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Which costs MORE, LABOR or PARTS?

16 Apr, 2007 By: Jack Duncan imageSource

Which costs MORE, LABOR or PARTS?

This may be an age old question with a simple answer, but I really think we
need to give it some more thought as to how we approach the subject.

The Simple Answer:

The simple answer is that the labor costs more! According to the most
predominant business models, 27.5 percent of service revenue is consumed by
labor costs, while only about 16 percent is consumed by parts cost.

The Issue:

Far too many times I have visited or worked with dealerships who’s purchasing
and inventory control staff feels more qualified to judge what a service
technician needs to carry in their inventory than the technician whom we have
sent to school and trained to service the equipment. The result gets
complicated. Paul Pierce, founder of OMD, used to tell us that every rescheduled
service call for parts costs an additional $100 in labor and travel expense. In
today’s business climate, I’m sure that it is higher still. When we do not have
the right parts in the right place at the right time, we are throwing labor
dollars at a parts problem. I have seen as many as four full time service
technicians whose entire day is consumed installing parts which should have been
in the technician’s initial  inventory as normal stock items. If each of these
technicians carries a cost of approximately $50K per year in salaries, fringes
etc., this is a $200,000 error in bottom line dollars!

The Reality

The reality is that the equipment the technicians service will dictate what
parts are necessary through either failure or necessary maintenance; therefore,
the parts actually consumed and the related expense will be the same. The
difference, however, is the additional labor consumed by having to return to the
same customer we have already been to and install the parts we should have had
on the first service call. Add to this the fact that technicians are resourceful
by nature and you will find that to combat this problem, they will gather parts
that they don’t need on the premise that they indeed might some day! This would
be called hoarding and exacerbates the issue even more.

The Concept

The ideal concept would be to have inventory staff that works with the
technicians as a team, to have that “Just in Time Inventory” of parts available.
We will invest additional funds in parts to have them in the right place at the
right time so as to not consume additional labor as a result of a dysfunctional
parts inventory system. We should remember that we buy the parts one time, but
we must buy the labor every hour on the hour! We also need a parts system that
sees changes in usage trends and adapts by suggesting additional quantities be
ordered as usage increases. Perhaps even more important is the downward trend in
usage. As usage drops we must immediately lower our purchasing so that we do not
get trapped at a later time and have to write off parts which no longer have
value due to obsolescence.

The Team

In far too many situations, the technicians and the inventory and purchasing
staff are on opposite sides. The technician wants to get the equipment running
with the parts it needs in the least amount of time possible, while the
inventory and purchasing staff are trying to hold down costs and maximize
inventory turns. In this situation, they are diametrically opposed. The Team
concept would be to set clear goals and realize the relationship between
inventory turns and incomplete service calls due to lack of proper parts.

The Goals

The goals might be to have 8 – 10 percent of all service calls rescheduled
for parts while inventory turns would be at 2.5 to 3.5 annually. We can not
afford to stock parts that would drop the reschedule rate below 8 percent as
that would result in excessive parts write offs at a later date. If we push
inventory turns much past 3.5 annually, we will pay for that lack of inventory
with labor dollars. It’s basically a pendulum swing; swing it too far in either
direction and it will cost money!

The Ultimate Goal

Both groups should realize that their common goal should be that the
customer’s equipment is up and running the maximum amount of time possible at
the lowest possible cost to the dealer. After all, in a world where most of our
income is derived on a “click” basis, when their gear isn’t clicking, our cash
register is not ringing!

Final Answer

The final answer is that indeed the labor costs more that the parts; however
we must balance the purchasing and inventory aspect with the reschedule rate to
meet common goals.

The Solution

The solution would be to have inventory and service working together to
achieve a common goal of customer satisfaction at the lowest possible operating
cost with a minimum of inventory obsolescence. Both groups must understand the
responsibility and the role of the other as well as the financial ramifications
of inefficiencies in either. Do not throw labor at a parts problem, but don’t
purchase so many parts that you are overstocked, as usage drops and you must
write them off.

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