Shop Supplies – The Little Things Add Up
What do you include in your “Shop Supplies” expense area? Most dealers include uniforms, rags, job consumables such as lubricants, grinding discs, disposable gloves, and many dealerships regularly use it as a “catch-all” for items that probably should be expensed elsewhere. There is no written set of rules on what does – and doesn’t – qualify as a “Shop Supply”, so what goes into this account varies greatly.
A comparison of dealers illustrates these major differences, with these expenses varying from a few hundred dollars to four or five thousand every month. Is this just a cost of doing business? If you are one of the dealers spending $5,000 per month or more, you are spending in excess of $60,000 a year…and that should command your attention.
If that doesn’t, 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 Grand a Year? They have better places to spend it.
These “Shop Supplies” expense items are used and consumed while work is being performed on each and every Repair Order written in your shop. ..so shouldn’t they be included as an expense for each individual job and offset by income? You betcha they should, and there are several ways to accomplish this.
Some dealers simply add a percentage onto every repair order as an “Environmental Fee” or similar. 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 to help recover these expenses that is normally quite acceptable with most service customers.
The first step is to compute the actual costs per RO. It’s simple to factor a percentage of revenue required to offset your monthly shop supply expenses. Simply divide the total monthly “Shop Expenses” amount 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. An example is a dealer who is spending $3350 per month on shop supplies ($40,200 per year), and writes 170 Repair Orders per month. This comes to $19.91 spent per repair order ($3350 divided by 170 ROs). His average sales amount per RO is $144.75, so his 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 a fifth of the profit!
Some dealers have found great success in recovering these expenses – without alienating their customers – by creating small “parts packs” as listed 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 Brake Pad Disposal Fee. These are all listed out as a 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 actually see what is included in the charge.
Moreover, your “Shop Expense” category will thank you, and so will the owner.