What Is Fixed Absorption? (Service Drive Revolution)

Foreign.

Welcome, everybody, to Service Drive Revolution.

Please say hello to Christian Lafferty. Hello, everyone. Como esta, senor?

Muy bien. Gracias. Y tu?

Today we're going to talk about a term that everybody thinks they know, but maybe they don't know, or maybe they hear the term and they have heard it so many times they think they know what it means. But I think often we don't really know what it means. And that's fixed absorption.

Yeah.

We're going to talk about. What is it? What's the formula?

How.

Why? Why? Why, Christian? Why?

I don't know. Why does it have a P in it instead of a B?

Yeah, that's a great question.

Thank you.

We're gonna clearly. We're gonna do questions from the audience. Remember, everybody, if you have a question that you would like Christian and I to answer, preferably a question about the service Drive, but it does not have to. Parenting advice, stocks, whatever. We've got a library, financial advice. 8, 3, 3, 3, ask. SDR. That's 8, 3, 3, 3. A, S, K, S, D, R. Well.

That'S the first time you spelled it out like that. That was kind of good.

And we're also going to play Would you rather. And I'd like. It's my favorite bit. I would like to start the show with. Would you rather.

Oh, my goodness. I didn't even have my prep time.

This one's a good one. Oh, boy. Okay, so this is where I asked Christian, would you rather do this or would you rather do that? And.

Would you rather fire a single mom.

Who'S a service advisor who's late all the time, but she can barely pay her bills, dad of the kids is deadbeat?

Or would you rather interview a dealer's friend who thinks he can be a tech, but he's been selling insurance?

Okay, so I feel like I need to ask a couple more questions if I'm gonna give you a real honest answer. How many kids does the woman have?

Let's say three.

Okay. What's the oldest kid?

16. Pain in the ass.

Okay.

Knows everything.

Does the woman have any tattoos?

The single mom?

Yep.

Oh.

Yes.

Okay. How many times has the dad been to prison?

Zero.

Okay.

That would make a difference. No, you're firing her. You're not dating her.

That's a good point. I need to understand.

We trying to figure out, like, if you. If you moved in and you were dating her, like, how big. How big of a problem is the X going to be?

Yeah, probably.

Yeah. You're playing the wrong game.

I Suppose so. And then with the, the other person. What kind of insurance? Life insurance? Car insurance?

Home.

Car, home. You know, like that sort of thing.

Okay. How many jobs has that guy had over the last five years?

Last five years?

Yeah.

Two.

Okay.

Drinker?

Yes.

Okay.

Let's just say that they're. They're straight up alcoholic.

All right, cool.

Yeah. I'll fire the woman.

Oh, no.

Really? You'd rather fire the single mom?

I've never seen an insurance person turn into a technician before.

Okay, there you have it, everybody. Christian has a heart made of stone. Please put in the comments what you would do if you're cold blooded like Christian or if you actually have a heart.

I have been accused of being heartless before.

Let's go to questions from the audience. What question do we have today?

I have a question. I actually have a felony on my record. It's a hit and run. I served two years in prison. I've been released for a year now. I have a work history of Automotive for 10 years. I've been a service writer and assistant manager in Sears Automotive. Since my release of about a year ago, I have not been able to find a job in automotive. Seems to be really hard. Did an interview with a BMW dealership which they told me that they couldn't cover me for insurance purposes. And the reason I want to ask you, Chris, about this is because I understand that you have a large network of people and you have a long time experience. I was just wondering, someone in my case, which was my first felony conviction of a hit and run, if you've ever hired anybody or know of anyone that usually will hire.

I know that there's probably people out there that have felonies and, you know, they've done their time and they just want to move forward with their life. So I'm sure this would help a lot of people. And I thank you for your help so much.

It's tough.

Yeah. In a lot of situations the insurance company won't cover you. And so it really isn't even the employer's choice because they can't hire somebody that they can't insure. And it, you know, it gets harder and harder with all of the lawsuits and claims and things like that that happen. The insurance companies have a pretty good handle on what you can and can't do. And so a lot of dealerships just.

Wouldn'T, you know, they just wouldn't be able to hire you because of their insurance at the time. Most of them probably wouldn't even interview you once they saw that because they know.

We'Ve tried getting things like that pushed through, and it's 100% better. No.

Yeah. It's more than just an uphill battle. It's an impossible fight. I think in those cases. My heart hurts for him, though. Like, I feel like everyone deserves a second chance. So this. There's a couple of things I came up with. One is it was a BMW dealership that he went to. Right.

They interviewed him. Yeah.

So the one thing that I would say is that what's the difference between.

This is a segue to a joke. This poor guy, he's trying to find a job, and you're gonna make it into a joke.

Yeah. I feel like levity is everything, but. What's the difference between a cactus and someone driving a big BMW?

What's the difference between a cactus and somebody driving a BMW? I don't know.

The pricks on a cactus are on the outside.

The pricks on a cactus are on the outside.

They're on the outside.

Hey, I have a BMW.

Yeah, I used to own one, too, so I feel like that makes it okay for us to tell the truth. But seriously, the thing that pops into my head with this is that because the dealer world's so strict, it might behoove him to try an independent chop where there's a little bit less HR red tape, and he might be able to get a chance based on his merit and his abilities as a service advisor. So I. I would really like to see this guy get a chance. So that's the only thing that. That's what kind of popped into my head as he was telling the story.

Man.

It's good. That's good advice. Cool. Good. Good question. Thank you for that.

Sorry about the.

He doesn't want us to say his name, so I won't say your name, but thank you for that. Remember the phone number? 8333. Ask SDR if you have a question you would like us to answer.

Now, you came up with the idea about talking about fixed absorption because you feel like oftentimes.

It'S a term that's thrown around, but a lot of people don't understand what it means or even why.

But it's definitely a term that's coming up more and more in the field from our clients, is that we're talking a little bit more about fixed absorption. I really like the opening of the discussion because one thing I think is great about it is it's fixed absorption. It's not service. It's not parts. It's what's happening in the back? Right. So I think that it naturally kind of brings those two departments together, which I think is something that we've been talking about here at the office a lot. And the other thing we have, like.

We'Re just sitting around the office talking about it.

Yeah, maybe I'm just talking to myself, but it's really bloody important to me.

Okay.

What'd you do this weekend?

Absorption.

I was working on my fixed absorption. That's so great.

What I understand about fixed absorption is that it came out of Henry Ford trying to scale Ford up. And what would happen is he had a dealer network, but he would deliver the cars, they would sell the cars to the consumer, and then he would get paid. And to scale, he needed to increase his cash flow and not have receivables.

And so what he did is he convinced the dealers to get a line of credit, which we call a flooring line, which means when the Model A's were delivered to the dealer, they were put on a line of credit with the bank.

And then he got, you know, Ford got paid right away, but the dealers had to pay interest on their inventory. So, you know, an inventory at a dealership.

Can be, you know, 10 million, 20 million, depending on the. On the brand. You could have $10 million worth of new cars in inventory, and then that dealership is paying interest on that money. And so let's say, you know, interest rates are 5%, so you're going to be paying 5% divided by 12 because it's an annual interest rate. Right. You're going to be paying that on that every month. So, you know, your flooring expense in a dealership can be 20,000 to, you know, 100,000 depending.

And so what he did is he encouraged the dealers to have service and parts departments. And they literally used to make these charts of what it would cost to build a Model A in parts and service. So if the Model A was $1,000, it costs $17,000 to build it in parts and service. Now, nobody in Parts and Service is ordering a wood frame Model A and building it. But the point was, is if they serviced cars, they would be able to cover the overhead of the dealership. And if times got tough, they could give the cars away at cost and still be profitable because of their parts and service business. And so if you ever wonder, like, why, you know, cars back then didn't have a warranty, why does it. Why do dealerships have parts and service? That was a big part of the plan on how Ford scaled was them Having parts in service to cover the overhead and then other manufacturers followed, followed suit. But it is, if you think about it, odd that dealerships have like five different businesses inside of one business. Right. They could be separate businesses. Warranty came later and then it made more logical sense. But.

It is a measurement of how healthy is your dealership in a competitive market. Do you parts in service and if you have a body shop, so you know, fixed ops, parts service and body shop, do they cover the overhead of, of the business? And could you just give cars or trucks, whatever, whatever you're selling, could you just give them away it cost and still be profitable or you know, in some cases this has happened, you give them away to loss and you're still profitable. Like really, if you think about the model of printers, like you really could make a dealership profitable by giving away the car and charging for the maintenance. In a sense, which we, we might move to an economy where it's more of a lease maintenance type thing. Especially if like cars don't depreciate as much as they have historically, which might change. They, they might just have more software updates and they might not depreciate as quick. Also, yeah. That we might be more of a printer model where you're buying the printer at cost or even at a discount, but where we're making the money is and you buying the ink cartridges over time. And it's more of a subscription model that, you know, I know here, Porsche tries to do that here in Los Angeles. I think a couple other manufacturers are trying to subscription models. So fixed absorption, when you say 100% fixed absorption, that means that the fixed ops are covering 100% of the overhead for the dealership. Now, there's two ways to do that formula. One would be all of the overhead. The other would be taking out the sales department's commissions, flooring expense and advertising.

Called the variable selling expenses, the direct.

Expense to sell the truck or car.

It's probably the most common calculation that I see.

Yeah.

I think the great thing is when you think about it, you know, as a parts and service department, you are definitely served well by doing everything you can to support the sales department, because the sales department is what gives you the most customers. So it's that that huge circle. Right. So you want to keep as many cars going out of your sales department as you can because, you know, six months, 12 months down the road, those people are coming to see you. So focusing on the whole dealership health is exactly why fixed absorption exists.

Yeah. In understanding as we move Forward that the customer sees us as one. One business or one manufacturer, they could care less that there's parts, service, sales, finance, whatever. They don't care.

Yep.

They, they, it's one experience in one, you know, one payment. It's their budget monthly. And so we will, as an, as an industry, adapt to that. And there'll be less walls in between departments. Also, I mean, it's conceivable that the service department could be selling the next car, especially when, when manufacturers start going to more of a subscription base. Like, for example, the Porsche subscription here in Los Angeles, you just call the concierge and they bring you a different one. So you have three levels. And if you, you know, subscribe, let's say to the middle level. And in the middle level, I don't know, it's their middle. SUV and the Panamera and something else. I don't know what it is. But you want a Panamera and you want to give back the suv, you call and then just swap it out.

Yeah. Sounds pretty darn easy, right?

Yeah. And you're not. So you're also not going in for service either. And that will be something too, where as things evolve, the service departments will be more of a fleet type service department than a consumer.

Type. Right.

This is definitely the time to start getting good at handling fleet accounts and.

Get good at tires, because you're gonna. Tires all these electric cars. Remember my rant about those clowns in Detroit saying that they wouldn't sell 40 trucks, electric trucks, like it was yesterday. Okay. So, you know, Biden, our new president.

Announced that he's going to replace all of the federal vehicles, which a lot of them are trucks. It's close to a million vehicles, all electric.

So those four guys might not be.

On to something, which was originally my point.

Yes.

But Detroit wants to hear that. So to a man with the hammer, the world is a nail. But if you open up your, your eyesight a little bit, you would understand that you might not be doing as much research as you should when you answer the question.

I don't think anybody cares about that. I just want to make that point that I'm always right.

That's it.

That's a great point.

So that's fixed absorption in a nutshell. It is the health of the dealership. How healthy are you in a competitive market.

And even in good times.

Yep. And service and parts managers should be talking about that number every month. Like, how are we doing? Are we covering the net?

Yep. Fun stuff. But thanks, thanks, you guys, for tuning in and we will see you next time on Service Drive Revolution.

Thanks so much for watching this episode of Service Job Revolution. We're uploading new stuff every day, so make sure you subscribe and click the bell icon so you don't miss out. If you have a question you'd like us to answer on the show, call 8333-ASK SDR and we'll answer your question on the show. That's 8333-ASK SDR. For special deals on our books and training, head over to offers.chriscollinsinc.com now that's offers.chriscollinsInc.com I'm Chris Collins, and I'll see you in the next video.