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by Glenn Troub

CHANGING GEARS

President of
GT Enterprises

Are You Running

An Efficient Shop?
H

ow do you increase efficiency

in a shop? First you have to
understand what poor efficiency really 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 do
you have available from each employee
to sell? The answers may shock you.
Start with operating expenses. You
need to find out what your TRUE break
even costs are. In other words, what
would it cost to keep your doors open if
you had no sales at all?
You wont add in parts, commis-

sions, royalties, towing, credit card fees

and other expenses associated with
sales. You will, however, need to add in
rent, utilities, advertising, wages and
benefits for hourly and salaried
employees (because you pay them
whether they are producing or not).
Now you know what it costs (for say a
week) just to keep your doors open.
Now lets take a look at hourly
employees. You dont 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

Hours paid: 52weeks@40 hours per week = 2080

Paid vacation: 2 weeks -80 hours
Paid breaks: 2.5 hours per week 122
Paid holidays: 6 days at 8 hours per day 48
Total 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 196
Shop or work area cleanup 15 minutes per day 49
weeks = -61
Hours left = 1573 annual or 30.2 hours per week
22

pay for 40 hours and get 30 hours.

Thats 75% of the time you bought, and
that only applies if the employee
PRODUCES something for each of
those 30 hours. What if he has time
standing around, what does that cost
you? Say you have two employees producing 60 hours per week that you can
sell to a customer. Lets assume that
your true break even costs are $4800
per week. That amount divided by 60
hours equals $80 per hour that each
employee must produce just to break
even. If you want a reasonable profit
then the figure will be more like $100
per hour. Dont confuse that number
with your labor rate because when you
sell a job to your customer you will be
doing a parts mark-up which should
account for some of your income.
The point is simply this, if youre
only getting 75% production for each
hour you buy, then you better make the
most out of each one of those hours.
Anytime an hourly employee is waiting
for instructions, running for parts or
doing anything else that does not produce income he is wasting time that you
never get back at a rate of roughly $100
per hour. If both employees are standing around (not producing), then it is
costing you $200 per hour, or more than
$3 per minute. Anything that happens
in the shop that keeps the employee
from producing a billable hour is costing you a great deal of money.
GEARS May 2002

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The point is, when you change one

item, you almost always change at
least one of the other two.
There are lots of ways to waste time
but lets start with two of the biggest
ones. Standing around waiting for their
next instruction or waiting on parts.
Lets start with parts. Now days with
parts deliveries every day, shops have
gotten away from stocking too much in
the way of parts. That may not be such
a good idea if it costs us production
time. Obviously, we want to tie up as
little of our money as possible in inventory. So how much is the right amount
to stock. In a simple world we could say
to 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 what
your top 10 transmissions are. If you
are a typical shop, your top units are
probably the A604, 4L60 and 4L60-E,
A4LD, 413 and 670s, E4OD, 4T60-E,
AOD and AOD-E, AXOD and AXOD-E.
Your top 10 transmissions probably
make 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 parts
that usually go bad. You now have a
minimum inventory to build 70% of
what comes in without ever waiting on
parts. (If you did your top 15 units you
would probably handle 85% of what
comes in, but that also ties up cash in
inventory.)
This is an ongoing process so if
cash flow is tight then start by just
stocking for the top one or two units
and add more as you can afford it. To
truly run an efficient shop and make
money, you want your inventory to be
as small as possible but never so small
that it stops production. The production hours are worth more than the
slight increase in inventory because the
inventory can always be sold or used
later but a lost production hour is gone
forever.
GEARS May 2002

In the October 2001 issue of

GEARS I discussed three measurements that tell you if you are running
efficiently or not. Lets cover those one
more time. The three measurements are
Throughput, Inventory and Operational
Expense. While those words sound
familiar, their meanings are different
from what you may have heard before.
Throughput is the rate at which the
shop generates money through sales. If
you build a stock unit and it goes on the
shelf, that is not throughput. It must get
sold.
Inventory is all the money the shop
has invested in purchasing things that it
intends to sell. Production employees
could be considered as inventory. You
purchased their time and intend to sell
it to a customer.
Operational expense is all the
money the shop spends in order to turn
inventory into throughput. Non-production employees like the manager or
other office help could be considered as
an operational expense.
Each of these things has an effect
on the others. For example, If you cut
inventory improperly like laying off a
productive employee or cutting back on
parts on the shelf, you probably lowered
throughput. In addition, if you now
have to overnight ship a part because it
wasnt in stock, you raised operational
expense. The point is, when you
change one item, you almost always
change at least one of the other two.
Even if you dont change one of the
others, you arent necessarily making
money. What you want to do is reduce
operational expense and reduce inventory while simultaneously increasing
throughput.
In later issues we will discuss even
more ways to raise production
(throughput) while keeping costs under
control.

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