John Yoswick (148)
John Yoswick is an automotive freelance writer based in Portland, Oregon, who has been writing about the collision industry since 1988. He has a body shop in the family and is the editor of the weekly CRASH Network (for a free 4-week trial subscription, visit www.CrashNetwork.com).
A number of automakers in recent weeks have issued bulletins, launched programs or made announcements that could impact collision repairers —whether at dealerships or independent shops. Here’s a wrap-up of this recent news from the OEMs.
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Concerns about data privacy prompted the formation this spring at the Collision Industry Conference (CIC) of a taskforce focused on the subject. At CIC in Chicago in July, Tony Passwater, an industry trainer and executive director of the Indiana Auto Body Association, said that the new taskforce that he chairs has in recent weeks been discussing and finalizing its objectives.
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The primary issue, he said, is that as the industry’s information providers move toward “cloud computing” systems—in which a shop’s estimate and even management system information is stored on the system provider’s computers rather than the shop’s— concerns are being raised about access to and use of the data.
“I don’t think the current data privacy policies and terms-of-use address all the ramifications of that,” Passwater said.
John Edelen said that three years ago when he stepped out of retirement to take on the role as CEO of I-CAR, someone well-known and respected in the industry asked him why he would “waste his time” with an organization like I-CAR that was “no longer relevant.”
“At first I was stunned, and then I was really … angry,” Edelen said, obviously choosing the adjective carefully, generating laughs among the 200 people gathered in Chicago for an I-CAR event this summer. “I-CAR irrelevant? An organization that was established by the inter-industry 30 years ago to meet the training needs of the inter-industry … irrelevant? After 30 years of efforts by volunteers to provide that training … irrelevant? After the industry had spent $170 million over that period of 30 years … irrelevant? Not if I could help it.”
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Over the last three years, Edelen has overseen I-CAR’s efforts to reach out to the industry to find out what the training organization was doing right and what needed to change to ensure that its training and recognition programs were focused, valuable – and relevant – to shops, insurers and educators.
Edelen said the results of that effort, which were rolled out at the Chicago meeting, is I-CAR’s new “Professional Development Program.”
If the industry developed a formal set of “repair standards,” what then?
That was the question a Collision Industry Conference (CIC) committee attempted to prompt discussion of at CIC’s meeting in Chicago in July.
Jeff Patti, chairman of the Industry Standards Committee, said his committee felt than in addition to working on the proposed set of standards, it should also begin the process of considering what might be the next step.
He outlined the proposed creation of a non-profit organization that would oversee the final development and implementation of the standards. Although designed primarily to prompt discussion of the topic, Patti’s proposal included details down to the level of potential costs for launching such an organization and possible fees for those wishing to participate.
Such an organization, Patti said, would be limited to one focus: the development and implementation of the standards.
It would work to gain consensus from “all stakeholders in the industry” for the standards, he said, thus following the guidelines established by the American National Standards Institute (ANSI), the body that essentially sets standards for standards-development.
Organizers of the annual International Bodyshop Industry Symposium (IBIS), face a difficult assignment: bringing together two days of presentations on industry issues that will be of interest and value to a diverse group of attendees—insurers, repairers and industry vendors—hailing from about two dozen different countries.
The 10th annual IBIS, held in London in June, included as many presenters from outside the industry as it did collision repair experts. The goal, conference director David Lingham said, was to offer some fresh perspectives and a look at how comparable issues are being addressed in other industries.
Here is a wrap-up of some of the more striking and interesting comments and insights offered from the IBIS podium this year.
Future view of the OEMs
Prof. David Bailey, an automotive analyst with the Coventry Business School in the United Kingdom said that despite the growing interest in electric-powered vehicles, collision repairers can expect to see plenty of diesel and gas powertrains for the foreseeable future. Even by 2020, he predicted, only about one-third of new cars will have electric powertrains.
Although 10 automakers currently account for about 75 percent of the vehicles currently being produced, Bailey said he expects to see even further consolidation among automakers through mergers, acquisitions and alliances (such as OEMs sharing more jointly-developed platforms across multiple auto lines). Some automakers may get out of the assembly process altogether, he said, focusing on developing and branding vehicles that are actually manufactured by suppliers.
Much of what gets written and talked about regarding “lean” in collision shops focuses on recommended changes in the office and body department. But streamlining in those areas will only lead to backlogs if some lean-thinking isn’t done in the paint shop as well.
“If an organization is truly going to be lean, the whole organization has to be lean-focused,” Amjad Farah, manager of business development for BASF Automotive Refinish and a Lean Six Sigma Black Belt, said. “There can’t be one part that’s not.”
Farah and other experts on lean processes within the collision-repair industry weighed in recently on what’s different within the paint departments of shops implementing lean-focused problem solving to improve productivity. Here are some of their key suggestions. Standardize the processes.
Farah said one signal a shop is thinking lean is when he sees a clear chart on the wall of the paint shop showing, for example, exactly what products and exact ratios the shop is using for its clearcoat.
“There’s no ambiguity and it’s very specific to that shop: Here’s how we do it here,” Farah said.
Part of reducing waste is standardizing the best practices, he said, clearly defining—even using photos when appropriate—products and processes to be used, and what quality standards must be met. This reduces time-wasting conflicts about, for example, what grits are used to finish body work or primer.
It also can eliminate the need to stock multiple brands and variations of different products “preferred” by different employees. Should such standardization of materials come from the top of the organization down, or be left to employees to develop? A little of both, Farah said.
“Management needs to get employees together and talking about it, so the employees can determine what’s best overall once they understand the goal,” he said. “Lean is about continuous improvement. That won’t happen if you’re not empowering employees to find better ways to do things, or if you haven’t shown them you’re going to listen.” Don’t wait to match.
Eighty percent of the time wasted in the paint shop involves color matching, Steve Feltovich, manager of collision business consulting for Sherwin-Williams Automotive Finishes, said.
“So you start to minimize the waste on color issues by getting ahead of it rather than letting it get ahead of you,” he said.
One key to this, he said, is ensuring the paint shop has—and is using—all the color tools available through the paint manufacturer. But just as lean-thinking shops try to eliminate delays in the process through “blueprinting”— a complete disassembly of the vehicle up-front to identify at the start all needed parts and processes—Feltovich said color matching should start before the vehicle reaches the paint shop.
“Get color identification done during pre-planning and blueprinting process[es] so it’s proved out well before the car arrives in the paint department,” Feltovich said. Involve your paint supplier.
Another source of potential waste in the paint shop: excess inventory of paint and materials. Feltovich said Sherwin-Williams’ branches can work with shop customers on what is sometimes called a “kanban” inventory management system.
“Kanban is a Japanese word that really only means signal,” Feltovich said. “The goal is to have just the products and amount of products on hand that you need, to have minimums and maximums established, and a signal system in place that indicates when you’ve used something and when it will need to be replenished. It’s about just-in-time stock and inventory management.”
Such a system could be electronic, using a barcode system and computerized inventory, or as simple as a tagging system on paint and materials cabinets in the shop. The system is less important, Feltovich said, than keeping the goal in mind: having just what you need when you need it.
“When you reduce inventory and over-stocking, your people also become more conscious of what they use,” he said. “It changes their behavior. They tend to become more conservative, more conscious of waste and in doing things right the first time because they don’t have excess material to throw at their mistakes.” Get organized.
Once you’ve eliminated unneeded or overlapping products and materials from your paint inventory, put what your techs need at their fingertips, suggested David Knapp, senior manager of business solutions for PPG Industries. Knapp said it may be helpful to have a paint prepper, for example, keep a list of every tool and product he uses for a week. Then go through the list and identify the items that he uses every day. Those are the items that should be included on a “point-of-use” cart, always within easy reach.
Knapp said Mission Viejo Auto Collision in Mission Viejo, CA, took the idea one step further.
“Using the list of what they used every day, they cut the shapes of those items out of a piece of foam they bought at an upholstery shop, and put the foam on the top of the cart,” Knapp said. “They dropped those items into the foam, and now there’s not room for anything else, so it avoids the cluttered mess I see on prep carts in many shops.” Provide information visually.
Knapp said even in shops where language barriers aren’t an issue, providing information to employees in ways other than just writing can help reduce wasteful mistakes and oversights. PPG’s “lean” training, he said, includes “visual mapping,” using symbols and markings on the actual vehicle to indicate, for example, what panels are to be blended, what should be done with pre-existing rock chips on a hood, etc.
“One extra piece of visual mapping that affects the paint shop could be ‘loose parts,’” Knapp said. “A body man might remove a bumper cover or mirror or molding that may need to be painted. Make that part of the mapping process. Write down on the drivers’ window of the vehicle how many loose parts there are, so the paint department makes sure they’re in the booth at the same time.” Look for wasteful, non-value-added processes.
Steve Trapp, collision services development manager for DuPont Performance Coatings, said waste in the paint department can be as basic as using 2-inch masking tape when 1.5-inch or narrower will do the job.
“You see people still papering the car instead of just using plastic to mask even through the plastic is now sufficient to keep [overspray] paint from flaking off,” he said. “You can now just tape the plastic right to the blend area, so that whole activity of masking the car with paper is no longer necessary.”
Changes in products and processes, he said, have similarly eliminated the need for wet-sanding. Choosing the right size DA sander can reduce the repair area. Can’t fully mask a car because you still need to be able to drive it through the paint shop?
“What if you used magnets to hold the plastic down so you can still drive it into the booth, then quickly pull the magnet off and reposition the plastic and use strip magnets to hold it down,” Trapp suggested. “That’s a good lean-thinking solution.” Schedule smarter.
Trapp said one key aspect of lean production is “flow,” developing a steady, level stream of work moving throughout the shop each day. If the goal is to process $200,000 in sales in a 20-working-day month, for example, and the average job is $2,000, the goal for the paint shop is to produce five cars per day. In an 8-hour day, that means a car should be moving into the booth ready to spray every 96 minutes.
“So many shops don’t think that through,” Trapp said. “Their paint shop ends up with nine cars on Thursday, so the painter stays late, trying to make flow.”
One way to achieve consistent flow, he said, can be to move resources. If the prep team may not have a vehicle ready to go for the next booth cycle, someone from detail may be pulled to help out. The real key, however, Trapp said, is [to] not look at that 96 minutes as a deadline but as a signal.
“If you’re not achieving that flow, it’s your signal to stop and ask ‘why didn’t we,’ and the answer is the next problem you look to solve,” Trapp said. “You look for ideas to make that happen, to remove the barriers.” Focus on the whole.
Trapp cautions that any single such idea may not be the right answer to immediately implement within a shop.
“You really first have to look at what problems you’re having,” he said. “If a change doesn’t address the particular constraint you’re having, it may be a good idea but not what you should be doing first. For a true lean-thinker, it’s all about solving a problem, not just implementing ideas.”
At the same time, the paint company experts agree, the paint department shouldn’t be ignored during implementation of lean processes elsewhere in the shop.
“For a shop that’s truly working on lean, it has to lean throughout, not just in body, not just in paint, not just in the office,” Farah said. “It’s as if there were a string that ties every part of the shop together. When one part of that string moves, it all needs to move, or the string is going to break. If an organization is truly going to be lean, the whole organization has to be lean-focused.”
It starts with ‘cleaning house’.
Perhaps the first step in getting “lean” in the paint shop is some simple house-keeping, Steve Feltovich, manager of collision business consulting for Sherwin- Williams Automotive Finishes, said.
“It cannot be lean if it’s not clean,” Feltovich said, saying the industry has a mixed record at best in maintaining a clean working environment. “You can’t see all the problems through that dirt. Scales encrusted with months and years of paint ... yet they think that’s going to give an accurate measurement and color match? Or mixing machines so messy and disorganized you can’t quickly make sure every toner is pushed in when that mixing machine is spinning to make sure it’s properly mixed.”
Lean operators, Feltovich said, understand that there are first health safety risks to an unclean paint shop. But they also have processes in place, for example, to prep and clean vehicles thoroughly before they are brought into the booth, rather than just masking over the dirt and bringing it into the booth — and potentially into the paint job.
Booth maintenance—making sure fan blades and lighting fixtures are cleaned, and filters are changed regularly —also is part of lean, Feltovich said, because it drives down energy use.
“It’s got to be bright. It’s got to be clean,” agrees Amjad Farah, manager of business development for BASF Automotive Refinish, when asked about paint shop cleanliness as part of “lean.” “That helps ensure you don’t make mistakes.”
Farah said two of the pioneers in workplace time management were Frank and Lillian Gilbreth, a husband-and-wife team researching in the late 1800s and early 1900s. He said while Frank focused on process, Lillian understood that “the psychology of the worker within that process had a huge impact on output.
“So if you have a really good process but really anxious, frustrated and angry people, it’s just not going to be as effective as one in which people are happy and energetic,” Farah said. “Having a clean, bright area to work in does have an impact on the psychology of your workers.”
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The fallout in recent months from concerns raised about non-OEM bumper and structural parts raised by industry trainer Toby Chess was clearly on the minds of the parts manufacturers and distributors gathered in Indianapolis, Ind., this spring for the Automotive Body Parts Association’s 30th annual meeting.
At the Collision Industry Conference (CIC) this past November and January, Chess demonstrated key differences between some non-OEM structural parts and the OEM parts they are being sold to replace. The demonstrations have led at least four insurers to pull back from asking shops to use certain non-OEM parts, and has led to new testing and certification efforts related to such parts. Chess’ latest presentation on such parts at CIC in April was halted at the last minute after he said he was threatened with a lawsuit by LKQ Corporation, parent company of Keystone Automotive.
In an unsuccessful bid for a seat on the ABPA board, Rob Wagman, of LKQ Corporation, told attendees if elected he would push ABPA to be more proactive on such issues.
“I reached out to the association in November after the first CIC demonstration, and quite frankly, I didn’t think ABPA did enough to get out in front of this thing,” Wagman told the 150 people attending the ABPA event. “I think on the board I would push to get the association out there, defending its membership and really getting in front of these guys who are coming after the industry. If we don’t act soon, I think we’re in a lot of trouble as an industry. If I was on the board, I’d want to make sure... that everyone knows we’re a quality industry that’s trying to help the [rest of the] industry and not bring it down.”
On its surface, the proposal seems fairly straight-forward.
“Word-tracks used to offer repair shop referrals to consumers should not include comments, remarks or statements that disparage any collision repair business,” the proposal, crafted last year by the Collision Industry Conference (CIC) Trade Practices Committee, reads. “When a consumer voices their shop selection, their decision should be honored without further comment. Repairers should also refrain from making any comments that disparage an insurer, direct repair program or other repair facilities.”
But during a recent panel discussion at CIC about how this and other trade practice proposals might get implemented, it became clear that shops and insurers aren’t always speaking the exact same language. One man’s “steering” is another man’s “consumer education.”
“I’m not sure what this statement is intending to provide,” Allstate’s Randy Hanson said, a statement echoed by some other insurance company representatives on the panel. “If you’re trying to say,’ Follow the law and play nice,’ we do that. But I suspect there are other issues this is trying to get at, and this statement doesn’t do a lot for me in terms of what that is exactly.”
Industry consultant Lou DiLisio spoke for many collision repairers when at CIC he voiced frustration with insurers’ view of the issue.
“It’s the implementation and execution of those word tracks, and it’s what gets done when there’s something identified that’s out of place,” DiLisio said. “Whet gets done when I call up and say, ‘Your word track was deviated from…’ What gets done? Unfortunately, nothing.”
So it came as somewhat of a relief to the Automotive Service Association (ASA) and its event team to announce that about 20,000 attendee made the trip to Las Vegas for the trade show and classes, a more modest drop of 8% from last year but less of a decline, they say, than that experienced by some other trade shows.
So while you’re working to keep your company profitable and paying those dividends, it also pays to think longer term, in order to do the things that will build the value of your business.
And whether you’re planning (long-term or short-term) for retirement, want to give a son a daughter some equity ownership in the business, are ready to sell or are just curious about your own net worth, it’s good to understand how to calculate what your business is worth right now.
No doubt you can think of several different ways to go about determining a value for any of the vehicles in your shop right now. Determining the value of a business is similar in that there are dozens of ways to approach it. And even experts will tell you that business valuation is almost as much art as science.
But here’s an example of one method of determining the value of a business (see Chart A). ABC Autobody has assets totaling $500,000. The owner’s salary, bonuses and profit total $59,000. When half of the depreciation expense on equipment, and all of the interest expense on loans is added to this $59,000, the owner’s “cash flow” totals $70,000.
A portion of this cash flow is assigned to cover the cost of carrying the shop’s assets. Let’s say the current interest rate is 10 percent. Then $50,000 (10 percent of the $500,000 in assets) is deducted from the cash flow and viewed as satisfying the return on the investment in assets. Any cash flow over that amount is considered excess.
Deduct $50,000 from the ABC Autobody owner’s cash flow, and there will be $20,000 in excess earnings. This amount is then multiplied by a number between one and six (based on such criteria as stability and growth potential of the company) to get the value of ABC Autobody’s cash flow.
Let’s say ABC Autobody’s track record indicates that it is about average in terms of risk and desirability. Its excess earnings ($20,000) could be multiplied by a factor of 3.5. This figure is then added to the value of the assets to get the total price. For ABC Autobody, this means $70,000 is added to its $500,000 in assets. The total value of ABC Autobody: $570,000.
Or you can use the method the owner of XYZ Collision used to determine the value of the business (see Chart B). Write down the net profit of your business for the past five years. Figure a “weighted average” by multiplying your 2008 profit by five, your 2007 profit by four, your 2006 profit by three, your 2005 profit by two and your 2004 profit by one. Add these five numbers and divide by 15 for your average yearly earnings.
Then divide your average yearly earnings by an appropriate rate of return (usually between 20 and 30 percent for businesses with average “risk factors”). XYZ Collision, for example, found its weighted average yearly earnings was $90,000. Divided by a 30 percent rate of return placed the value of XYZ Collision at $300,000.
Perhaps the most common valuation tool, which is similar to the first example, goes by the acronym “EBITDA” (earnings before interest, taxes, depreciation and amortization). Once EBITDA is calculated, it is increased by a multiple, usually between 2 and 6.
A buyer might recalculate your EBITDA after reviewing your company’s financials. A buyer with multiple shops, for example, won’t have the salary expense of an owner onsite, which could boost your business’ EBITDA. Or if the buyer expects to offer better employee benefits than you offer, that would lower the EBITDA.
Getting a Professional AppraisalIf your interest in the value of your business is more than just idle curiosity, it may be time to hire a professional. When choosing a business appraiser, ask about their training, certification and experience with the industry. One option: Calling the American Society of Appraisers (www.appraisers.org, 800- ASA-VALU), or the National Association of Certified Valuation Analysts (www.nacva.com, 800-677-2009), for a referral.
Remember that a business appraiser will help you determine a value for the business but isn’t likely to be involved in the sale process. A business broker can help you buy or sell a business, and may be able to help you determine an appropriate selling price, but might not have formal training or certification in business valuations. A broker’s valuation also may be influenced based on their interest in selling the business.
The cost of a professional business appraisal will be based on which of three types of reports you want. The most comprehensive reports can easily cost $12,000 to $18,000. At the other end of the spectrum is a verbal report, in which the appraiser provides a valuation but no written report. Probably of most use to shop owners is the “limited-scope report,” in which the appraiser provides a valuation letter and often some supporting documentation. Costs for this type of report generally start around $3,000.
The appraiser is likely to ask for a variety of documents including financial statements and tax returns for the past five years, incorporation papers, any buy-sell agreements, and accounts receivable and payable aging reports. He or she will likely want to tour your shop to get a feel for the age and condition of the facility and equipment, the training level of your employees, how closely the success of the business is tied to you or a key employee, etc.
Make sure you end up with a good understanding of any business valuation. And keep in mind that while it’s foolish to blindly accept what a broker or appraiser tells you your business is worth, part of the reason so many businesses fail to sell in a reasonable amount of time is that many business owners don’t accept what a competent appraiser can demonstrate is a reasonable price for the business.
Chart A: Method No. 1
$________ owner’s salary, bonuses
$________ 1/2 depreciation expense on equipment
$________ all interest paid on loans
$________ TOTAL CASH FLOW (line A)
$________ total assets (equipment, furniture, inventory, cash, tools, etc.) (line B)
_______% current interest rate
$________ RETURN ON INVESTMENT IN ASSETS (line C)
$________ line A (above)
$________ line B (above)
$________ excess earnings (line D)
Multiply line D by the number that best describes your business…
1 or 2... low stability, low growth potential
3 or 4... average stability, average growth potential
5 or 6... high stability, high growth potential
…and write that total on line E (below)
$________ Line E
$________ Line B
$________ BUSINESS VALUE
Chart B: Method No. 2
Net profit for…
2004 $__________ x 1 = $__________
2005 $__________ x 2 = $__________
2006 $__________ x 3 = $__________
2007 $__________ x 4 = $__________
2008 $__________ x 5 = $__________
(total of above 5 numbers) $__________
divided by... 15
= weighted average profit $__________
divided by... 20-30% (.2 or .3)
= BUSINESS VALUE $__________
Improving your company’s valueWhether you plan to sell your business soon or decades from now, here are some things you can do to improve its value.
Accretive value. Owning multiple shops can often make your business worth more than the sum of its parts. If you own one shop worth $1 million, and buy a second one also worth $1 million, the sum of the two might actually be worth $3 million because of how you are positioned in the market. But it can work the other way too: A weak shop can pull down the value of your other shop.
Capacity. A buyer will want the ability for the business to grow. So if you are running your business at its peak capacity and have maxed out your property, that’s great for you but may decrease its value to a potential buyer.
Debt and other encumbrances. While having debt isn’t necessarily a negative when it comes to the value of your business, it can have an impact. A Small Business Administration (SBA) loan, for all its advantages, can scuttle a sale because it generally must be paid back in full at the time of the sale.
Trending. About the time your business is growing and doing well – and you decide maybe you should stick with it – is actually the time it has the most value to sell. Anyone buying your business is likely to review your financials for the last three years, but the most recent information – especially the last 6-12 months – are the most important. So timing can be critical.
Barriers to market. Zoning laws that would limit others from operating a shop in your area can obviously drive the value of your business up. On the other hand, grandfather clauses or zoning overlays may be good for you now but may restrict a future owner’s options, driving the value down.
Accurate financial records. Most businesses are operated to minimize reported earnings. To a buyer, this may make it seem like the business is overpriced. Your books should directly reflect what you’re doing in business.
In a tough economy, shop owners are usually more concerned about attracting work than they are recruiting employees.
But many business and personnel experts say a focus on employee recruitment and retention is every bit as important in times of stagnation or decline as it is for businesses growing rapidly.
Why? Unlike in boom times, there’s a much larger pool of available workers. If your business has job openings – or employees who might not be the best fit once the economy rebounds – now may be the ideal time to seek out new talent.