The Flat Rate DebateWritten By Pam Gruebnau and Mary Seaman
Article Date: 06-01-2005
Copyright (C) 2005 Associated Equipment Distributors. All Rights Reserved.
And other product support issues facing dealerships today.
Are dealers equipped to establish flat rates to increase gross margin? Are manufacturers helping?
- Flat rates allow us to give customers a firm number up front without uncertainties. One of the critical things is that we get away from the dollar per hour charge and adopt a component charge.
- We have three people dedicating 40 to 50 hours per week to developing reports that we can use to create flat rates. We’ve added 1,200 standard jobs since last year. It’s an ongoing process, because as products come out there’s always something new or different about them.
- We take the items we’re repairing most frequently and analyze those first: what it takes to do the job. We do some plain old digging through work orders to quote this and attach those work orders to the history to see how we’re doing by segment.
- We are currently spending resources to build our own database to allow us to apply flat rating in a consistent manner. But, we have 11 service locations in our territory and eight of them speak their own languages when it comes to service, which creates problems.
- Standard jobs are the building blocks for invoices; if there is a variance, we look at those and build a history to go back and modify. It ties into compensation and opens avenues of inquiry into our issues.
- I don’t believe most dealers have the ability to develop their own flat rates. We have to continue to use manufacturers’ flat rate systems as a platform. We use an escalator where we think its necessary.
- Demand from customers for uptime and from dealer principles for good financial performance has never been greater, and most dealers are understaffed.
- Our biggest challenge is taking a manufacturer’s flat rate, adapting it and making it interface with our operating systems. Now we’re running two systems. We need the manufacturer’s help.
- An explanation of what’s included in a flat rate is absolutely necessary – everything that’s included: this much sheet metal, this bolt, etc. I don’t see how smaller dealers can possibly employ resources to develop their own flat rates.
- We hope later this summer to pilot one of our stores with flat rates that are incentive-based. This industry is six or seven years behind the auto industry. We want to get to the place where if something takes four hours to do, and it only takes the technician two hours, we still pay him for four hours and invoice for four hours. Theoretically, we might pay a technician for 20 hours and he might only work 10 or 12 hours. It results in better customer satisfaction and it gets the technicians working.
- We buy tooling or pay for training so a four-hour job can become a two-hour job and then we only charge for two hours so we’re not getting the benefit of improvements we make.
- We use online skills assessment. We’re building three years of curriculum for training a technician. It’s a career path, and we hope it will tie the technicians to the dealership.
- We’re looking to the future. They’re service technicians – not mechanics – and they have laptops. We talk about the technology they’re going to be involved in. Plus, they want time off. The young technicians don’t want to work six days a week. We have to change our culture.
- We’re looking at our manufacturers to help with product information and to tell us what it should take to do the work, but the numbers we get from them are impractical. They have all the equipment, but there’s no mud on it, it’s not out in the middle of a jobsite, and it doesn’t take time to clean it before they can work on it.
- Another issue is that our OEM supplies a flat rate book, but our software maker and our OEM are not communicating, so now we have two sets of records. We want to be 100 percent flat rate, but how do we get there? Someone will make a lot of money if he can create flat rates that work.
- As for software, we just put in a system two weeks ago, and much to my chagrin, it doesn’t do flat rates.
Some customers are asking for guaranteed costs so they can better compete in their markets. How are dealers meeting these demands?
- One of the ways to get around the pricing issue is looking at the manufacturer’s flat rate and multiplying by 1.25 or 1.5. It takes dollars out to establish a labor standard and takes care of the rusty bolts and cleaning issues. It’s a good starting point.
- As for knowledge sharing, we provide standard flat rates. We reimburse dealers for flat rates on warranty. On ground-engaging tools and undercarriages, the base factors included represent the use conditions those machines will see during warranty. All of our dealers using standard charges are starting from a derivative from the manufacturing flat rate. It varies depending on the dealer and their marketplace. That appears to be an effective solution.
- We created a flat rate system tied in to the business system based on the skill set of technicians. How do we share all of that information with the dealer? It’s like dealers asking OEMs to share their suppliers.
- When customers buy a warranty, they want to know the rates. Manufacturers are putting everything together and everyone has their own term for it. They want to roll service in and know their cost. They want to put an operator in there, put fuel in it, grease it and make one phone call to us to work on it on weekends, rainy days and after hours.
- Manufacturers getting extended warranties more in-line would be helpful. More customers are willing to prepay the maintenance expense. Predictability goes a long way. After the first year, it’s kind of a guess. What we’ve done is say, “Here’s the monthly charge for up to $3,000 worth of repairs, and after that it’s on your dime. If they don’t use it, it’s a profit. If you’d have asked me a year ago if someone would sign up for that, I wouldn’t have believed it, but they do.
- More customers are looking for that type of program. They know the equipment cost when they bid a job. Where we struggle is looking at the variance in the levels of dealers. Whatever you’re guaranteeing, you need to guarantee the customer will be up and running within 24 to 48 hours, that the parts are on a shelf, and the technicians are trained and capable of repairing it within the guaranteed time. We’re leery of the side-by-side guarantee unless both the manufacturer AND the dealer can keep the commitment.
- We’re helping the distributor meet that goal. We’re stocking parts and providing any other help they need.
- Going forward, it will become more the norm for customers to ask for fixed pricing out five years.
- It goes with the economy, too. When it’s robust, they want predictability; when it’s not, they’re saving every nickel they can.
- We’re seeing contractors get out of the repair business because they don’t want fixed assets. I see it as a growth opportunity.
- The 4,000-hour maintenance is going to cost. You don’t know what this part is going to cost five years from now. The only variables are that and the travel times.
- We want maintenance contracts on a pay-as-you go basis.
- With a maintenance contract, you can make it a condition that you do all PM work.
- We tie them together; here is the price to buy it separately or together. It’s only $20 per month more. We can self-insure and make a profit and still have reserves to cover a catastrophic failure.
What do you do if the customer buys a five-year program, and 18 months later decides the tractor isn’t right?
- The key is financing. That’s where we’ve seen distributors being successful in the program, financing up front and rolling it into a monthly amount. It becomes invisible to the customer.
- If we’re looking at giving guarantees, I see our role as supporting profitability. If a dealer shares in gross margin, I see our role as sharing or providing tools to be profitable. That could be a guarantee, an extended warranty to support product maintenance contracts, repair and maintenance contracts – we have to support them one way or another. If the dealer is profitable, we’re profitable.
More dealers are employing full-time product support sales reps (PSSRs) and marketing their product support capacities. What are the obstacles?
- The warranty stays with the tractor. If he bought an extended warranty he can’t get his money back if he decides not to keep the tractor. What do you do, say “Sorry, I’ll make you a better deal on the next one?”
- We’ve transferred the maintenance to a new purchase, but we don’t know how to handle the difference in the warranty prices.
- If they buy an extended warranty and then have a maintenance contract, there’s not much risk. The risk is if the manufacturer doesn’t have a part on the shelf. I guess it depends on how good the customer is.
- We run into people who want contracts beyond what you can buy from the manufacturer. Customers want to know about 20,000 to 25,000 hours, going through two rebuild cycles. That’s hard.
- And I thought 7,000 to 10,000 hours was stretching it.
We can’t determine if we would have gotten that business anyway or if it’s new business the PSSR brought in. We handled it by separating the primary line from other types of parts. We still pay them for what they sell, but they have to have a quote on file ahead of time. Their commission is separate for our OEM part sales and shop jobs than for all other jobs, for example non-OEM ground-engaging tools or undercarriage. At the end of the month and year, I’m able to tell how much business they brought in for the primary product and how much other business they got. We only pay commission if they have already gone out and completed a profile and surveyed the machines. If a customer has five excavators, we want the product numbers and serial numbers in a file in the parts department. If a customer comes in and buys something and the file is there, then the PSSR gets the commission. PSSRs become parts men in trucks, but we want them to sell service. Our PSSRs complete trip reports, and weekly prospect reports are required every Monday. We go through prospects and suspects. If it’s a prospect, does he have a need to buy? Is there a sense of urgency? Does he trust you? A suspect is someone that you might be able to do work for in the future. PSSRs are first to go in a downturn. What is the cost of sales for this guy vs. what he brought in. We don’t measure it on a regular basis. The customer contact and the added benefit of having another guy in the territory gathering intelligence are also benefits. Our PSSRs work closely with sales to give each other leads. We don’t want to get to the point where we wake up one day and have a parts man in a truck. In terms of marketing, we do a poor job of marketing service contracts. In my opinion, the salesman has the best opportunity to sell at the time of the sale, and we do pay them for selling maintenance contracts. PSSRs form relationships with the person involved with the maintenance for the customer. The dilemma is that in order to sell maintenance, they need to go to the owner of the company, but the PSSR has a relationship with the person the customer hired to do service. The PSSR doesn’t want to put their employment in danger if the owner makes a decision to do away with those mechanics or reduce staff. Our sales people say selling maintenance contracts is one more way to mess the sale up. When they don’t sell it at the time of the sale, they give them a quote for the maintenance contract and we have customers say they don’t want it and initial off on it. If we don’t sell it through the salesman, the PSSR is dispatched. We call that a “last minute” maintenance contract and/or extended warranty. One of the things I think is important in evaluating PSSRs is to give them credit for being your first line of defense. We’re seeing will-fitters chasing our parts business. As everyone gets into “all makes” service, everyone is trying to get into everyone else’s machine populations. Our PSSRs are the last ones we let go in a downturn. That’s when having someone out there reminding your customers of the best profit potential is absolutely critical. We evaluate our product support and pay on the OEM business. One of the things we’re looking at is having one or two people that do nothing except service quotes. That person has to have a different skill set, probably a different compensation program, because of the ability he brings to the job. To handle that job of quoting, we’re trying to put in an in-house central resource to do it. It gets us more continuity across territories. With 15 locations, customers have learned to call different stores and get different pricing. A PSSR can quote an undercarriage, but a more complicated wheel loader or hauler requires a different skill set. I have field service guys in their first year of selling service in a territory. We may dispatch him to a call in his area and send him out to do a repair job, but any time he’s not doing that he’s developing his own customer base like an independent agent. We pay him per hour and 3 percent of the ticket of any service job. If we dispatch him, he doesn’t get the commission. The funny thing is he can tell someone, “I can get to you a week from Wednesday.” He’s built a following and the customer will wait for him. If we were to tell the customer that, he wouldn’t wait. We’ve gotten great utilization doing that for a year. He doesn’t have time to make visits; he talks to customers at night. It works well having him on commission. An area where we can use more help from manufacturers is training. Certification from the manufacturer is important. Manufacturers respond:
We have a week-long class for certification. It’s a three-year program for PSSRs, mostly on features and benefits with a small portion on closing the sale. We’re hoping to rely more on AED’s support and classes they have on closing the sale. There are prerequisites online that the PSSRs have to take, and post-testing for the next class. Sitting in class for two days doesn’t mean they are moving forward. The whole certification process is the same one technicians go through. The biggest downfall is where do we put our resources. We’re responsible for a whole network of distributors that we have to train. Is anyone successful at having PSSRs in compact equipment?
What are the implications for dealers of providing “all-makes” product support?
- I don’t know many that are working in skid-steers or compact equipment. The average transaction is so small. We have a huge customer base of little guys. We haven’t been successful.
- Sell the whole house. When you’re trying to drum up new business, sell new, rental, and product support.
- I’m not sure they have the skill set; you might find one in 100. Our new equipment salesmen tend not to be technical and I’m not sure they would represent the product support area very well. Selling service might tie into rental; there might be a connection there.
- We’ve taken our senior service managers that have quite a few years in – they’re not good with a computer and not keeping up with technology – and made them PSSRs. They’ve done an outstanding job because they have a relationship with the customers.
- I hire from outside the industry. I didn’t use to, but now I hire a guy that doesn’t know what a dozer is but has the aptitude to sell. The industry I’ve had the most success with is guys that sold cell phones. I put together an eight-week training program; some of it is provided by the manufacturer at my request. We are training him to ask questions about the customer’s business. That draws the new guy in and helps the guy along. We ask the larger customers to mentor these new PSSRs. Also during training we put them with a contractor for a week or so. Hiring from outside the industry has been our biggest success.
- Traditionally, we haven’t used parts people; we took service people and put them in the role because of the technical knowledge. What we’ve done is create a retirement community. Now these guys aspire to being a PSSR to retire. We’re in the process of trying to make the next step, the large store service manager. We’ve overpaid, underutilized and under-demanded.
- We have good service technicians that can’t be PSSRs, so we’re trying to make them service mangers. There is a six-month training program for someone who wants to be a service manager.
- Our PSSR’s next step is whole- goods salesman.
We have a relatively small machine population so it’s necessary, but in the larger stuff if we do a good job, it demonstrates our ability to service equipment. If a guy has another brand of equipment, we can show him our product support capabilities and it leads to him doing business with us on a rental. Next thing we know, he’s interested in buying our product. It’s aiding the enemy according to the sales guys. I don’t see a downside to it unless the service department misjudges their ability. I don’t believe in rebuilding components for all- makes. All-makes repair in our shops is non-technical. We remove and install complete components and wear items on all makes of machines. If we get a request to do a complicated repair, we decline. Manufacturers respond:
OEMs are the same – we’re making all-makes parts. We’re all for it. If you capture 100 percent of the service business, you have 100 percent of the parts business. The only thing we make money on is parts and service. One of best opportunities there is is providing a full suite of solutions for the customer. Major accounts are forcing the issue. They have an array of equipment and they are looking for a guaranteed price and a one-stop solution. Dealers comment: We don’t ever want to get into the position where we are telling the customer “No.” It’s hard to train your service technicians. It’s kind of frightening how many things they have to work on. There are pitfalls; for example, it takes a while to get parts. If you can’t get parts for the repair, your customer’s mad. The second problem is when you can’t get to your primary customer and they look down the bays and see your technicians working on brand X. Gray goods are another problem. Are dealers paying attention to third-party providers of product support? Why are customers choosing these third parties?
- In Michigan, some ex-technicians from a dealer went out and bought a service truck and started doing repairs. A dealer in Michigan hired them as a third party and gave them his customer list.
Are dealers and/or OEMs providing service training to end-users? Is there a trend to allow end-users to do warranty work?
- Ex-technicians who worked for dealers have the skills. If they hook up with someone that can get them parts, that's a problem.
- We have two or three former employees that have gone off on their own, but when they left so did access to training on new products. They attract customers with old products so they don't need laptops. They're not putting any money into upgrading their trucks or tooling; at some point, they'll put themselves out of business. In the meantime, however, they are having an impact.
- There's also the liability issue. We try to talk to customers about that.
- They can be more nimble with networking. I hired some of those guys and found them to have good relationships with the customers' service managers. They make good PSSRs: They come with a network, a knowledge base and a truck.
- Very few of the ones I see are less than 40 years old. I don't see a lot of younger people venturing out on their own; we tend to ignore them now. We're more concerned with third- party providers of parts to customers. Fleet Guard, Parker, Hensley, and Esco - all are supplying parts directly to the end-user. I don't know what can be done about that, but that's a bigger threat than service providers.
- From a manufacturing standpoint, there are a small group of contractors and large equipment owners asking for technical training and reimbursement for warranty repairs. We are making online training available to those types of customers - in essence it's component training, hydraulics - the first level of interactive training material that lets the shop supervisor assess where the technicians need further training.
- It's a niche where large contractors with a significant number of technicians who do their own repairs recognize changes in the technology and product, and grow with the changing times. We have had a few customers ask for that and we've made it available. They don't do engine overhauls; they're replacing components that fail.
- Contractors have the ability to do warranty repair. That's in essence allowing the customer to do a non-invasive repair - take it off and put another one on. In those situations, we are reimbursing customers for the cost of parts and the customer's labor rate.
- We're working with some that do the repair but don't file a warranty claim. It's a factor of who's requesting the warranty agreement and who's doing the work. The people doing the work don't have a process in place for filing warranty claims. Their focus isn't on chasing down $60 worth of labor; it's on getting the machine up.
- We're getting requests for more training from the end-user. We address them with the field school rather than bringing them into the training facility. We don't give them quite the same level of training we do dealer technicians, but we want them to feel more comfortable with the equipment. They can recognize there is a problem and know what they can do and when it's time to call the dealer. It gives them a warm fuzzy feeling to know the product and they don't get upset when they encounter something abnormal.
Are you seeing more customers sourcing parts online?
- We set up a very large customer to do warranty work. They used it once. It's easier to pick up the phone.
- We've turned training into a profit center. We charge $1,000 per day. All of it comes to us by word of mouth. We also rigged up an old semi as a portable training center. If we charge, we have a better draw than when we were giving it away.
- It's important to have training for customers. We'd love to see manufacturers limit it to maintenance do's and don'ts and "how-to" service. Everyone can do our business - independents, other dealers. We own very little in the service department that's of value to the customer. It's the technical knowledge we have. We want to train customers to know when to come to the dealer.
- We're active with a dealer storefront in the parts store. We look at it as relieving the parts counter phone traffic. Fifteen percent of our parts are ordered online.
A survey of AED member dealers found 75 percent of dealers hire technicians from other equipment dealers. Why don't more dealers grow their own technicians?
- We've found it works to link the parts manual and the storefront. Otherwise, we're giving them a resource to look up parts numbers and no resource to order it. We track where they look. We can track by click, by book, what transitions into orders, who it‘s ordered from. When a customer goes into the parts book and then gets the part from a dealer in another territory, we can see that.
- We were forced into it. Customers want equipment and parts available Saturday or Sunday and after hours.
- The cost of growing your own technicians is high.
- We have a local two-year college program. Seven of our people came out of that two-year school, and it's wonderful but it's mostly a local project. We provide scholarships; that's what it takes.
- We're trying to recruit people from the NASCAR school in Charlotte. Kids are paying $30,000 for training, and they don't have jobs. Probably 20 percent get a job afterwards. The question is how to retain the people. We're tired of passing them around, but the basic problem is we don't have enough.
Anyone changing work schedules or hours of operation to attract or keep technicians?
- We had commitments with three schools. We were providing scholarships for 25 students in the two-year program, and we asked for 2 years after they got out of the program, if not they had to reimburse us. What happened is when we had a slowdown, we cut the number of students in the programs and the school's programs died.
- We'll need 100 service technicians in the next three years. We're recruiting at the 8th and 9th grade levels.
- We hire brothers, cousins, whatever, but we don't pay well enough. In ‘98 I tried to get guys from the local Cadillac dealer. I started them at $17 per hour, and our average technician was making $15.50 at the time. Now I base it on what Sears charges. It's at least $12 dollars more. I'm not saying paying more is the answer, but if they can do well.
- Keeping them is what we're working on now. I pay some guys over $20 per hour.
Are there changes dealers can make in their service operations to make it possible for experienced technicians to solve some of the technician shortages?
- We're looking at it; we're trying to attract these guys by offering every other weekend as a four-day weekend.
- We'd like to move toward owning the tools. That can make it hard for a technician to leave.
- I know a company that gives a service technician of the year award, and the prize is one year of college for their kids. They have monthly bonus programs in which they take a percentage of revenue and split it.
- I know a dealer that added a second shift. It eliminated overtime, the rate to the customer went up, and gross margin increased.
- We use to be open Saturday and Sunday and our rates where higher on those days. The more-experienced guys wanted Saturday and Sunday, and the younger guys wanted Monday through Thursday.
- Two guys in their 50s came to us and said they didn't want to work 40 to 50 hours per week anymore, they wanted to work three or four days a week. We said, "We can't do that," and they said "Ok, then we're leaving." We worked it out for them and it hasn't been a problem, but that kind of flexibility was hard to swallow up front.
- We have special deals for guys in their 60s, they are diagnosticians rather than doing the heavy work. We make sure they have a boom so they don't have to lift anything.
- We use them to help service technicians. Instead of calling the service manager, they call the older guys behind the desk. And they are there for mentoring. Each new technician is assigned to an older technician for mentoring.
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