Service Shop Optimization Drives 21 Basis Points of Profitability Improvement

Service shop network shifts from negative double-digit profitability to +8% in just seven months thanks to strong leadership engagement, employee participation, lean best practices, and management system.

Surviving and thriving over the long haul doesn’t happen by chance. To keep growing and maintain profitability companies have to change and adapt many times over the years in response to shifting market dynamics and internal business challenges.

Our client is a regional dealer of heavy equipment with a headquarters and seven satellite facilities that support sales and service. Revenues were growing and the company was profitable. But some key metrics were trending in the wrong direction.

  • Profitability in the service department—typically a significant driver of earnings for any equipment dealer—had fallen into negative territory.
  • Long lead times were undercutting customers’ equipment utilization levels and satisfaction. 
  • Goodwill, having to honor inaccurate quotes, was costing thousands of dollars on too many jobs. 

Company leaders knew they had to act, and act quickly, to turn things around.

Challenge

Although the equipment dealer’s revenues were growing, the service department was losing money. Customers were dissatisfied with long turnaround times, poor communication, and inaccurate quotes.

The effort began with a multi-week diagnostic that included data collection and consultant site visits.  Service team members and managers at all levels participated. The primary targets for improvement were service margins and equipment turnaround times. 

After that was completed, these were the key focus areas:

  • Shift profitability to the black.
  • Improve main shop billable rates. Lead technicians’ time was not being captured accurately, which meant it wasn’t billed at the appropriate rates.
  • Improve quite compliance and quote accuracy. Long lead times were undercutting customers’ equipment utilization levels and satisfaction.
  • Reduce rework and goodwill. 

The first kaizen event focused upstream on the job quoting process. In addition to establishing work standards for repairs, TBM helped build a service excellence playbook. Based on the company’s specific needs and workflows, it details how work processes should be organized and managed for maximum efficiency.

Solution

The company embraced a service excellence program that included standardized repair and quotation processes, revamped work bays, SQDC boards, a daily management system and a detailed playbook to sustain forward progress. An embedded interim project manager helped to ensure success and sustainment.

Within seven months, the company’s main shop went from a negative profit situation to post an 8%+ operating margin. Gains in a number of performance areas contributed to the financial improvement.

  • Goodwill, the variance between required work inputs and the job quotes including parts and labor, declined from 2.3% to 0.2% of sales.
  • Rework as a percentage of sales declined from 5.1% to 1.2%. The service department’s effective billing rate, a measure of labor efficiency not previously tracked, improved dramatically as well.
  • Service turnaround times were reduced from 5 to 2.1 days, as measured by the last labor to close (LLC), improving both cash flow and customer service levels.
  • More accurate quoting also improved customer satisfaction.

 

Results

Within seven months the company’s main shop had went from the negative profit situation to post an 8%-plus operating margin.
  • Trailing 12-month profit before tax percentage improved from negative double-digit performance to +8.2% in just seven months.
  • Rework fell from 51% to 1.2% of sales in the component rebuild center.
  • Profit jumped $24K per employee in one year.

 

Topics in this Case Study

Lean TransformationPerformance Improvement

At a Glance

Client

Regional heavy equipment dealer, with seven satellite facilities that support sales and service

Results

Service Shop Optimization Drives 21 Basis Points of Profitability Improvement.

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