Shop Management: The great debate repair or replace

Sometimes it is more profitable to repair a panel, sometimes better to replace it. Making the right choice equates to making the highest profit. But how do you decide?
A researcher for NSW Motor Traders' Association provides some answers.
It has become customary for smash repairers to say: "we're here to sell labour". However, you may also notice others that smile knowingly and shake their heads.
We have to ask ourselves what we're here for. The official line would suggest it is to solve customers' problems by returning their vehicles to pre-accident condition in the shortest time possible, in the most cost effective manner, while still making a reasonable return for the shop.
The issue of repair versus replace creates considerable debate in the industry with many people focussed on selling labour because of its high gross profit percentage. Many times we hear: "how can you make net profit if you don't make gross?" Well, it's about turnover, not only gross profit.
When you begin to analyse the information, people are looking at the absolute dollar gross profit or percentage per job, not the overall impact on their business and its capacity to repair vehicles.
When discussing repair versus replace many issues need to be considered. Here are a few:
? What impact will it have on my average cost of repairs?
? Work providers focus on repairing because it reduces the average cost ? with very little consideration placed on cycle times.
- Are the parts available in Australia, or are they ex-Japan?
- Are the parts new genuine, recycled or aftermarket?
- If a shop's current backlog of work is high it should favour replacing.
- If a shop's current backlog of work is low it should favour repairing.
- It is easier and quicker to paint a new part than a repaired part.
- There is an impact on shop cleanliness because there is less dust generated in the preparation of a new part.

The fact that there is more profit for a business if it replaces rather than repairs is better appreciated overseas. Most US based consultants and business owners understand that "parts intensity" and "labour efficiency" combine to give the maximum profit for the business.
Here's the real issue: the measure of how well a business is performing is gross profit per employee real hour worked. This takes you right back to what is critical to making a profit. Let's put it another way. How much does each person make for each hour worked? That's the key.
There is no doubt we can find extreme examples to prove the replacement theory is incorrect, but let's go through the exercise of evaluating a small bumper job, taking into account not just the gross profit generated but the time it takes to do the job. You could be in for a surprise.
Currently, when there is still over-capacity in the industry, it makes sense to repair rather than replace - but for individual shops that have a backlog of work it does not.
The lack of tradespeople in the marketplace means there is a lack of skills which may force us to replace more than repair in the future anyway. However, the loss of technicians to better paid work is a separate issue.
The use of newer steels, aluminium and plastics will also have an impact on whether the panels can be repaired or must be replaced. The techniques and equipment required to repair many of these newer materials will require significant investment in equipment and training. And we also have ask, who are we going to train?
Figures can be manipulated to show what we want but to replace is more profitable than to repair.
Below, you'll find an example to back this up. Some people will find it hard to follow and so dismiss the concept. Yes, the numbers are a little messy but understanding the principles is essential if you are to make informed decision that will affect the long term viability of your business.
Many people say they are working harder and longer, and are struggling to maintain profitability. Maybe part of the problem is to do with the current popular blind belief that it is always better to repair rather than replace.
Our exercise has not taken into account possible direct billing of parts ? which would bring about a much stronger focus on repairing rather than replacing. Likewise if the parts were recycled or after market their profit margins would be way down on new genuine parts. It is worth noting that if we're not careful we'll be repairing parts that should be replaced, and while more repairing might push down the average cost of the job it could have a negative outcome for the quality of the final job and the profitability of the shop.
The exercise below assumes that paint materials represent 35 per cent of the paint work total, and the gross profit on the paint materials is 40 per cent. It uses a shop rate of $60 per real clock hour and labour gross profit of 67 per cent. Assume labour efficiency of 100 per cent ? meaning that target times are achieved.

REPAIRING THE PANEL

VEHICLE: Toyota Camry CSI V6 Auto, 2002 model, colour: white

REMOVE & REPLACE UNITS RATE TOTAL TARGET TIMES GP
Rear bumper 0.60
OS tail lamp 0.20
Necc boot trims 2.00
Total units 2.80 @ 30.90 86.52 1.44 $57.97

RREPAIR AND ALIGN
O/S/R Qtr panel `32.00

Total units 32.00 @ 30.90 988.80 16.47 661.96

REFINISH
O/S/R/Qtr panel 1.90
Single panel allowance 1.00
Booth allowance 2.00

Total units 4.90 @ 48.30 236.67 2.56 136.20

Total labour units 39.70 1311.99 20.47 856.13

NET TOTAL 1311.99
GST @ 10% 131.20

GRAND TOTAL ($) 1443.19 20.47 856.13

Gross profit per employee hours $41.82

REPLACING THE PANEL

VEHICLE: Toyota Camry CSI V6 Auto, 2002 model, colour: white

REMOVE & REPLACE UNITS RATE TOTAL TARGET TIMES GP
O/S/R Qtr panel 18.30
Total units 18.30 @ 30.90 565.47 9.42 $378.86

REFINISH
O/S/R/Qtr panel 4.10
Single panel allowance 1.00
Booth allowance 2.00

Total units 7.10 @ 48.30 324.93 3.72 $80.00
Total labour units 25.40 908.40 856.13

PARTS REQUIRED LIST
O/S/R/Qtr panel 400.00
Total 400.00 13.14 $656.22
NET TOTAL 1304.40
GST @ 10% 130.84

GRAND TOTAL ($) 1439.24 13.14 656.22

Gross profit per employee hours $49.94

AND THE WIINER IS . .

The above examples show that gross profit for replacement is $656 or 50 per cent, as against repair giving a gross profit of $856 or 65 per cent. On face value, repair wins, but here's the trick. It took the repair 39.7 labour units as against 25.4 for the replace. While the repair technicians were still working on the job, the replace technicians had finished and were well into the next job. When you take into account the gross profit per actual hours on the job, replacement comes out better by 40 per cent.
Another way of looking at the exercise is this. If you work the repairer and the replacer for one hour side by side, the repairer earns for the shop only his chargeable hours, whereas the replacer earns for the shop his chargeable hours PLUS the profit made on the parts he fits. The profit on the parts is made simultaneously with the R&R labour profit.