Lean Will Save the Industry…Or Will It?

Increasing vehicle complexity and OEM involvement are increasing the cost of doing business in the collision industry. Capital requirements are increasing. More training, more tooling, and more equipment is needed to compete in today’s environment. The result is lower margins.

Decreasing profitability is a trend that has been taking place for some time in the industry. Labor and material reimbursement rates have more or less stagnated. Yet the cost of labor and materials steadily increase. Compounding matters is a shortage of experienced technicians.

The cost of software and technology continues to march upwards. There is a proliferation of IT platforms designed to help collision repairers lower their costs and operate more efficiently. But with so many programs on the market they sometimes become more of a burden than a benefit.

What About Lean?

Further complicating measures is shifting consumer expectations. Insurance providers and vehicle owners have increasing expectations for excellent service, rapid repairs and low costs. The result is additional investments in process and procedures like lean, 6 sigma and kaizen.

But think five years back. Lean was just coming on to the stage. Ten years back almost no one in the industry was talking about Lean. But now most shops are actively practicing some form of lean process designed to increase throughput while managing costs.

Lean is powerful when done right. Overall, the industry suffers from many inefficiencies. There is no disputing the positive impact of operational excellence.

But the drawback of lean is that it is a never ending quest for perfection. What was cutting edge 10 years ago is antiquated.  What was cutting edge five years ago is average (at best). What is cutting edge now will not be in two years time.  Lean requires continual reinvestment to be effective (the 5th S, Sustain).

Technology, Scale, and Lean

Beginning in the early 2000s the technology revolution came, and stakeholders throughout the industry suddenly had insight into costs and efficiencies at a granular level never previously available. Gross margins were compressed as technology was used by various outside stakeholders to drive down repair costs and drive efficiencies.

At the same time as the technology revolution competition increased as the first stage of consolidation began. For the first time in the history of the industry economies of scale began to be successfully developed. Enterprise, LKQ, FinishMaster in addition to the collision consolidators saw the huge economic benefits that a national organization could provide.

These companies continue to be leaders in their respective sectors. These companies display high levels of operational excellence. But what makes them leaders is not just operational excellence. They also fundamentally changed the way business was done in the industry. Simply put, they grew larger to provide products and services with a high value proposition at a lower cost.

It Just Ain’t What It Used to Be

The business is not what it used to be. Many owners have felt a squeeze from a number of areas: decreasing gross margins, increasing overhead costs, slowing sales, increased complexity, increased customer demands, difficulty recruiting and retaining employees. Looking forward these trend will likely continue.

Yet while profitability at the individual store level continues to be pressured, this is still one of the most profitable times to be in the industry. Valuations for collision repair businesses are at all-time highs, especially for repairers who have built local or regional platforms.

But this trend will not last forever. The boom in valuations is temporary. Many factors influence valuations, including supply and demand, company profitability, and the acquisition strategy of the major buyers in the industry. Already we have seen some of the larger consolidators shift to a brownfield and greenfield expansion strategy. Brownfielding is when a company builds locations. Brownfields depress business purchase prices. Why pay huge sums to buy a business when you can build one from the ground up goes the logic.

Where Does that Leave You?

Depending on your perspective, the industry evolution can be a threat or an opportunity. For those with a longer time line there are still plenty of opportunities to grow. But if you are approaching the end of your runway, liftoff in the form of a sale to others in the industry has never been more attractive.

My goal in 2016 is to help you increase the value of your business. Everything we do at Supplement is designed with that in mind. There are a lot of ways to increase your value, from expanding and acquiring another location, merging with another business, understanding how to best finance equipment or manage facility upgrades. Conversely, if all that seems like too much of a hassle you may decide that now is a good time for liftoff.

We want to help you increase your value.

Are you curious as to your value in a sale – contact me and we can discuss. If you want to increase your cash flow, our recently launched Simple Financial Dashboard is a great way to find hidden cash in your business. We also provide CFO and strategic advisory services. These are customized to your specific business need. And of course, if you are looking to sell your business (or perhaps acquire another location) our transaction management services are a must. If you’re still unsure what to do next, use my contact page and we can set up a time to talk.

Until next week.

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2 thoughts on “Lean Will Save the Industry…Or Will It?

  • Interesting article Brad. I agree with most of your thoughts. While it is true valuations are higher than they were 5 years ago, there is data in the industry that suggests prices may have peaked. I would argue that shops that invest in LEAN and develop a LEAN culture will be the true winners. The principles of LEAN thinking trancend time. Eliminating waste and operating more efficiently will always improve profitability. If shops are valuated on an EBITDA basis, the shops that operate the most efficiently will be the true winners in the long-run because they will be the most profitable. Regardless if a shop sells now or it continues to operate independently for the foreseeable future.

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