Dealer Insights - Jan/Feb 2011 - The Ins and Outs of Benchmarking With KPIs
January 01, 2011
Key performance indicators (KPIs) are a way to benchmark your dealership against its past performance and against other dealerships. These financial measures allow you to chart successes and pinpoint deficiencies. KPIs provide a snapshot of your dealership at a particular point in time and, when gathered regularly, an ongoing report card on its health. Let’s take a closer look at the ins and outs.
Q: How does benchmarking with KPIs work?
A: One of your dealership’s overall KPIs might be total gross profit (TGP) per employee per month. For this category, you’d record metrics for 1) your own dealership, 2) the average per dealership in your franchise, and 3) the average for all dealerships.
For example, if your dealership has an average gross profit per employee of $6,200, while the average for other like dealership franchises is $6,600, you may have excess personnel. Further analysis by department will point you in the direction of where a reduction in headcount might be needed.
Q: How should you develop your KPIs?
A: When deciding which KPIs to use for your store, it’s helpful to ask the question, “What’s really important to my dealership’s stakeholders: the owners, customers and employees?” Your KPI focus needs to be on what matters to these different groups.
Also, strive to get participation from all departments. Some employees might dislike the idea of having their performance measured — and fear what might happen if they’re not up to par. So be prepared for a challenge. But most employees will buy in if they understand how the information collected will help your dealership be successful and meet its long-term goals.
Q: What should you measure?
A: Develop KPIs for your overall dealership and for individual departments or functions. Here are some potentially useful KPIs for your dealership as a whole:
- Net income as a percentage of sales,
- Employee expenses as a percentage of sales,
- Employee expenses as a percentage of TGP,
- Total advertising expenses as a percentage of TGP,
- Fixed expenses as a percentage of TGP,
- Total expenses as a percentage of TGP, and
- New vehicles sold to used vehicles sold.
You’ll want to create separate KPIs for your new vehicle and used vehicle operations. You can use many of the same indicators for both areas. For example:
- Gross profit per retail unit,
- Advertising expenses per retail unit sold,
- Vehicle department gross profit as a percentage of TGP,
- Retailed cars to retailed trucks,
- Vehicle unit days supply,
- Average cost of ending new inventory, and
- Average cost of retail units sold.
For new vehicles, you’ll want to add floor plan cost per retail unit sold.
Also develop KPIs for F&I, parts, service and body shop, if applicable. Additionally, consider including an expense analysis section that lists costs such as employee benefits per employee, payroll taxes per employee, and rent or equivalent as a percentage of total sales. You also might want to include utilities as a percentage of rent or equivalent, telephone expense per employee, non-floor-plan interest and so on.
Q: Where can you get KPI data to benchmark against?
A: Industry trade associations, such as NADA or a Dealer 20 Group — and benchmarking resources, such as those from Ward’s Automotive Group — can provide you with data on other dealerships.
Q: How can you use benchmarking results?
A: You want to have a set of KPIs that produce information you can use. For example, once the data is in, start by looking at departments that aren’t profitable — let’s say, used vehicles — and focus on major expense categories. Advertising, for instance, is one of the largest expenses in a dealership. To determine if your store’s advertising is effective, look at your “cost per used retail unit sold” combined with advertising expense as a percentage of the total used vehicle department gross.
You may find that you’re spending more on each unit in advertising than other dealers while your overall percentage of advertising to the department gross profit is comparable. Because advertising generally drives volume, not gross, the results would indicate that you could reduce your advertising expense on used units and not see a drop in the overall department gross.