Without three “SIDES”, the triangle doesn't exist.
Service
Without three three “SIDES” of the business there is not profit in Service
Profit
The ABC of service business profit.
Maximizing Service Profitability
A reduction in the labor utilization, due to low productivity, &/or increase of allowed hours, reduces the productive or billable hours meaning a low volume of labor sales & the associate parts Labour Labour Utiliza Utilization tion % - Technici Technicians ans Producti Productivity vity % - Expenses Expenses hours hours %
The Labour hours management.
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Maximizing Service Profitability s e s n p e x t e c e e i r d t t r p o WIP vs. Low volume of invoiced p s u t o sales generate low volume of: gross l o w f margin & cash flow. h c a s Low volume of gross margin is not enough to support l, o w direct expenses,& profit will be compromised. Direct expenses I P h W are independent of sales invoiced. WIP reduction is g i one time only benefit. H
The work in process management.
Maximizing Service Profitability S a l e s / C o s t : L a b o r r a t e / h - R e a Service hour inefficiency l i z e d Labor discount or free hours vs. L a b o break even rate r r a t e / h Realized labor rate vs. break even - B r e rate a k e v e n Break even rate out of market r a t e Compromise Service Profit / h
The Labour Labour hours efficiency manageme management. nt.
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Maximizing Service Profitability sS a l e s e s o r n c o p e x s t e : L t c a b e e r o r i d r a t t t e r / o h p - R p u e a s l i t o z e d w L a o l f b o h Service r r s a t c a e / h w - B Profit l, o r e P a k I e v W e n h g r a i t e H / h Labour Utilization % - Technicians Productivity % - Expenses hours %
The ABC of service business profit.
Maximizing Service Profitability
n
Increase Sales. Has a direct positive impact on Maximizing Maximizing Service Profitability Profitability 1:1 ratio. Without increasing service costs.
§ Increasing labor selling rate.
Has a direct positive impact on Maximizing Maximizing Service Profitability Profitability 1:1 ratio, assuming no loss of sales. s ales. But will customers accept this increase?
Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Specific formulas: Total Service labor cost/h or Break Even rate/h & price calculation Break Even = rate/h
Total Service cost after indirect expenses and before interest and taxes _____________________________ _______________ __________________________ ____________ Total service productive or billable hours
Always
A
& B
Vs.
Average Realize rate/hour = A
(external)
Average Realize rate /hour = B
realize break even rate/h Total external labor sales
Total external service productive or billable hours
Total interdepartmental labor sales
(internal)
Total interdepartmental service productive or billable hours Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Gross Profit Defense (internal) • Forecast & Budget vs. Monthly Service Sales - Sales variance tracking control. • Month Monthly ly Labor Labor Sales
Information from Finance department.
• Sale Saless Tracki Tracking ng Labor rate sales Actual labor sales sales rate – Published Av. labor sales rate rate variance % = Published Av. labor rate
Labor cost rate Published Published Av.la Av.labor bor cost rate rate – Actual Actual labor labor cost rate rate variance % = Published Av. labor cost rate Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Reduce Expenses Defense (internal) • Forecast & Budget vs. Monthly Direct Expenses - Direct expenses tracking control. • Month Monthly ly direct direct expens expense e
Information from Finances department.
• Direct expenses cost tracking tracking Budget expense cost - Direct Expenses cost hours Expenses hours cost deviation = Budget
Budget other expense cost - Direct expenses cost Other expenses cost deviation = Budget
Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Conclusion Service profitability is affected by: Service Sales. Cost of Sales. Direct expenses. Service Sales is affected by: Labor Sales Variance. Cost of Sales is affected by: Labor Cost Variance. Direct expenses is affected by: Expenses hours Others expenses Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Labor Sales Variance is generated as consequence of Work order opening or closing process . Wrong job quotation. Wrong use of Flat rate philosophy. Excess of discount. Deviation on hours assigned for a job, hidden inefficiency to increase or to maintain technician productivity. Overtime not invoiced. Travel hours not invoiced. Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Labor Cost variance is linked with Labor sales variance: Wrong job quotation. Wrong cost calculation on Flat rate philosophy. Wrong labor cost calculation, inadequate, and not enough quantity. Deviation on hours assigned for a job, hidden inefficiency inefficiency to increase or to maintain technician technician productivity. Overtime not invoiced. Travel hours not invoiced. Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Direct Expense is linked with:
Direct Expenses related with hours at labor cost Expense hours (allowed hours & non-chargeable). non-chargeable). Other Direct Expenses not related with hours ( Management Salaries, Service Van cost, tools, parts rework, depreciation, kilometers or miles, not recovered, etc.)
Maurizio Bonacchi Caterpillar Geneva
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Maximizing Service Profitability Services Sales: “Profit after direct expenses is affected by”
Service Sales –/+ –/ + Sa Sale less variance – Cost of sales –/+ –/ + Cost variance – Direct expenses hours hours at labor cost – Other direct expenses. expenses.
