of the department’s overall financial health and efficiency in managing costs. A higher net profit margin indicates effective cost control and a healthy financial position. On the other hand, a declining or low net profit margin may signal issues such as excessive expenses, inefficiencies in operations, or challenges in pricing strategies. It helps management make informed decisions about pricing, cost-cutting measures, and overall operational improvements.
Calculation
Net Profit Margin = (Total Revenue – Total Expenses) / Total Revenue x 100
Benchmark
A common industry benchmark for Net Profit Margin is around 10% to 15%
11. Fixed Coverage
Fixed Coverage in a dealership service department refers to the ratio of fixed expenses to the gross profit generated by the service department. Fixed expenses are the costs that remain constant regardless of the level of business activity, such as rent, utilities, and salaries. The Fixed Coverage metric helps assess the efficiency and profitability of the service department by examining how well the gross profit covers these fixed costs. A higher Fixed Coverage ratio indicates that the gross profit generated by the service department is more than sufficient to cover its fixed expenses. On the other hand, a lower ratio may signal potential financial challenges, indicating that the service department’s gross profit is not covering fixed costs adequately.
Calculation
Efficiency Rate = Gross Profit / Fixed Expenses x 100
Benchmark
A Fixed Coverage ratio of 1.2 or higher is often considered favorable
Conclusion
Although you don’t have to track these specific KPIs, this gives you an idea of where to start. Review other industry metrics and determine which ones are mosts important to you and your dealership. For each department and employee, identify 3-5 metrics that they will be tracked and graded against as it relates to job performance. Don’t leave them guessing if they are successful in their job. You should be able to point to specific KPIs and their results to determine if they are excelling in their jobs. End the new year strong, and start the new year right, by identifying your preferred key performance indicators and start tracking them today.