Are You Running an Efficient Shop

Are You Running an Efficient Shop Gears magazine article
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  Are You Running An Efficient Shop? 22GEARS May 2002 H owdo you increase efficiencyin a shop? First you have tounderstand what poor efficien-cyreally costs you. To do that you need to find out two things: What are your true operating expenses for a given period of time, and how many hours doyou have available from each employeeto sell? The answers may shock you.Start with operating expenses. Youneed to find out what your TRUE break even costs are. In other words, whatwould it cost to keep your doors open if you had no sales at all? You won’t add in parts, commis-sions, royalties, towing, credit card feesand other expenses associated withsales. You will, however, need to add inrent, utilities, advertising, wages and  benefits for hourly and salaried employees (because you pay themwhether they are producing or not). Now you know what it costs (for say aweek) just to keep your doors open. Now let’s take a look at hourlyemployees. You don’t get 40 hours per week that you can sell to a customer from each one. Here is why: (see chart below)As you can see by the chart, you pay for 40 hours and get 30 hours.That’s 75% of the time you bought, and that only applies if the employee PRODUCESsomething for each of those 30 hours. What if he has timestanding around, what does that costyou? Say you have two employees pro-ducing 60 hours per week that you cansell to a customer. Let’s assume thatyour true break even costs are $4800 per week. That amount divided by 60hours equals $80 per hour that eachemployee must produce just to break even. If you want a reasonable profitthen the figure will be more like $100 per hour. Don’t confuse that number with your labor rate because when yousell a job to your customer you will bedoing a parts mark-up which should account for some of your income. The point is simply this, if you’reonly getting 75% production for eachhour you buy, then you better make themost out of each one of those hours.Anytime an hourly employee is waitingfor instructions, running for parts or doing anything else that does not pro-duce income he is wasting time that younever get back at a rate of roughly $100 per hour. If both employees are stand-ing around (not producing), then it iscosting you $200 per hour, or more than$3 per minute. Anything that happensin the shop that keeps the employeefrom producing a billable hour is cost-ing you a great deal of money. CHANGINGGEARS by Glenn Troub President of GTEnterprises Are You Running An Efficient Shop? Hours paid: 52weeks@40 hours per week = 2080Paid vacation: 2 weeks -80 hoursPaid breaks: 2.5 hours per week –122Paid holidays: 6 days at 8 hours per day –48Total hours off for holidays and breaks –250 Hours left = 1830 Warranty work at a 10% CB/No-Go rate = 4 hours per week at 49 weeks –196Shop or work area cleanup 15 minutes per day 49weeks = -61 Hours left = 1573 annual or 30.2 hours per week   GEARS May 200223 There are lots of ways to waste time but let’s start with two of the biggestones. Standing around waiting for their next instruction or waiting on parts.Let’s start with parts. Now days with parts deliveries every day, shops havegotten away from stocking too much inthe way of parts. That may not be sucha good idea if it costs us productiontime. Obviously, we want to tie up aslittle of our money as possible in inven-tory. So how much is the right amountto stock. In a simple world we could sayto stock just enough parts so that your technicians are never standing around waiting for a part. How do you do that?You have to start by figuring out whatyour top 10 transmissions are. If youare a typical shop, your top units are probably the A604, 4L60 and 4L60-E,A4LD, 413 and 670’s, E4OD, 4T60-E,AOD and AOD-E, AXOD and AXOD-E.Your top 10 transmissions probablymake up 70% of all your work. Now figure out what it takes in parts to build each one of those units.Be sure to include any updates or valve body kits that you routinely put in.Also include any common hard partsthat usually go bad. You now have aminimum inventory to build 70% of what comes in without ever waiting on parts. (If you did your top 15 units youwould probably handle 85% of whatcomes in, but that also ties up cash ininventory.)This is an ongoing process so if cash flow is tight then start by juststocking for the top one or two unitsand add more as you can afford it. Totruly run an efficient shop and makemoney, you want your inventory to beas small as possible but never so smallthat it stops production. The produc-tion hours are worth more than theslight increase in inventory because theinventory can always be sold or used later but a lost production hour is goneforever.In the October 2001 issue of  GEARS  I discussed three measure-ments that tell you if you are runningefficiently or not. Let’s cover those onemore time. The three measurements areThroughput, Inventory and OperationalExpense. While those words sound familiar, their meanings are differentfrom what you may have heard before. Throughput is the rate at which theshop generates money through sales. If you build a stock unit and it goes on theshelf, that is not throughput. It must getsold.Inventory is all the money the shophas invested in purchasing things that itintends to sell. Production employeescould be considered as inventory. You purchased their time and intend to sellit to a customer.Operational expense is all themoney the shop spends in order to turninventory into throughput. Non-pro-duction employees like the manager or other office help could be considered asan operational expense. Each of these things has an effecton the others. For example, If you cutinventory improperly like laying off a productive employee or cutting back on parts on the shelf, you probably lowered throughput. In addition, if you nowhave to overnight ship a part because itwasn’t in stock, you raised operationalexpense. The point is, when youchange one item, you almost alwayschange at least one of the other two.Even if you don’t change one of theothers, you aren’t necessarily makingmoney. What you want to do is reduceoperational expense and reduce inven-tory while simultaneously increasingthroughput.In later issues we will discuss evenmore ways to raise production(throughput) while keeping costs under control. 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