What do you include in your shop supplies expense column? Most dealers include items such as: uniforms, rags, and job consumables (lubricants, grinding discs, and disposable gloves). Also, many dealerships regularly use this column as a catch-all for items that should probably be expensed elsewhere. There are no set rules on what does and does not qualify as a shop supply, so what does go into this account varies greatly between dealerships.
A comparison of dealers illustrates these major differences, with expenses varying from a few hundred dollars to four or five thousand every month. Is this just the cost of doing business? If you are one of the dealers spending $5,000 or more per month, you are spending $60,000 per year on shop supplies—that should command your attention!
Time for a change
If that doesn’t make you sweat a little, then perhaps this will: the most efficiently run service departments show a goose egg in this expense account category. That’s right … a goose egg. Zero. No cost. Nada. Zilch. That $60,000 per year? They have better places to spend it.
These shop supply expense items are used and consumed while work is being performed on each repair order written in your shop. So, shouldn’t they be included as an expense for each individual job and offset by income? Definitely! And there are several ways to accomplish this.
Some dealers simply add a percentage to every repair order as an environmental fee. This is better than nothing, but you may risk dissatisfaction and even push back from many customers. Also, charging a percentage may not be allowed in some geographic locations due to local laws. Let’s look at an alternative way (that most customers approve of) to help recover these expenses.
Doing the math
The first step is to compute the actual cost per RO. It’s simple to factor the percentage of revenue required to offset your monthly shop supply expenses. Divide the total monthly shop expenses by the number of repair orders to get the amount per RO, then compute that amount as a percentage against the average RO dollar amount. The ratio may surprise you.
Example: A dealer is spending $3,350 per month on shop supplies ($40,200 per year) and writes 170 repair orders per month. That is a spend of $19.91 per repair order ($3,350 divided by 170 ROs). Their average sales amount per RO is $144.75, so their percentage per RO is 13.75%. Not bad, you say? Wrong. Consider this: This dealer’s average gross profit per RO is $96, so that $19.91 expense is taking 21% of the gross per RO, over 1/5th of the profit!
Some dealers have found great success in recovering these expenses—without alienating their customers—by creating small parts packs as inventory items for their most common repairs. For instance, a disc brake parts pack might include: brake fluid, brake pad backing gel (or lube), cotter pins, new lock washers, disposable dust mask, disposable gloves, brake cleaning solvent, and a brake pad disposal fee. These are listed out as one line item with an assigned part number and sold for $19.95, which offsets the expense for that repair order. Most customers will find this a reasonable charge because they can see what is included in the charge. Moreover, your shop expense category will thank you, and so will your dealership’s owner.