Effective Labor Rate Is a Key Measurement in the Service Department
Another key indicator in the Service Department is the Effective Labor Rate or EFL. Measured in conjunction with Hours Per Repair Order, it can be used as a powerful tool in gauging Advisor Performance.
What is Effective Labor Rate?
It is a measurement of how good of a job you do in selling Time to the Customer and how much money you kept from selling that unit of time.
In the Service Department we sell Labor Hours. The EFL is another way of measuring how well we do that job.
What follows is an illustration. For simplicity sake we will use $100.00 a Labor Hour.
You have a Service Advisor who sold one hour of labor in your shop. He closes the repair order and the Customer comes in to pay the bill. They pay $100.00. The Effective Labor Rate for that sale is $100.00 an hour. 1 RO at 1 Hour of Labor Time Sold at $100.00 equals $100.00.
Say the Customer comes in a pays $90.00 for that same labor hour. Now the EFL is $90.00.
Every time there is a reduction in the amount of money you collect from the Customer, there is a corresponding reduction in the EFL. As you can see, discounting is the number one way to decrease your EFL.
There is another factor in the Service Department that can have a profound impact on the EFL and that is the type of repair the repair facility is doing. And there is one other thing you must know about EFL. It is cumulative.
Say your Advisor had 10 Customers today. Of the 10, 4 were minor services like an oil change. The remaining 6 were typical repair orders, customer pay mixed with warranty repairs. This particular Service Advisor checks his Performance Numbers daily and notices that compared to the day before, he had a bit of a fall off in total Performance Numbers.
He investigates and notices that the day before he wrote 10 Repair Orders, sold 1 Hour of Labor on each RO and collected $1000.00 from the Customers he worked with. His EFL for that day was $100.00 per Labor Hour.
Today, his results are markedly different. On the ROs that were minor services, the Labor Charge to the Customer is only $7.50 which translates into an EFL of $25.00 an hour. He wrote 4 minor services. On the 4 minor services he sold.3 per RO in Labor Time Sold, and he collected $30.00 from the Customers on those Repair Orders.
On the remaining 6 Repair Orders he collected $600.00. The total collected from all of the Customers is $630.00. The Labor Time that he actually sold is 7.2 hours.
4 Repair Orders at.3 each and 6 Repair Orders at 1 hour each equals 7.2 hours of Labor. That translates into an EFL of $87.50 an hour. $630.00 divided by 7.2 Hours of Time Sold gives you the Effective Labor Rate, in this case, $87.50.
If you are the Service Manager and keeping an eye on your Advisors Performance Numbers daily, this will not seem to be out of line.
However, continued Low EFL is indicative of some type of a problem that needs to be addressed.
For instance, if your Advisor is a very good Discounter, it may be that he or she is not very good at estimating a repair, or not very confident in the quality of service provided. Maybe the only Service Item they can sell is a minor oil change and they need Sales Training to overcome their shortcomings.
Effective Labor Rate is another tool the Advisor and the Manager can use to measure Performance. Check it daily, keep an eye on Discounts and make sure the Advisors know what Products and Services best fit their Customers’ needs. If you can do that, the EFL will take care of itself.
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