A Visit To The Dentist – Part Two

 

Here in the Northeast, there is an 800-pound gorilla that enters the room every November – the weather. It has an enormous impact on every dealer, and there isn’t a single thing the dealers can do to change the temperatures or precipitation levels that are headed their way. They can, however, take steps to make sure their business practices are set to soften the blow to their business.

 The service department really feels the effect of dramatically reduced customer activity. When customers don’t bring their bikes in because of falling temperatures or questionable road conditions, a lot of the inventory of technician hours can disappear each day without being sold.

A brief digression back to costs, which I touched upon in my last column. There are three broad categories of costs in the typical dealership:

– Fixed costs, which are set, repeatable, and have minimal variations. They include rent (or mortgage), insurance, vehicle payments, etc.

– Variable costs, which can change from month to month and include utilities, payroll, supplies, etc.

– Cost of goods, which  is simply what the dealership pays for bikes, parts, and anything else it sells.

If we think of the business equation as having two sides – demand (customers buying activity) and supply (the dealers’ efforts to satisfy that demand) – then we can study how smart dealerships impact both sides of the equation to minimize the negative effect of seasonality.

Supply Side Cost Control

On the supply side, the single greatest service department variable cost is technician wages. The simplest (and worst) way to handle reduced seasonal service demand is to simply lower the number of available technician hours by reducing headcount – laying off technicians.

Dealerships that use this method of cost control can achieve some immediate savings by lowering their payroll expense. The down side to this approach includes poor employee loyalty as technicians can’t count on continuous employment and may need to keep a constant eye open for a better situation elsewhere.

Also, the dealer takes the risk of losing a laid-off technician permanently if they find alternate employment during their layoff. When the busy season returns, the dealership is left short-handed or is forced to find another technician to fill the vacancy – not always easy to accomplish. Service department morale is best served when employees feel confident about their prospects for continuous future employment.

The opposite extreme of reducing service hour inventory by laying off technicians is to keep everyone on the payroll regardless of whether or not there is work for all. This can get expensive for the dealership as hours paid to technicians without corresponding customer billing comes directly out of the dealerships pocket at a time when they can least afford it. Few dealers can continue to pay full wages when revenue slides steeply in the off-season.

Dealers that want to retain their technicians through the winter without going broke have developed flexible pay plans. Usually, these pay plans provide for an incentive during busy times and a way for technicians to get paid while they are producing far less billable hours in the off-season. Sort of a “Make hay while the sun shines” approach.

A technician’s peak earning opportunity occurs when there is a lot of work and (if he is highly productive) he can exceed the flat rate hours for repair jobs and/or work overtime for extra earnings. During the off-season, the technician will be paid a lower hourly rate for time that he is not producing billable hours, which reduces the hit to the dealerships’ bottom line.

In some states, like Connecticut, the state unemployment system accommodates “partial layoffs.” Under Connecticut’s Shared Work program, employers can lay off staff for up to 40 percent of their normal work hours. This is usually equivalent to two days per week. So, instead of laying off employees for an extended period of time, dealerships can reduce payroll hours by up to 40 percent. Those partially laid off employees stay on the payroll, work fewer hours, maintain their benefits, and receive state unemployment benefits for those days not worked. It’s possible that other states have similar programs.

Regardless of the method employed, it’s pretty common for supply side service costs to be controlled by modifying the single biggest component – technician wages.

Demand Side Cost/Revenue Control

No business can survive without adequate demand for its products and services.  Ideally that demand will be sufficient to cover cost of goods and both fixed and variable costs, leaving some profit to pay the owners for their trouble.

In the off-season, proactive dealerships try to stimulate service demand via any number of creative approaches. Those dealers that simply let the off-season hit them between the eyes without taking some special efforts are doomed to financial suffering and playing catch-up for most of the following busy season.

Even though most Northeasterners don’t ride through the winter, many bikes are parked at the end of the riding season still in need of service work or repair. Getting that work done during the off-season can bring much needed cash flow to dealerships. It also means that riders can ride on the first warm day of spring without enduring the service log jam that occurs every year as riders want their bikes taken care of at once.

In addition to doing service in advance of the next season, proactive dealers offer incentives to riders so they will be motivated to get service work done in the winter. The extra costs associated with offering pick-up and delivery will eat into dealership profit margins.  So will dealer discounts on parts and service labor. If a dealership can offer these incentives, he has a chance to see some off-season revenue – albeit at reduced profit levels.

The service department is an important piece of the overall picture. Dealerships that measure results, utilize best practices, and apply creativity in the management of their businesses have a decent chance of sustaining a profitable dealership and being around for the long haul.