Up Your Business - December - 2018

Shrinkage

Up Your Business is an exclusive GEARS Magazine feature in which I share stories, insights, and reflections about business and life.

I’d love to see a show of hands of how many of you immediately thought about the old Seinfeld episode when Jerry’s sidekick George Costanza gave the term “shrinkage” a whole new meaning. If you never saw it, just ask anyone within earshot and I’m sure they’ll fill you in.

I’m actually talking about a different application of the term. Shrinkage is an accounting term (how boring), that refers to reduction of asset value on your balance sheet. Most often, it refers to reduced inventory value due to loss, theft, damage, clerical error, or obsolescence.

In the transmission business, this isn’t as much of a factor as it once was because most shops don’t carry much inventory anymore. Among the reasons are:

  • The advent of “just-in-time” parts delivery eliminates the need to stock a large inventory. In some areas, shops enjoy two or more free daily deliveries from more than one supplier.
  • Even the shops in areas that have to rely on traditional delivery services like UPS and FedEx find that the vast array of transmissions makes it almost impossible to stock enough of the right parts.
  • The cost to achieve any reasonable level of parts coverage would be monstrumental.

So, you might ask, why write an article about shrinkage? The answer is that, while inventory shrinkage may be just a memory, other forms of shrinkage deserve your attention. In fact, some forms of shrinkage are more critical than parts inventory shrinkage ever was.

LEAKAGE

Leakage seems like a good word for a transmission shop, right?

Actually, the idea for this article popped into my head while I was watching an old 1990’s era movie, Casino. They actually used the term leakage in the movie.

Casino was about the mob’s entrance into the Las Vegas gambling scene. The mob established a “legitimate” casino that skimmed incredible amounts of cash and transported it from Vegas to the bosses back East via their runners.

The amount of cash reaching the bosses was so huge that they didn’t worry about the “small” amount of cash that was disappearing in each step of the process as the various money handlers were taking a little for themselves. In essence, these intermediaries were skimming the skim. The bosses called it “leakage.”

In your shop, no matter whether you think of it as leakage or shrinkage, the bottom line is that your bottom line gets smaller if your leaks go undetected and uncorrected.

Here’s how important even a small leak is. If you have a net operating profit of 15%, do you know how much you’d have to sell to recover a $40 per month leak? The answer is $3200 ($40 X 12 months = $ 480 / 15% = $ 3200). If your net operating profit percentage is lower than 15%, you’ll need to sell even more to make up for it. Don’t let another day go by without becoming a leak detection and leak correction specialist for your company.

COMMON TYPES OF LEAKS

So let’s look at some of the ways leakage might be reducing your bottom line. What to do about it should be evident.

  • Small amounts of missing cash… are you kidding me? Unbelievably, I’ve talked to several shop owners who don’t concern themselves with small amounts of missing cash from the register or petty cash. Sure, sometimes mistakes are made, but to tolerate cash shortages as routine is a huge mistake.

    Unexplained overages aren’t a good thing either. Crafty petty thieves cleverly camouflage their activity with occasional overages, but over time, the short will exceed the long.

  • Lost sales come in many shapes and sizes. The list includes lost phone leads, overall low lead conversion rates, failure to convert diagnostic appointments into jobs, missed sales due to misdiagnosis, and missing additional sales while the car is being repaired.

    You can detect most of these leaks with accurate tracking processes and by using systematic procedures with checklists to insure adherence to the procedures. Quality shop management software will provide the tools you need to better manage these aspects of your business.

  • The production hours you’re purchasing with the wages and benefits you pay your production team is much like inventory. The key difference is that, at the end of the day, any unused hours are gone, never be recovered. It’s like fruit that goes rotten at the grocery store: it no longer has value. Here are some ways that production hours go to waste.
    • Techs waiting for their next job assignment
    • Techs waiting for parts they need for a job
    • Techs waiting for customer approval
    • Techs taking phone calls — personal or work-related
    • Techs doing research or waiting on hotlines
    • Techs fixing mistakes — theirs or others
    • Techs lacking knowledge or skill they need
    • Techs lacking tools or equipment they need
    • Techs performing warranty repairs
    • Techs putting away or unpacking parts
    • Techs doing anything we don’t bill for

    Again, a shop management computer system with workflow management can help resolve these problems. If you already have one and aren’t using this feature, it’s time to git’r done.

  • Pricing errors often go undetected because we think we’re charging the right price. If you use a computer, you can’t just let it price the job and assume it’s the right price to be profitable.

    A simple example is with parts pricing. If you buy a part for $50 and the computer is programmed to double the price, you sell it for $100 and make $50 gross profit. But if you get the part on special for $40 and the computer doubles it, you sell it for $80 and only make $40 gross profit. Make sure your computer sells it for the regular price of $100 so you enjoy the benefit of the special cost savings and added profit.

    Another example would be if you give “shoot-from-the-hip” estimates. If your shop labor rate is $90 an hour and you only bill 15 hours on a job that calls for 15 1/2 hours, you’re shorting your shop $45. This might not seem like a big deal when you sell the job with parts and labor for over $2000. But if you do this consistently, say five or six times a week, that’s about a $13,500 annual leak! As explained earlier, it’ll take about $90,000 in sales to recover if your net profit percentage is 15%.

    The same principle applies to discounting or failing to charge for things you’re doing but not charging for… things like servicing battery terminals when you do electronic testing and, for that matter, doing free scans.

  • Paying too much is another leak to consider. Advertising is a huge leak for most shops. In spite of the fact that virtually nobody uses the Yellow Pages anymore, as I travel around the country, I see countless shops that still buy Yellow Pages ads.

    I’m not even going to do the math, but can any of you who are still buying Yellow Pages ads justify the cost if you apply the 15% formula? That’s a lot of sales that you’d have to attribute to the Yellow Pages. By the way, reconsider the cost of all your advertising using the same formula.

  • Staffing is another huge leak for many shops. If you have more employees than you need to achieve your current sales and productivity level, that’s a leak.

    Too often I’ve seen shops throw more staff at a production problem. First, you need to locate the bottleneck in the production process and fix that. Output will never be any greater than the slowest step in the process will allow… this is the bottleneck.

    On the other hand, not having enough employees can also cause leakage. The rush and confusion that accompanies having more work than the team can reasonably produce will eventually lead to leaks like misdiagnosis, overlooked sales opportunities, excessive warranty reworks, careless mistakes, billing errors, etc.

    Another staffing leak has to do with having the wrong employees doing the wrong jobs. To use a football analogy, it would be like having a lineman play quarterback. Being a good athlete won’t overcome the lack of skills, aptitude, and ability for the position.

  • Leaks that are attributable to process are often the most difficult to detect, but they’re usually the easiest to correct. This is because they fall into the “this-is-how-we’ve-always-done-it” category. Complacency also comes into play. Here’s a short list of things that fit this category of leakage:
    • Failing to return unused parts
    • Failing to return cores
    • Failing to identify and charge for “personal use” parts, whether for employees or shop vehicles
    • Continuing to offer services that aren’t profitable — do you know if you’re doing this?
    • Shop insurance policies — when did you last compare coverages and premiums with competing companies? ○ Credit card processing fees — when did you last compare competing processing companies?
    • Shop management software — when did you last compare products, companies, capabilities, and cost? This is also a potential area of duplicated expenses — why buy two when one will do?

ACTION STEPS TO RESOLVE SHRINKAGE

Benjamin Franklyn said, “A penny saved is a penny earned.” Essentially, what Ben was saying was any expense reduction adds directly to your net income, but only a portion of sales will increase it.

Two action steps that I guaranty will resolve shrinkage and boost your net profit are detecting and correcting the leaks and bottlenecks in your business.

As you read this article, you’re probably planning your goals for the new year… or you should be. This year, consider including leak detection and leak correction as part of your plan.

What are you waiting for? The time to start is right now!


About the Author

Thom Tschetter has served our industry for nearly four decades as a management and sales educator. He owned a chain of award-winning transmission centers in Washington State for over 25 years.

He calls on over 30 years of experience as a speaker, writer, business consultant, and certified arbitrator for topics for this feature column.

Thom is always eager to help you improve your business and your life. You can contact him by phone at (480) 773-3131 or e-mail to coachthom@gmail.com.