In this module of our series on Understanding the service numbers, we will dive into the realm of Effective Labor Rates (ELR) as this is, without a doubt, one of the most important factors of your service operation.

Answer this question to yourself first: If my ELR drops $10.00 per hour, do I have a problem?
 
Whether you answered "yes" or "no", you have done so prematurely, as you don't have all of the other facts that contribute to the actual reasoning for the ELR going down.
 
Before you can react, you must understand what ELR is, how it is calculated and what factors contribute to its number. Simply put, not all of your labor is charged at the same hourly rate, now is it?
 
A Lube, Oil and Filter in most facilities in North America is a 0.3 flat rate hour job. Assuming you charge a total of $19.95, the oil and the filter make up probably around $10.00 of that $19.95, which leaves $9.95 in labor sales. Which means you are 'effectively' charging $33.16 per hour for LOF's. ($9.95 divided by 0.3 = $33.16). Now, fortunately, we do more than LOF's in our Service Operations, and if you price your labor like most do, you have a different labor rate for, let 's  say, an engine replacement.  Assuming  your engine replacement labor time is 4.5 hours and your labor rate for this type of job is your standard 'labor rate' of $65.00, ELR calculation here is simple, as it doesn't change, your ELR on this work is $65.00. In fact, most of our maintenance work will be charged at a considerably lower labor rate than that of our 'repair' work in our efforts to be competitive, and this should be encouraged.
 
For example purposes, we'll keep this relatively simple and assume that this technician performs one engine replacement and 4 LOF's in one day. Lets total the math:

• 4 LOF's at $9.95 labor per LOF (4 X $9.95) =  $39.80 in labor sales and a total of (4 X 0.3) = 1.2 flat rate hours.
• 1 Engine replacement at 4.5 hrs X $65.00 = $ 292.50 in labor sales and a total of 4.5 flat rate hours.
• In total we have 5.7 hours of labor charged at a total labor sales of $332.30.
• The totals for this technician this day are $332.30 (total labor sales) divided by 5.7 (total labor hours) which results in an Effective Labor Rate of $58.29.

As you can see, the ELR is a result of work mix, and the labor amounts charged to a customer. There are other factors that contribute to the overall ELR as well. Not every operation 'pays' the technicians the same flat rate hours on various jobs. I've been in shops that pay 0.7 for a transmission flush and others that pay 2.0 for the same flush. Even though they may charge the same amount for this service, obviously the ELR in each location is going to be dramatically different. In some locations, Service Advisors/Consultants have the authority to discount the labor sale amount, which also effects the ELR negatively. The biggest contributing factor, however, is not a matter of discounting or flat rate time, but that of work mix. Maintenance vs.. Repair ratio then becomes the number to measure. Most facilities would like a mix of 60% maintenance and 40% repair, and with such a mix will have a certain ELR. If maintenance work drops, then naturally, repair has gone up and so will the ELR. However, if maintenance work goes up, then repair work must go down and obviously your ELR will go down. Simply because your ELR has dropped, does not mean you have a problem in your shop, in fact, it may represent that your Advisors are doing a much better job of presenting the Service Menu and in turn, you are selling more maintenance.
 
The reality is, until you understand your mix, your ELR, the level of ability of the Advisors and the job that they do, the technicians ability to find additional work, both repair and maintenance, your flat rate times, potential discounting, and of course your labor sale amount totals, you are not in a position to answer the question posed at the beginning of this article.
 
Are you in a position to answer? If not, don't be embarrassed, simply Click here to contact us to find out how we can teach you to understand more about the Service Numbers