BUSINESS TOOLS FOR SERVICE MANAGERS

Maximizing Service Profitability

Maurizio Bonacchi Caterpillar

Geneva 1

Maximizing Service Profitability

n Main areas to address

n Labor Sales hours Forecast & Budget vs.

n Labor Expense hours Monthly Labor reports
n Labor sales Offense,
n Increase labor selling rate (external)
Gross n Improve efficiency, reduce cost of sale
Profit Defense,
n Reduce expenses
(internal)

Maurizio Bonacchi Caterpillar

Geneva 2

1
 Maximizing Service Profitability

Without three “SIDES”, the

triangle doesn't exist.
Service
Without three “SIDES” of the
Profit
business there is not profit in
Service

The ABC of service business profit.

Maximizing Service Profitability

A reduction in the labor

utilization, due to low
productivity, &/or increase of
allowed hours, reduces the
productive or billable hours
meaning a low volume of labor
sales & the associate parts
Labour Utilization % - Technicians Productivity % - Expenses hours %

The Labour hours management.

2
 Maximizing Service Profitability

es
ns
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ire
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WIP vs. Low volume of invoiced

su
to
w sales generate low volume of: gross
flo

margin & cash flow.

sh
ca

Low volume of gross margin is not enough to support

ow
,l

direct expenses,& profit will be compromised. Direct expenses

IP
W

are independent of sales invoiced. WIP reduction is

h
ig

one time only benefit.

H

The work in process management.

Maximizing Service Profitability

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bo
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ate
/h
-R

Service hour inefficiency

ea
liz

Labor discount or free hours vs.

ed
La

break even rate

bo
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ate

Realized labor rate vs. break even

/h
-B

rate
re
ak
ev

Break even rate out of market

en

Compromise Service Profit

ra
te/
h

The Labour hours efficiency management.

3
 Maximizing Service Profitability

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Labour Utilization % - Technicians Productivity % - Expenses hours %

h
The ABC of service business profit.

Maximizing Service Profitability

n Increase Sales.
Has a direct positive impact on Maximizing Service Profitability 1:1
ratio.
Without increasing service costs.

§ Increasing labor selling rate.

Has a direct positive impact on Maximizing Service Profitability 1:1
ratio, assuming no loss of sales.
But will customers accept this increase?

Maurizio Bonacchi Caterpillar

Geneva 8

4
 Maximizing Service Profitability

Specific formulas: Total Service labor cost/h or Break Even rate/h &
price calculation
Break Total Service cost after indirect expenses and before interest and taxes
Even = _________________________________________
rate/h Total service productive or billable hours

Always A & B Vs. realize break even rate/h

Average Total external labor sales

Realize rate/hour =
(external) Total external service productive or billable hours
A

Average Total interdepartmental labor sales

Realize rate /hour =
(internal)
B
Total interdepartmental service productive or billable hours

Maurizio Bonacchi Caterpillar

Geneva 9

Maximizing Service Profitability

Gross Profit Defense (internal)

• Forecast & Budget vs. Monthly Service Sales

- Sales variance tracking control.
Information from
• Monthly Labor Sales Finance department.

• Sales Tracking
Labor rate sales Actual labor sales rate – Published Av. labor sales rate
variance % =
Published Av. labor rate

Labor cost rate Published Av.labor cost rate – Actual labor cost rate
variance % =
Published Av. labor cost rate
Maurizio Bonacchi Caterpillar
Geneva 10

5
 Maximizing Service Profitability

Reduce Expenses Defense (internal)

• Forecast & Budget vs. Monthly Direct Expenses
- Direct expenses tracking control.
Information from
• Monthly direct expense Finances department.

• Direct expenses cost tracking

Expenses hours cost deviation = Budget expense cost - Direct Expenses cost hours

Other expenses cost deviation = Budget other expense cost - Direct expenses cost

Maurizio Bonacchi Caterpillar

Geneva 11

Maximizing Service Profitability

Conclusion
Service profitability is affected by:
Service Sales.
Cost of Sales.
Direct expenses.
Service Sales is affected by:
Labor Sales Variance.
Cost of Sales is affected by:
Labor Cost Variance.
Direct expenses is affected by:
Expenses hours
Others expenses
Maurizio Bonacchi Caterpillar
Geneva 12

6
 Maximizing Service Profitability
Labor Sales Variance is generated as consequence of Work
order opening or closing process.

Wrong job quotation.

Wrong use of Flat rate philosophy.
Excess of discount.
Deviation on hours assigned for a job, hidden inefficiency
to increase or to maintain technician productivity.
Overtime not invoiced.
Travel hours not invoiced.

Maurizio Bonacchi Caterpillar

Geneva 13

Maximizing Service Profitability

Labor Cost variance is linked with Labor sales
variance:

Wrong job quotation.

Wrong cost calculation on Flat rate philosophy.
Wrong labor cost calculation, inadequate, and not enough quantity.
Deviation on hours assigned for a job, hidden inefficiency to increase
or to maintain technician productivity.
Overtime not invoiced.
Travel hours not invoiced.

Maurizio Bonacchi Caterpillar

Geneva 14

7
 Maximizing Service Profitability
Direct Expense is linked with:

Direct Expenses related with hours at labor cost Expense hours

(allowed hours & non-chargeable).

Other Direct Expenses not related with hours ( Management Salaries,

Service Van cost, tools, parts rework, depreciation, kilometers or miles,
not recovered, etc.)

Maurizio Bonacchi Caterpillar

Geneva 15

Maximizing Service Profitability

Services Sales: “Profit after direct expenses is affected by”

Service Sales
–/+ Sales variance
– Cost of sales
–/+ Cost variance
– Direct expenses hours at labor cost
– Other direct expenses.

Total maximum service profit

Maurizio Bonacchi Caterpillar

Geneva 16