By Paul MacDonald, Expert Service Program
Peter Drucker (1909-2005) was one of the most widely known and influential thinkers on management, whose work continues to be used by managers worldwide.
Peter said, “If you can’t measure it, you can’t improve it.” I think a more appropriate variation for the appliance industry, or more specifically, the service department of a retail appliance dealer, would be “You can’t manage what you don’t measure.”
While service is not impossible to operate without measuring performance, I will bet it’s draining margins from the sales side of a dealership. Appliance service departments are often looked at as a cost of doing business. This cannot be further from the truth. Tasco Distributors in Toronto and BrandSource member Plaza Appliance Mart in Charlotte, N.C., both enjoyed successful sustained growth after shedding their service departments. Thousands of independent repair shops prosper from appliance repair without appliance sales.
For the record, I believe a dealer differentiates itself from big-box stores by offering repair and installation services, and furthermore, that service feeds sales and sales feeds service.
Two of my top management measuring tools in service operations are separate financial statements for the department and technician key performance indicators, or KPIs. Let us focus first on the need for separate monthly profit-and-loss statements for the service operations. We do this primarily to set service rates that deliver profits, and second to know how the department is performing each month. As Peter says, “If you can’t measure it, you can’t improve it.”
Wouldn’t it be useful to know if your service department was profitable on a monthly basis, rather than four months into the new year? Appliance service is profitable. If yours is not, act now to improve it.
The P&L statement is a financial measure that summarizes revenue and costs and expenses incurred during a specific period.
I wrote last month about setting service rates based on a company’s cost of doing business (CODB). I am shocked at how many large operations I have worked with that cannot accomplish this, as they do not have separate financials for the service operations. It takes me three times longer to calculate what rates a company should set because their department costs are difficult to accurately identify.
Larger companies generally have clerical staff to enter payables and expenses into their business management systems (BMS). Once set up it is easy for bookkeepers to allocate all expenses accurately across all departments. Most BMS have the ability to print financials in-house for management on a monthly basis. Without separating revenues, cost of goods sold (COGS), and expenses appropriately across a business, it is not possible to accurately manage each department. Think of a dealer that sells appliances, mattresses and electronics and provides delivery, service and installations. Each of these activities require separate financials to manage each effectively. In addition, overall amalgamated financials are required for the IRS, investors and lending institutions.
COGS are subtracted from revenues to determine gross profits.
Cost of goods sold is the cost of acquiring or manufacturing the products or services a company sells during the period, so the only costs included in the measure are those directly tied to production, sales or service, including the cost of labor and materials. On service financials, COGS are the direct cost of producing goods or services that were purchased by customers during the period. Those COGS are the parts costs and the technician’s wages for that period. All other costs are expenses.
Recording these properly on service department financials is crucial when setting service rates and making other decisions for the department. Separate financials may be a challenge to set up, but once in place they are easy to maintain and invaluable to management. The same can be said of key performance indicators in business.
KPI measures strength and identifies weakness.
KPIs are a quantifiable measure of performance over time for a specific objective. KPIs provide targets for teams to shoot for, milestones by which to gauge progress, and insights that help people across the organization make better decisions.
Business in general has an infinite number of KPIs to consider, but let’s stick to the service department. KPIs in a service operation help to measure strengths and identify weaknesses in day-to-day activities. Strengths are to be celebrated and weaknesses should be addressed. On service financials I recommend recording COD, warranty, extended warranty labor, and parts revenues separately. Doing so provides management with a clear understanding of where the revenue is coming from and from which manufacturer and brand.
A healthy goal in service revenue is 70/30, COD to warranty. As the warranty rate increases, profits will decrease. Servicing what you sell often determines how much warranty work a company performs and is out of our control. When the warranty-to-COD ratio is not where you want it, promoting COD service is how to return to that healthy ratio of 70/30.
Setting KPIs for technicians is not only good management, but it also lets employees know how they are performing in management’s eyes. KPIs should be used to measure what is important to the business and should include at a minimum the number of first call completes; average labor and parts sales per ticket; the number of call-backs; percentage of walks (when no repair is carried out); conversions to sales; and on-line reviews to name a few. By measuring these KPIs monthly for each technician, you will establish a competitive culture and drive employee performance. No one wants to be on the bottom of the performance charts on a regular basis.
KPIs implement accountability of staff and set the company’s performance expectations every day. They identify the training needs of individual technicians and additional resources your team may need. KPIs also provide an opportunity for managers to deliver the often-overlooked praise for, and awareness of, an employee’s performance, and are great for motivating a field service employee who is out of management sight most of their time.
Every department should have their own KPIs and use them to manage what is important in your business.
BrandSource service consultant Paul MacDonald ran his own 38-tech service business and is a past president of the UASA. He currently operates Expert Service Program, which helps servicers run their operations more efficiently and profitably. You can reach Paul at (647) 500-7785 or at Paul.M.MacDonald@gmail.com.