sewellsgroup.com

SEWELLS PERFORMANCE

INSIGHTSBalance As A Driver Of Sustained

Retail Automotive Performance

2 sewellsgroup.com

Sewells Performance Insights

BALANCE AS A DRIVER OF SUSTAINED RETAIL AUTOMOTIVE PERFORMANCE

The pursuit of automotive retail excellence is an ongoing and multifaceted task. It relies on bold leadership, confident management and above all a clear grasp of the key drivers and enablers that form the basis for performance enhancement. One of the primary drivers in this regard is balance or Mix, in other words the contributions that are made across all business units and in particular from fixed operations.

When one considers that a typical new vehicle sales department will contribute upwards of 80% of a dealership’s total turnover while only producing 35% of its gross profit and that a service department will produce a similar amount of gross off only 15% of turnover, it serves to reason that dealers who focus on enhancing their workshop performance will boost the performance of the total dealership.

To understand how this works in practice we hold up the example of a group of 20 dealerships who participated in a focused service improvement program. Dealers were selected from a broader franchise group of 180 dealers and represented a spread of locations and sizes.

The program consisted of three primary phases:

1. Engagement & Education - As a starting point Dealer Principals and Fixed Operations Managers were invited to attend a one-day performance management workshop. Objectives of this interaction were to introduce and map out a blueprint for business performance (based on the Sewells Group MRA model) and to establish the key drivers that form the basis of performance improvement.

2. Dealership Assessment - In a bid to ascertain the issues on the ground, each dealer underwent an on-site review of their performance and processes. This included an initial desktop analysis and an interactive one-day visit by a senior consultant. The outcome of this analysis was the production of a comprehensive performance report, highlighting the current status and identifying future opportunities.

3. Management Team Feedback & Action Planning - The final formalized phase of the initiative included the engagement of the senior dealership management team in a structured feedback and action planning session. This facilitated process served to clarify findings from the dealership assessment and provided an opportunity for debate and the formulation of strategies to address the issues that were presented. The outcome of the session was a set of actions that were to be pursued by the management team.

The overall aim of the program was to improve bottom-line service performance and to contribute towards a better balanced and more sustainable dealership model. The key methodology lying in the encouragement of senior dealership managers to take responsibility for their own results and to support them by providing perspective and focus on the fundamental drivers.

3 sewellsgroup.com

Sewells Performance Insights

RESULTS

 Figure 1: Change in Bottom-line Service Performance

PILOT GROUP CONTROL GROUP

% Change in Service Turnover + 1.42% + 1.08%

% Change in Service Gross Profit + 5.02% + 1.06%

% Change in Service Expenses + 1.42 % + 2.56%

% Change in Operating Profit + 30.3% - 6.2%

Table 1: Percentage Change in Service Variables

With bottom-line service performance being held out as a success factor, an assessment was made of average monthly service performance for the 12 months before program commencement (FY June 2009) and again for the 12 months post program conclusion (FY June 2011). The results reflected in Figure 1, illustrate a marked improvement in performance for the participating (pilot) group, with a monthly percentage gain of 30.3% versus a variance of -6.2% for the non-participating (control) group.

An important consideration is how these results were achieved? Intuitively performance can be driven by one of three ways or via a combination of all three. This includes improving throughput i.e. focusing energy on selling more, by improving margins i.e. focusing on Mix, or by reducing expenses. Ultimately how these factors are manipulated in relation to each other plays a significant role in determining the end result. Consider Table 1 below which reflects how the pilot group performed versus the control group in each of these areas and in particular how this affected their overall result.

4 sewellsgroup.com

Sewells Performance Insights

 Figure 2: Impact on Monthly Service Performance

 Figure 3: Impact of Improved Mix on Service Performance

Reflected in Dollar terms these results are telling. The impact for dealers participating on the program was on average a net gain of $65,496. When considered against a market driven reduction in profit for the control group of $14,916, the result translates into a variance of over $80,000 for each participating dealership (see Figure 2). The impact of this result on the overall sustainability of the business, not to mention the positive consequences relating to incentive plans and increased resourcing capability is notable.

Focusing on improving the Mix of the business goes a long way towards driving these results. Mix in the service department translates to the ability of the department to generate and sustain gross margin. The increase of 5% in Gross Profit versus an increase in Turnover of 1.4% enables the dealership to actively grow the bottom line without necessarily requiring any investment in infrastructure or additional resources. Essentially it’s about focusing energy on added customer value, the effective utilisation of resources (as reflected in workshop productivity and technician efficiency) and on service quality. These factors are inevitably reflected in line items such as sales, gross profit (GP), parts and hours per repair order (see Figure 3).

5 sewellsgroup.com

Sewells Performance Insights

DISCUSSION

 Figure 4: Change in Retail Repair Orders Processed per Annum

Reflecting on the results presented there are both tangible and intangible factors which lead to improved performance for any department.

The tangible components of success relate to the logical or rational financial drivers. We know for example that if we sell more or gross more that performance will increase. Likewise we know that if we trim expenses the bottom line result will be better. The key with these factors is twofold.

First to ensure that the objectives sought are clearly quantified and articulated to all stakeholders (a fundamental requisite of any robust action planning process).

Second the dynamics of change must be clearly understood and managed.

Simple rules apply in this regard, fundamentally any percentage change in Gross Profit must exceed that for Turnover and similarly any percentage change in Gross Profit must exceed that for Operating Expenses. Businesses which comply with these conventions will inevitably experience positive growth on the bottom-line.

Bearing that in mind what was of interest was the fact that the pilot group managed to grow their service contribution in spite of market conditions. While turnover increased marginally over the period under consideration, the number of retail repair orders processed declined (see Figure 4).

The ability of a business to add value ‘against the run of play’ can only happen if the dynamics of growth are understood.

6 sewellsgroup.com

Sewells Performance Insights

The notion of enhancing retail performance through considered processes and the application of a structured business model lies at the core of the Sewells Group offering. Our experiences reflected in this document provide evidence of this approach. Assigning credit for results achieved is a complicated and precarious endeavour and ultimately something which can only be claimed by those who achieve it. That said observations regarding success are easier to offer and factors such as the focus on organizational balance and the belief of the management team sit comfortably. The results speak for themselves.

Intangible success factors are by nature harder to explain and pin down. What were the underlying factors, beyond the simple financial realities that contributed to the pilot group producing superior results to non-participating dealers? The answers to this question are drawn from direct experience and observation. The process undertaken by each of the dealers included an on-site assessment of their operation and a subsequent management feedback session.

This process provided consultant access to the inner-most workings and culture in each dealership and provided some interesting insights. While not present in every participating dealership three factors distinguished pilot group dealers from the control group.

Comprehension of the MRA business model

The Sewells MRA model is provides a proven framework for retail automotive performance enhancement. As such the degree to which it is understood, embraced and integrated into the dealership management environment provides a tell-tale sign of the probability of success. The model provides clear direction on the drivers and enablers of bottom-line performance, focusing management efforts on three key factors, namely margin management (Mix), expense management (Retained), and asset management (Activity). Introduced to the pilot group during the initial education session, its value and deployment as a benchmarking tool was evident in all pilot group members and degree of integration across top performing group members was unmistakable.

Focus on performance drivers, in particular MIX

The results outlined in this commentary have shown that the degree of Mix or balance in an organisation is a clear determinant of bottom-line performance. Gross Profit or margin management as an indicator of Mix was found to be a point of focus throughout the pilot group. Evident in issues such as customer value-add, minimization of rework and maximization of technician efficiency, the focus on Mix (in relation to both turnover and expenses) serves as a catalyst for profit maximization. This is enhanced by broadening the focus across practical service department issues such as the retention of sublet margins, effective labour rates and the balance between retail, internal and warranty work. The key takeout of this is the undeniable fact that dealers who prioritise the accumulation of gross across the dealership, tend to be far better positioned to capitalize from any associated growth in turnover thereby laying a solid platform for growth.

Management team engagement and ownership

Possibly the most interesting and important of the observed insights was the degree to which the management team connected with the process of change and embraced the opportunity for improvement. In a business environment cluttered with ‘performance elixirs’, quick fixes and day-to-day operational distractions the ability to stop and reflect and where on where the business is headed is an under-estimated factor. Without exception those successful dealers within the pilot group who excelled, demonstrated a level of undistracted devotion to the task at hand. Identifying challenges and quantifying objectives and tasks is one thing but the execution of actions can be held out as an essential ingredient. Certainly knowing what to focus on and how to achieve it is shaped by the business model and process at hand but ultimately success lies in the ability to get the job done.

The Sewells Group specializes in the enhancement in retail automotive

performance. Partnering with dealers and OEM’s and assisting them with

dealer development strategies; services include training, consulting and

business management.

About the Author:Greg Strydom is a Partner in Sewells Group’s Melbourne office. He works with dealers and OEMs, specialising

in performance consulting and dealer development initiatives.

If you have any questions regarding this document please contact info@sewellsgroup.com