Service Absorption  (continued)
A high service absorption (and here I am talking about exceeding 100%) gives the
dealership an opportunity to sell more vehicles - new and used - at a lower price than
its competitors.
    Service absorption is the percentage that the Parts, Service and Body Shop
    operating gross covers of the total of its own entire combined department operating
    expenses PLUS the total of fixed expenses and dealer salary.  Let me repeat that
    statement.  When a dealership parts, service and body shop operation develops
    enough gross to cover their own individual department operating expenses, plus the total fixed expenses and
    dealer salary, then that dealership has the opportunity of a lifetime.  Why?  That is because the new and used
    car department can now sell merchandise at a greater discount because all they have to cover is their own
    department expenses - AND - generate an operating profit from same.
    Let's look at it another way.  The operating statement is broken up into many selling segments.   
    Think of an auto dealership as a very big umbrella.  Each segment is a department.  Those
    departments are, as you are aware,  New Car and Truck retail, New Car and Truck fleet, Used Car &
    Truck retail, Used Car & Truck Wholesale, New & Used Finance Sales, Parts Department, Service
    Department, and Body Shop Operation, Fixed Expenses and, ultimately, the Dealers Salary.  Then
    there is the Rental Car and Other Income section of the statement.  It sounds like a lot to look at and
    analyze. Well, it is.  However, we are going to concentrate on just the Parts, Service & Body Shop
    income and expenses along with the Fixed Expense and Dealer Salary.  No other information will be
    required for this calculation.  Again, the objective is to attain a minimum of 80% Service Absorption
    and to build this percentage to the goal of 100%, and then try to exceed that. Just think of the
    value this would add to your dealership if you were in the market to sell same.  Wow!  How high
    is up?
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Jim Bernardi has held such positions as; Dealer,
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Operations Manager, Parts & Service Director, Service
Director, Service Manager, Service Advisor and is
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    Let's get the calculation out of the way first, before we talk
    about increasing operation numbers in each department.
    1st - List the $ of gross profit per department -

           Parts Department                               ______________________

           Service Department                           ______________________

           Body Shop                                           ______________________

           Total Gross                                         $_________________

    2nd - List the total $ of operating expense per each of these departments -

           Parts Department                                 ______________________

           Service Department                             ______________________

           Body Shop                                             ______________________

           Fixed Expenses                                    ______________________

           Dealers Salary                                       ______________________

           Total of these expenses                    $__________________

    3rd - Divide the total of 1st category (Gross) by the total of 2nd category (Expenses) to give you
    the Service Absorption Percentage.

    Service Absorption                             _____________________%  

    The absolute least you should accept is 80%.  There are many dealers with a Service Absorption
    percentage consistently well over 100%.   The majority of dealer’s numbers that I have seen are
    between 60% and 110%.
Just a thought:

In this example; let’s say a particular Dealer does not pay attention to his parts WIP inventory.  The obvious problem
was called to his attention but not acted upon.  However, one of his employees also saw the problem, pulled up the
ROs and called this to the Dealers attention.  The missing ROs had been found.  They had been filed away by
someone in the service dept without being completed - WIP claims not filed with the factory.  Did the dealer ever look at
WIP - Parts detail run?  Did the dealer look at the outstanding RO list?  All of you should take a look at these lists
prepared for you each and every month?   One thing that is obvious is the relationship of outstanding ROs on WIP -
Parts list to the number of stalls in the dealership.  If you have 22 Service and 13 Body Shop stalls available,  why
would you have 335 RO's outstanding on WIP - 96 for Body Shop and 239 for the Service Dept?  These numbers were
called to the dealer's attention.  It is
your (The Dealer) responsibility to look at the outstanding or missing RO list.   
What was discovered was that the parts department was ordering - and costing - parts for cars that had not come into
the shop - just people who said they would be in at some future date for service or body repairs.   The prospective
customer provided a copy of an insurance estimate to the Body Shop Manager and left.  They did not return to have
the repairs completed.

Folks; this is a very good example of someone not paying attention to the vast amount of information on their financial
statement or from their accounting records.  How about you?  Are you paying attention?
It’s often the fine details
that result in huge increases as measured from a financial overview.

Until our next issue, keep your service department full and your team ready for drive-ins.