Lean Thoughts

11/2008

Material Thresholds (Material Caps)

In this current era of ever increasing costs (bought any gasoline lately?) and a completely flat Paint & Material reimbursement climate (when was your last increase in P&M reimbursement from the insurance industry?), it’s becoming increasing difficult to make a fair profit on Paint & Material sales.

Since there’s little we can do to soften the petroleum and steel price increases that affect your costs, perhaps we can help on the other side of the equation, your P&M Sales.

In an effort to maximize your Paint & Material Gross Profit, don’t lose sight of how material thresholds (material caps) can affect your bottom line. Every time you accept a material threshold limit from an insurance company it has a major impact on your ability to make a fair profit, not only on that particular job, but also on your entire month’s book of business. Let’s take a look at an example:

Job A
· 19.5 hours Refinish Labor @ $28.00 / hour = $546.00 in P&M Sales

· Now lets assume you accept a Material Threshold of $350.00

· That makes the P&M shortfall $196.00 on this job.

· If we assume that you normally make 40% G.P. on your P&M Sales that would show your costs for that job would be $327.60.

· By accepting the Material Cap of $350.00, that would make your
P&M G.P. on this job 6.4%!!


Yes, from 40% to 6.4%!

Month’s Book of Business
· Your business accepts Material Caps at their face value throughout the month

· Now let’s assume that the scenario in Job A happens twice a week, that’s $196.00 X 8 times, or $1,568 in missed P&M Sales.

· If your P&M Sales should have been $10,000, your costs were $6,000 (at 40% G.P.).

· By losing $1,568 in Sales your new Sales figure is $8,432 and your costs are still $6,000, dropping your P&M G.P. to 28.8%!

Yes, for the month, your P&M G.P. moved from 40% to 28.8%!


So how do we overcome this drain on our Paint & Material profitability? Most experts agree that the most successful method is to challenge the Material Threshold concept by offering documentation that supports the notion that your true costs exceed the offered material cap amount.

This can be done easily by capturing all of your material usage with our Formula Express (F/E) system. Have your painters mix everything on the F/E scale. Tie each mix to the vehicle’s repair order (R.O.) number. Using the F/E management reports, you can print out a complete listing of all the Sherwin-Williams materials used to refinish that particular R.O.

And don’t forget that approximately 25% of the total P&M reimbursement is for non-paint items. Many industry experts use the equation 75% Paint / 25% Support Materials. That means you will need to increase your invoice by approximately 33% to account for those additional non-paint items.

While the challenge to make a fair Paint & Material Gross Profit in this era of rising oil prices continues to increase, don’t give away valuable sales dollars just because the insurance industry asks you to. Document your actual costs and present them in an open and honest fashion. Get paid for your true costs of doing business!