The mother of all state-of-the-industry speeches, the mentor to all state-of-the-industry speechwriters

“Remember Both the Art and the Business Involved in Collision Repair.”

COLLISION REPAIR STATE OF THE INDUSTRY SPEECH

Address by CHRIS MILLER, Senior Editor, Motor Age, Aftermarket Business
Delivered at PPG Industries’ MVP Business Solutions Conference, San Diego, Calif., March 29, 2010

Good morning. Before I begin, I’d like to share a little about myself. I’m senior editor for searchautoparts.com and the Advanstar Automotive Group, which publishes Aftermarket Business, Motor Age and ABRN magazines, among a number of other publications and products. We also have an automotive industry social networking site, workshop.searchautoparts.com.

Like some of you in the audience, I’ve held many jobs before finding my true calling, from washing cars to waiting tables and taking care of animals, but one of the first unofficial jobs I had was prepping cars for my dad while he was at work as a technician during the day child labor laws be damned. He would come home from a long day of fixing cars, to restore classic cars in our garage. I sanded, masked and, at times, helped with the primer coat, but my hands were never steady enough to paint the final coats. My dad was both an artisan and an artist he would often start with a shell and would restore these vehicles to their mint condition heyday, sometimes combing the entire country to seek out original interior, original paint mixes, and this was before the days of the Internet.

He would restore the car to a point where it was in mint condition, but then he sold it shortly thereafter, and another rusted old husk was towed into the garage to take its place. Back to square one. I could not understand it. Why spend all that work on restoring this classic car whether it was a 57 Chevy, classic Plymouth or muscle car only to sell it when it was completed. I couldn’t appreciate it at the time, but now I realize that it was the process of restoring that car, shaping body panels, painting, seeking out original rims, that he loved. More so than the finished product.

He is both artisan and artist, and that’s what makes this field so unique. You’re not just repairing a vehicle your job involves aesthetics, color-matching, tasks of an artist.

And this is also why the collision market is so challenging. You need to be both artists and businesspeople. Your work is judged before the customer even gets into the car.

But as you’ll see, there are many challenges, but conversely, there are more opportunities for success, due to the great technology and tools at our disposal.

So this morning, I plan to outline a state of the industry, and look at some of the trends that directly affect your day-to-day operations, like the use of aftermarket parts, new technologies, the changing makeup of cars, as well as claims frequency, total losses and pertinent legislation. I also plan to cover shop management best practices, using some real-world examples from those business people in the trenches.

First, let’s take a glimpse at the larger economic climate, and what this means for the collision marketplace.

Auto manufacturers have faced one of the worst years in recent memory, as they have been forced to discontinue models and close dealerships. Over the past decade we’ve seen the beginning of the end of the dominance of the Big 3. These three automakers began the decade with 68.5 percent of market share, but are closing the same 10-year span with 44.2 percent. As CCC points out, this Big 3 is now the Detroit 3, or you could say it’s been expanded into the Medium 6, which also comprises Toyota, Honda and Nissan. Overseas competitors grew, from Japan, from China, Korea and India. Combined, the Big 3 sold 6.8 million fewer new vehicles in 2009 than in 2000 nearly all of the 7 million fewer vehicles sold industrywide.

Ten point four million new vehicles were sold in the U.S. in 2009, and while it was down 21 percent from 2008, it was also better than the 9 million seasonally adjusted annualized sales rate from February 2009. As you can see from this slide, sales picked up toward the end of the year. And as sales have picked up, analysts foresee a better year ahead for the industry. Some of the reasons? Pent-up demand because of a higher number of vehicles scrapped in 2009 versus sold for the first time since World War II; historically, transaction prices have risen coming out of a recession; and, as most automakers and dealers have trimmed the fat from their fixed costs, they’re hoping to be profitable at a lower selling rate.

New vehicle sales are expected to increase 15 percent in 2010, with an additional 1.1 million used cars and trucks expected to be traded into dealerships this year.

Cash for Clunkers, which I’m sure you’re familiar with, added about 690,000 new light vehicles to the driving population, which prematurely boosted new vehicle sales, but analysts believe that at least half of those sales would have occurred regardless of the Cash for Clunkers program. What the program was successful in doing was helping automakers slash their inventory. As a CCC Report points out, “In December of 2008, the industry had an average of a 110-day supply; that number dropped to 64 days in August of 2009, and dropped further to 30 days by the end of September. At the close of the program, U.S. new-vehicle inventory levels stood at 1.4 million, versus 3 to 4 million during the 2006-2008 timeframe.”

What Cash for Clunkers didn’t do was bring new car sales up to where they once were. With last year’s sales of 10 million, it was still six million units down from the rate of an average sales year.

Here’s Manheim’s Used Vehicle Value Index, which reveals a year-over-year price increase for vehicles sold at wholesale auction of 5.1% for the full year 2009 versus 2008, the largest increase recorded in its 15-year history. This big increase came after a large decrease between 2007 and 2008, when the annual average fell by more than 6%.

We should see some relief to the existing used car shortage, but an NADA economist says it will be several years before supply returns to the 1998-2007 period of strong new car sales, a heyday in the auto industry. This short supply of used vehicles will mean a narrower spread between new and used car prices, so “expect new-car sales to be a greater share of the sales mix, and certified and other used cars to be a relatively smaller share compared to the last decade.”

In spite of Cash for Clunkers, the average age of passenger cars is at its oldest in our history at 10 years old. You’d think that the percentage of insurance claims deemed total losses would be on the rise then, right? No. The percentage of total loss insurance claims is actually expected to decrease, but more on that later.

Industry consolidation is forcing many changes internally and externally. At the start of the decade, the Automotive Service Association (ASA) estimates there were about 48,000 collision repair businesses in the U.S., including 10,500 that were affiliated with an automotive dealership. By 2009, analysts say, that number has fallen to 41,500 or fewer.

Data from the U.S. Department of Labor reports a drop of 9 percent to 166,400 individuals employed by auto body and related repairers, from the 183,000 reported two years prior.

There’s also consolidation occurring in the insurance industry.

Data from AM Best Company shows that market share for the top 10 personal auto insurance providers increased from 37% in 1960 to 59% in 2000. Recently, that number has increased from 63% in 2005 to 68% in 2008. How consumers are marketed to by insurers, shop for auto insurance, purchase it, and experience the claims process have changed over the last decade as insurers inside and outside of the top 10 compete for market share.

And with consolidation, shops have to prepare themselves for a smaller number of repairs, states the recently released CCC Crash Course report. For example, if you’re regularly doing business with 10 insurance companies, it might behoove you to focus on your relationship with the top four of those companies.

Learning to work with this industry consolidation is not a one-size-fits-all approach, either. The CCC report’s authors advise that you look at factors such as customer demographics, the types of repair jobs you bring in, whether it’s consumers who have been in a wreck or fleet accounts, the scope of competing collision, glass and/or mechanical repairers within your area and the status of local auto dealerships. Is there a void in your town due to last year’s rash of dealership closings? Find out.

As a result of consolidation, repairers are being asked to extend their expertise beyond just vehicle repair, and into areas such as claims handling and IT management.
Miles driven is another trend that the entire auto industry is taking a close look out. Miles driven has decreased and will continue to decrease. In fact, miles driven, as this graphic from CCC attests, has been slowing each year since 2005. And when vehicle-miles-traveled are divided by the count of registered vehicles in the U.S., it suggests that this is not merely a reaction to higher gas prices, but a trend that has been developing for nearly a decade. As the number of vehicles in the U.S. has exceeded the number of drivers, it’s not surprising to see the average miles driven per vehicle drop. Miles driven continued to decline throughout 2008 (down 3.6%), then increased moderately beginning in April 2009. And while there was a moderate increase of 0.2% through December in 2009 versus the prior year, miles driven in the U.S. are still down 3.2% from 2007.”

Here’s an interesting breakdown between rural and urban shares of miles driven. People are commuting longer distances to work, but driving less around their homes and in their personal lives.

And tied to miles driven, and these other stats, is unemployment. We know that it’s hovering around 10 percent, and 50 percent of those unemployed have been without jobs for at least half a year. Here’s a graphic from the Bureau of Labor Statistics, and what’s unsettling about this trend is in past recessions (like in the 80s), the demographics were a lot different, as workers were able to find their footing back in the workplace a lot more quickly. Now, more workers are staying out of work a lot longer, with some abandoning their fields of expertise altogether. Notice the bottom field has crept up to half of the unemployed, which means half of the current unemployed population could be out of work for a long time.

To cut unemployment from near 11% back to 7% in the early 1980s, you could employ a lot of people who had been out of work for less than six months. And that’s what happened. But there’s just not that much room to cut unemployment by putting the short-term unemployed back to work in this latest recession. It’s just not happening.
Bain Consulting compared how much time it took to recover from a recession to unemployment rates from prior recessions, projecting a period of 7.6 years (or the year 2017) until unemployment levels are restored to the pre-recession level of 5%.

A study released in early 2009 by the Insurance Research Council found strong correlation between the unemployment rate and the percent of uninsured motorists. Their data projects a 0.75% increase in the number of uninsured motorists for every 1% increase in the U.S. unemployment rate.

Now, let’s discuss the aftermarket. I have spent a number of years covering the automotive aftermarket, and these aftermarket parts manufacturers, many of whom also supply OEM parts, are looking for the “form, fit and function” of OEM parts. Aftermarket parts mean profits for those in mechanical repair, and for parts distributors. However, the aftermarket part is perceived much differently in the collision space, where the profit is typically experienced more by insurers when these types of parts are used.

There are numerous cases of collision repairers getting the aftermarket product in an OEM-labeled box, or those who follow insurance mandates for the aftermarket parts against better judgment. One collision shop owner told me that the packaging of aftermarket parts is terrible, and the fit and finish on many are unacceptable to the point where the part needs to be returned. He adds that the techs at his shop test fit everything before painting to ensure they fit properly, which creates a “double work scenario.” And as we get into discussing lean principles, you’ll see that we’re trying to achieve the opposite of this.

Rather than focus on the preconceived notion of aftermarket vs. OEM, should the debate be, “which is the quality part that will fit properly?” (aftermarket slide) Because the reality is, aftermarket parts represent a much higher percentage of appraised value; and predictably (OEM slide) OEM parts are a smaller percentage of appraised value in repairs. Both of these charts are from Mitchell International’s Industry Trends Report.

Aftermarket parts appear to be a double-edged sword, as aftermarket parts can help minimize total losses. But when they become mandated for you as a repairer, that’s a different story. SCRS national director and ABRN contributor Toby Chess has performed several poignant demonstrations comparing OEM and aftermarket structural replacement parts, like bumper reinforcement beams, radiator core supports and bumper energy absorbers. His findings were eye-opening. He also pointed out that in instances where the manufacturer paid attention to using the same materials as the OEM, including third-party testing, the parts performed much better in the collision scenario.

Here are some slides from Chess’ presentation, which points out clear discrepancies in overall strength and material thickness. While these parts appear to be similar, they are not performing the “form, fit and function” as many strive to.

The Certified Automotive Parts Association (CAPA), a non-profit that oversees the testing and suitability of automotive parts, recently established new standards for aftermarket bumpers, thanks in part to Chess’ attempts to draw attention to this serious matter. CAPA Executive Director Jack Gillis says that, “In testing what appear on the surface to be reasonably well-manufactured aftermarket bumpers, our laboratories discovered serious deficiencies in mechanical properties such as strength and metal hardness, material thickness, and fit. These deficiencies potentially place the driving public, who trust body shops to repair their vehicles with safe quality parts, at serious risk.”

CAPA will introduce its bumper standard in two phases: 1) Rigid Steel Bumpers, followed by 2) Bumper Reinforcement Parts. Once the technical aspects of the standard are finalized, CAPA will present it to its Technical Committee for review and approval.

The Auto Body Parts Association (ABPA) has said to its members that if sufficient testing is not available, sales and production of these part types should be discontinued, and estimating systems should be notified. It’s important that you as repairers understand the liability issues involved with being influenced to use these structural parts against your better judgment. Make sure the parts you’re using have gone through independent third-party testing. Do the homework, because many of these parts are getting through the supply chain, potentially damaging your reputation, and placing drivers at risk.

Often the differences between the OEM and aftermarket replacement parts (like alloy and material variations) cannot visually be detected. And, most importantly, this should not be the shop’s job to determine if the aftermarket part is equivalent in all manner.

In an ideal world, these inferior parts would not even make their way to market. But educating yourself about these differences is critical at this time. OEM parts problems typically lead to elaborate recalls. Aftermarket parts should not be treated any differently, but there are many drivers operating vehicles with these parts, and many don’t even realize the safety problems inherent in this.

This is something I will cover in the legislation section, but the National Conference of Insurance Legislators (or NCOIL) has tabled the discussion surrounding its aftermarket crash parts model legislation, because many of the interested parties involved did not like various components of this recommendation. Carmakers don’t like the idea that aftermarket parts could be mandated by the insurance companies. Others don’t like the language that deems certified aftermarket crash parts to be equivalent to OEM parts.

A number of insurance industry organizations say the anti-steering restrictions involved in the model legislation would violate insurers’ commercial free speech rights.

This is just one example of all the complex layers involved when it comes to aftermarket replacement parts. There are quality aftermarket parts out there. Do your homework, familiarize yourself with what you’re selling and putting on customers’ cars. As of now, there are no failsafe methods or legislation to keep inferior parts out of the supply chain.

It’s up to you at this point to keep a close eye on what your shop installs on the vehicle.
Technology is something that many fear, but remember that technology has been put in place to make our lives easier. They’re tools to add to the toolbox.

Significant advances have been made in crash avoidance, hybrid powertrains, and the use of new substrates such as aluminum in vehicle construction. These technologies are vital to automakers’ survival, and the technologies keep drivers safer and help avoid total losses.

From CCC’s recent Crash Course report: “If other accident avoidance technologies see the same level of adoption in the future, it will ultimately translate to reduced claim frequency over the next 10 years.” According to the report’s authors, “numerous automakers have seen bumper performance improve with newer models. One European automaker has incorporated specific design changes to help its bumpers withstand greater impacts without any major damage.

And these technological advances often are accompanied by new, and often expensive, tools and training.

Automakers are hard at work devising lighter yet stronger materials. One industry association leader says that new technology affects shops from a number of areas. It requires more training. It requires shops to have the ability to better specialize in the jobs they’re performing. Everyone has become more familiar with exotic metals, but more atypical metals used in more higher-end vehicles may start to make their way into production of more common vehicles. Boron, magnesium, high strength steels are not just found in Mercedes and Jaguars anymore.

Because of fuel economy regulations and the pressing need for lighter vehicles, one material we’re seeing more of is aluminum. Aluminum has one-third the density of steel, but its strength per pound approaches that of steel.

Aluminum comprises 326 pounds (8.7 percent of curb weight) of a typical vehicle sold in North America, a nearly fivefold increase from 1970, when aluminum was 77 pounds, or 2 percent of curb weight, according to Ducker Worldwide, who estimates that by 2015, aluminum will account for 9.6 percent of vehicle weight and 10.4 percent by 2020.

Some vehicles are ahead of this curve, like the Honda Pilot, Acura MDX and BMW X6 models, which already exceed 10 percent aluminum.

Aluminum originally found its way into castings, as nearly 70 percent of engine blocks were made from aluminum in 2009. Parts like knuckles, control arms and suspension links can be made from aluminum. Where this gets tricky is when aluminum is used for parts that are normally made of steel sheet metal, but one carmaker has used magnesium castings along with sheet aluminum for its large lift gate, which makes this part 40 times lighter than one constructed of steel.

Carmakers have been reticent to use aluminum in the past because it can be three times more costly than steel. For example, one Ford exec says a 10 percent savings in total vehicle weight represents a 3 percent savings in fuel economy.

If a carmaker effectively reduces the weight of the vehicle, it can also now downsize the engine, and there’s less unsprung mass.

As aluminum is used more and more, this could create some problems for collision repairers. A Toyota exec says traditional filler used in holes in steel would be insufficient for aluminum due to adhesion issues. The welding process is also different as parts may be joined in a different manner.

As the carmakers implement more aluminum, they should also provide the training and knowledge involved in working with this material. But regardless of what the OEMs do, it’s important that you take initiative and make sure you’re training yourselves and your employees to work with this material.

The technological issue also centers around something that doesn’t even have a physical presence in your shop: data. And data privacy has become an issue more and more in any marketplace. A lot of repairers may not understand that data privacy is a global issue that impacts everybody. And as increasing numbers of insurance providers move to cloud computing, which means information is stored on the Web, repairers are concerned about their data being accumulated by insurers and repackaged, and redistributed through industry reports. For example, management reports will these be packaged and sold? Could other shops look at hours billed of other repairers? Should they be allowed to look at this data?

Here’s a quote that was passed along to me recently that I think speaks volumes about your concerns with data, especially customer data that’s used by insurers. “The ability of cloud computing services to collect and centrally store increasing amounts of consumer data, combined with the ease with which such centrally stored data may be shared with others, creates a risk that larger amounts of data may be used by entities in ways not originally intended or understood by the consumer.” David Vladeck, director of the Federal Trade Commission’s bureau of consumer protection.

But cloud computing can work to your benefit. Google Apps is a great example. And when many different people are accessing the same files, cloud computing is a great way to make sure everyone’s working from the same documents. It’s a free file-sharing system. If you are involved in cloud computing systems, I would recommend periodically backing up these files on your computers as a safeguard.

A little understanding and knowledge can go a long way. Your proprietary information should be protected, so it’s important that you understand what is and is not proprietary, and protect these things. In the more general world of auto parts, for example, data providers can give every one of their distributor customers up-to-date reports on wider industry trends that could affect their businesses. They use the data from parts orders that are placed, but these data providers do not share individual proprietary store information. When some of your data can be used to lift all of the industry, it will work to your benefit.

Now I’d like to shift gears a bit and discuss claims frequency, and how this will impact your businesses. Claims frequency is clearly down. The recession has further impacted miles driven, and more consumers are opting to own and/or insure fewer vehicles.

Despite the potential for rising employment numbers to increase miles driven, claims frequency declined early in the last decade while miles driven were still increasing, suggesting the industry will not see much if any increase in claims frequency in the coming decade, even when we finally pull ourselves out of this current economic morass.

It’s a new reality of doing business, and a fact of life that everyone must adjust to, recession or no recession.

Officials from Audatex and CCC both see accident rates as mirroring total vehicle miles driven, which was on the increase heading into 2010. It’s also believed that a high number of uninsured drivers will drive insurance claim frequency down. Claims frequency is known to drive consumer confidence.

Growing numbers of consumers fearful of rate hikes increasingly are opting against filing claims, says one shop owner ABRN interviewed. He says the number of his self-pay customers has climbed by 30 percent to 40 percent in the past two years. He’s seen customers pay up to $5,000 out-of-pocket for repairs.

Some drivers are afraid to file claims, especially if the damage is minor, for fear of raising their insurance rates. Here’s an educational opportunity to help customers with the insurance claim process.

According to Greg Horn, from Mitchell, it takes an average of more than 7 days for policyholders to report losses. Delays also can occur when the person who is hit gathers incomplete information from the person who hit him or her. Horn also thinks there is a general lack of knowledge and understanding about the insurance claims process. He says: “If insurers want to reduce the time from date of loss to date of report, they must educate their customers on why they should report losses quickly—a process that can be spurred by, what else, technology.”

Technology is lending a helping hand and will continue do so. In addition to making the claims process visible on their Web sites, some insurers have launched downloadable free cell phone applications that ease the claim reporting process. These apps can help customers take photos to document the accident scene, along with assisting with other parts of the information-gathering and reporting process.

From CCC’s Crash Course report, here’s how the auto industry is expected to affect claims frequency: New, smaller cars added to the fleet of U.S. vehicles face a vehicle population still comprised of nearly 50 percent light trucks. With nearly 70 percent of all U.S. vehicle crashes involving multiple vehicles (according to NHTSA), there is an increasing probability of vehicle incompatibility in terms of ride-height, weight and front-end stiffness. Extensive research on the topic of vehicle incompatibility has been done by the Insurance Institute for Highway Safety (IIHS), with the data pointing to higher vehicle repair costs, and an increase in frequency and severity. The automakers’ focus on reducing sales to fleets and improving their residuals will translate to more stability in used vehicle prices in the coming years.

The rising numbers of new vehicles sold or leased in the coming years will improve the supply of used vehicles, which will otherwise remain tight as volumes of off-lease and repossessions taper off. Stability in used vehicle prices should lend stability to total loss frequency in the coming year as well; with frequency dependent upon the relationship between slow, steady increases in repair costs and in the aging overall vehicle population.” And that brings us to our next topic.

For total losses, I’d like to defer to the techs themselves who are rather vocal about this topic throughout online industry message boards and discussions. Shop owners and techs have shared the stories of how they’re struggling to survive, and how total losses are affecting business. One industry professional says a major challenge is that suppliers are raising prices on parts. A fender that used to cost $250 now may cost $387, which some shop owners believe has compelled insurance companies to declare more wrecked vehicles total losses.

Here’s a post from our searchautoparts.com community site: “The increasing complexity and safety of vehicles and the costs involved in creating more sophisticated transportation is a significant factor that is totaling vehicles. As an example, how many times have you seen vehicles where the costs of dealing with airbag deployment are as much as the actual physical damage to the vehicle? There are fewer miles driven, which contributes to decline in collision repair.”

According to the CCC Crash Course report, “Total loss frequency for insurance claims has been the topic of much discussion over the last decade, because the non-repairable rate has been increasing while the overall claim frequency rate has declined. In 2000, about 9 percent of all vehicles for which an appraisal was written were flagged as a total loss; by 2009, this number had grown to more than 14 percent. Essentially, this equates to a 5 percent total loss frequency increase over the last decade. Among the factors attributed to driving up total loss frequency have been air bags, an aging vehicle fleet, lower vehicle values and higher vehicle complexity.”

One collision professional writes: “There is no one factor that could be singled out that drives up total losses. Body shops and insurers want to avoid litigation, so it becomes easier to total a vehicle than to repair it.”

Here’s another: “I did vehicle inspections for mechanical repairs. Take a look today at the cost of one front and one side airbag…That will add at least $3,000 on top of the collision damage—take a 6 year old car with both front bags deployed and front end damage. If it was a low- to mid-price-level vehicle when new, goodbye owner and hello salvage.”

In a recent Mitchell Trends Report, Greg Horn writes, “As a result of slumping sales, the average age of passenger cars on the road is the oldest in our history at nearly 10 years of age. You’d think that the percentage of insurance claims deemed total losses would be on the rise then, right? Well, in a word, no.” The percentage of total loss auto insurance claims is actually expected to decrease, and Horn points out why:

When working through total losses, the normal procedure is to look at Actual Cash Value (ACV) as a threshold. Once the damage exceeds this percentage, the vehicle is determined to be a total loss. Factoring salvage values and insurance regulations, a standard guideline is 80 percent of the ACV, he says.

But Horn says that even if you follow every rule, you will still encounter errors when trying to determine which vehicles are repairable and which are not. At this point, it’s important to implement a verification method independent of manual input, so you’re relying on more than one method for determining total losses, and helping to avoid underreported data if an estimator doesn’t flag the estimate as a total.

But total losses are trending downward and are expected to continue that trajectory, even if it isn’t a steep decline.

So, what is contributing to this seemingly contradictory trend? The Insurance Research Council reports that the number of uninsured motorists has risen to 16 percent of drivers, with as much as 25 percent driving uninsured in southern states. Insurers also report that more drivers of older vehicles are dropping comprehensive and collision insurance because of personal economics. So if this driver has an at-fault total loss accident, there is no coverage for the vehicle.

These trends have taken older vehicles out of the insurance books, creating a newer base of vehicles, writes Horn, and basically eliminating the vehicles most likely to total from the pool of vehicles. The nearly 700,000 new vehicles added through the Cash for Clunkers program were put on the books as new vehicles, many of which require comprehensive coverage as part of financing arrangements, and replacing “clunkers” that were only required to have liability coverage at state minimum levels.

More totals are now being saved due to more used and aftermarket parts implemented into repairs (an estimated 3 to 4 percent more), keeping repair costs flat or down. But despite this, percentage of totals has crept up 1 point in 2009, and could rise further this year.

According to an industry association official, repair prices go up, and the price of parts go up. But the threshold of total losses should also increase, and it should remain fairly stable if everything’s weighted properly. One reason for increased total losses would not be because the cost of the vehicle has gone up, but the other factors in the repair aren’t weighted equally enough.

So what do all of these trends mean? We’ve set up the canvas, but what is the true picture of your industry? One way to determine this is to go into the shop itself.

A good place to start the discussion of shop operations is by looking at ABRN’s annual State of the Industry report.

According to our 2010 analysis, the weak economy only sped up losses already seen in the industry. The report includes some recommendations for the shop, like:
•    Cut out the fat
•    Return to fundamentals
•    Keep training
•    Distinguish yourself
•    Face the new world

Let’s look at these individual points, along with some real world advice on how you can use these points to help your business prosper.

Cut out the fat—one shop owner discovered he was spending $4,000 more than needed on uniforms and shop rags. He renegotiated contracts with his gardner, even. He replaced the security monitoring system, from a $1,200 monthly contract to $200 a month.

Cutting into the fat saved his shop $150,000. He also reduced employees through attrition. I’ll discuss lean operations in more depth shortly, but keep a constant lookout over how and why you’re spending money, and make sure you’re spending it in the right places.

Return to fundamentals—One dealer-owned shop starting picking up warranty and mechanical repair customers, for example.

The CCC Crash Course report states that numerous collision repairers are adding mechanical services, paintless dent repair, glass replacement, custom painting, detailing and rental cars to their waiting room menus and the lobbies themselves are looking more like doctors’ offices with attractive decors, refreshment offerings, clean rest rooms and other amenities.

Look at your scheduling. Have you considered flat scheduling? Shop owner and ABRN

Columnist Camille Eber uses the example of a collision center in Pa. that categorizes jobs as small (less than 20 hours), medium (20 to 40 hours) and large (40-plus hours). No more than one large job, three medium jobs and 10 small jobs are allowed to be scheduled on any given business day, the results of which the owner sites are a dramatic improvement in touch time and cycle time.

Some shops have not reported success with flat scheduling, as some techs had difficulty breaking from the mad dash on Monday and push to empty the shop by Friday afternoon.

One fundamental to place front and center is the person who walks into your door everyday. Treat your customers as customers, not as jobs given to you by the insurance companies. One shop owner in New Jersey recommends treating them as family. Collect information like birthdays, anniversaries, special events in their lives. An independent shop rep who spoke with ABRN collects information about customers’ hobbies, birthdays and other important dates. This shop also sends out birthday cards to customers’ vehicles, based on production month and year of the car. The birthday card invites customers to bring in their cars for a free wash, vacuum and 12-point inspection.

One shop owner we interviewed someone with no DRP agreements has personally picked up and delivered a vehicle 30 miles for a customer. This shop firmly believes in a strong word-of-mouth repeat business, and going this extra mile for the customer, in this case literally, will pay off in repeat business. 
Another note on the whole customer satisfaction issue a J.D. Power and Associates study of customer satisfaction in the insurance claims process concludes, predictably so, that customer satisfaction drops off if the repair takes more than a week. For towed vehicles, there was a big drop in customer satisfaction scores if the repair process takes more than two weeks. Customers want updates on the repair process: those who didn’t have to initiate contact with the shops (the shops contacted them instead) scored an 876 out of 1,000. Those who had to call at least once for updates scored only 774, a significant difference that one automated text message could have avoided. Customers also want to be contacted after the claim. Half of those surveyed said that neither shop nor insurer contacted them after the repair event. They scored 100 points lower than those who were contacted. You can’t sit back and wait for the insurance companies to try to improve customer relations. That’s your job.

Explain the repair to the customer in a language he or she can understand. If you’re in a DRP program, treat the DRP customers the same way, and maybe they can refer you to a friend or family member.

As you have a duty to educate your employees, you also have a duty of sorts in educating your customers. Issue a Customer Bill of Rights to inform the customer that he or she has a right to choose where the car is repaired. Work for the customer, not the insurance company.

Customer-pay work is an avenue that has so much merit now, especially in light of the data out there pointing to a reduction in claims and the change in way some people use insurance. If you market yourself properly, you can bring in a good bit of cash repair.
The pros to this are less administrative work, and jobs tend to be smaller, which means they’ll get through the door quicker.

But there are some downsides and risk to this segment of customer. There are those who will look for a budget job, and will seek out the inferior replacement part even with the knowledge that doing so could place them at risk. And if you give in to one of these repairs, will that affect referrals for business?

To capture customer-pay work, you need to sell to the customer. You need to read people what are they looking for? Use some lessons from Sales 101 you need to relate to people, and explain why your shop is the place to have the work done. Generating customer-pay work requires more than just being able to write a good estimate. Use selling tools like testimonials, photos, props, customer service indexing reports.

With cash work, you can also look into payment options that maintain sensitivity toward many peoples’ financial situation, like credit and debit cards or 90 days same as cash.

Keep training—Gain manufacturer and DRP certifications. But take note that becoming manufacturer certified can take up to 2 years in some cases.

Cross-training your employees will better help you adapt to lean principles in the shop.

Another important aspect of training is using technology to your advantage. Technology is in place to make our lives easier if you use these tools properly. Social networking tools like Twitter, Facebook and YouTube, along with industry-specific social networks can help you share a marketing message, and easily connect with customers through friends requests and setting up fan sites for your shop. Find some of your company’s younger employees, and designate them responsible for social networking.

Word-of-mouth not only passes person-to-person, but in digital discussions, in social networking sites, as well as sites consumer-run sites like Yelp, which are based on customer reviews, good word can spread quickly and far in the digital world.

As much as technology will help you manage your time better, the face-to-face interaction needs to be even more valuable than ever. People still want to do business with people, not a computer, not a text message. These are merely tools. Keep the customer in focus.

In a recent ABRN story, we interviewed a gentleman whose shop pulls in sales of more than $3 million a year, with no DIRECT REPAIR AGREEMENTS. Some of his advice includes making sure estimators and office staff avoid using industry terminology that customers can’t understand (again, you need to help the customer feel comfortable, not alienated), do not require customers to fill out forms at the shop, he says, rather, ask for the information and fill it out for them.

He also gives his cell phone number to every customer who comes into his shop. In addition, customers have access to an after-hours emergency number, and at least one employee is on call at any given time (for example, if someone left something important in the car, they can retrieve it after hours.)

Distinguish yourself—going lean isn’t enough. Set yourself apart. 
Develop SOPs (standard operating procedures). Write all customer requests, for example, on the driver’s side door glass, so these instructions are unavoidable to all who work on the car. Set up ONE WAY to do everything. 
Streamline the repair process and collect as much information as you can from the customer at one time, to save yourself from doing superfluous work down the line.

Face the new world—In Eugene Levy vs. State Farm, the ruling spells out the responsibility of insurers in a collision repair, making sure the vehicle is returned to pre-accident “safe, mechanical and cosmetic condition.” Due to this decision, look for more strict OEM-recommended repairs. And facing this new world involves embracing something referred to as «lean.» Maybe you’ve heard of it?

It’s an inevitable reality that we’re all being asked to do more with less. That’s where a lean process fits in.

Going “lean” should not be viewed as a means to an end; rather, it should be a continual improvement process. In the Audatex report “Making the Journey to a Lean Shop,” the authors emphasize that lean is a journey, not a destination. If you want to think along the lines of the literal interpretation of the word itself, lean could be looked at as a diet that never ends. Not much fun, but necessary to stay alive and healthy a lot longer.

But adopting a lean mentality will involve a learning curve, and will take an investment: in time, in money, in training, and in possibly recruiting new employees to replace those who resist this new way of thinking, because that will inevitably happen. Some people do not take to change very well.

Ultimately, a lean process needs to look at what the customer views as valuable, and consider as wasteful any actions that don’t contribute to what the customer values. It’s an understanding and focus on this bigger picture that really indicates whether a shop is lean.

One shop that spoke with ABRN implemented the Toyota Production System, or TPS, and is now turning annual sales of $3.6 million $200,000 more than two years ago, with one less production employee and 85 fewer overtime hours a month. According to the author who coined the termed “lean” by studying Toyota’s system, operating lean means taking the long-view. Rather than focusing on the short-term fix, lean thinkers plan for the future.

But you will not see instant results. This is a process.

I understand many of you are experts in this, and this very conference is covering this subject in depth, so I’ll just include a few pointers. Here are some recommendations from a recent ABRN piece:

•    Centralize your estimating one collision repair chain piloted a system wherein customer service and sales people at the shop communicate with an estimator using digital cameras to enable two-way voice and visual communication. The estimator can ask the service rep to zoom in on certain areas of the vehicle (some estimators can even remotely control the camera) to assess the damage and prepare the estimate. The company says this helps its estimators to focus solely on preparing estimates while the other employees can concentrate their efforts on selling the job and providing customer service. When you collect information, collect as much as you can to avoid duplicating work.

•    Run some of your calls through the Internet By using Voice Over Internet Protocol (VoIP), your phone calls can be routed through the Internet, and if the bandwidth is already in place, the calls are free. Of course, you need a high-speed Internet connection (which I assume the majority of you have already), but there are no long-distance charges and your phone lines can stay open for customers. One company cut its phone bill in half by using VOIP. At my office, we’ve taken to using Skype, because it’s easier than picking up our phones. Simply click the green button on the computer, and you’re face-to-face with anyone, whether it’s down the hall or across the ocean. (Skype, Vonage and AT&T all have similar services.)

•    Use technology to communicate directly with the customer. Mobile text updates for repair progress could free up your employees for other tasks. One owner has set up a system where the customer gets an e-mail or voicemail whenever a vehicle’s status moves forward in a shop management system. For those who receive the voicemail, they can simply press “0” at any time and speak directly to a person at the shop. Think of all the time that goes into physically calling each customer, and think of all of the other jobs your employees can do when freed of this task. You can also let your customers view the repair process by posting photos online. As technology becomes ever more affordable, it’s entirely feasible to set up some Web cams and let customers watch the repair process as you go. You can also provide some education for the customer, show him or her all the elements that go into the repair. Shops are reporting high customer satisfaction with these systems. Other systems for reaching the customer are information-based. One, for example, allows the customer to log in and determine where the vehicle is in the repair process, completion dates and any changes that may have occurred since you last communicated with them. Shop owners can use this same system to check on multiple locations at once, so you can monitor each shop’s production find out which customers are checking in to this system, as well as monitoring delivery dates and workflow.

While we’re on the topic of technology, these same systems can help your technicians gain a wealth of OEM repair data. There are a number of online resources for repair information. Kia (www.kiatechinfo), GM (www.goodwrench.com) and Toyota (www.ToyotaPartsAndService.com) all have free repair information ready for collision repairers. Other automakers have implemented paid sites, whose costs range from $25 to $1,000 or more to register.

Implementing lean operations does not necessarily have to translate to spending a lot of money, either. Some organization inside and outside of your shop could go a long way, says Toby Chess.

How are your parts stored? Are they orderly or cluttered? How long does it take employees to find these parts? What’s their time worth if it takes longer than it should to locate parts?

Are your bays cluttered? Is there paint sitting around in cups, unidentified? Are there obsolete tools in toolboxes, taking up valuable real estate?

All these small changes can equal large gains in the long-term health of your shop.

Here are a few more lean tips that we’ve collected at ABRN.

Understand the theory, not just the tools. One shop owner uses the example of blueprinting—- the complete tear-down of the car to determine (and order) all parts and get all necessary approvals before the car moves into a non-stop production process. This is an element of lean, but just one part. He says, “Without literally chaining everything together, and pulling all value through the organization from the end where the customer picks up finished work, shops will never attain the cultural change needed.” In this owner’s system, each stage in the repair process looks behind it for the next car to work on that’s moving through the process, “pulling” that work through. A monitoring system lets all employees know if any point in the “flow line” won’t be ready to move a car forward every 80 minutes, or if there’s a backlog of work at a given stage.

Expect some employee turnover. Anytime a company considers change and moves into a new direction, there will inevitably be some degree of resistance from within.

An Oregon-based shop owner says, “Hands-down the biggest challenge and the hardest thing was changing the culture of the shop” when she implemented lean processes. She adds: “Technicians are notorious for being independent thinkers and do’ers: ‘This is my car, from beginning to end.’ In this system, it is strictly a team effort. Nobody owns the vehicle. To change that culture has taken us two years.” Sometimes this resistance could be coming from employees whose weaknesses were more hidden in a team-based environment. The shop I just mentioned, for example, discovered overnight that some of its employees couldn’t put doors together in 80 minutes, or they couldn’t mask a car in 80 minutes. She says that under the old system, everything was hidden, and the system was hiding ineffective employees who came to work late, who didn’t work diligently and in fact had started to rely on the better people to do their work for them. Due to the current job market, there are more good technicians looking for work than in years past. Audatex advises that you involve your employees in the transition to lean, as keeping them involved can keep them happy with this wholesale change to your shop.

You will never be finished. This is a continuous process that always needs evaluated.

And remember that lean will not always be a smooth transition. For some, it could take upwards of a year to attain measurable results.

Now I’d like to cover some legislation pertinent to the collision repair industry.

Discussion on the NCOIL aftermarket crash parts model legislation, which I mentioned earlier, has been tabled for now. The crash parts discussion will continue at the group’s July meeting in Boston, where nuances of this proposal, like fines and penalties for non-compliance, will be hashed out. Steering has been considered a separate issue from aftermarket crash parts, and has been separated from the crash parts language and into its own legislative model. 
The Automotive Service Association (ASA) and the Alliance of Automobile Manufacturers (Alliance) released a brochure opposing the NCOIL model, which backs consumer choice in the type and quality of parts used to repair collision-damaged vehicles.

Recently, ASA wrote a letter to the National Highway Traffic Safety Administration (NHTSA) Administrator David L. Strickland questioning why NHTSA does not regulate aftermarket crash parts. ASA members are concerned that some insurance companies are encouraging the use of unregulated parts based on cost without consideration for quality and safety.

ASA has a long-standing view that consumers should be notified of the types of parts used to repair their vehicles and should give written consent for the use of these parts.

However, as ASA points out, very few states have implemented this policy, so most consumers are unaware of the parts used in a repair.
The Motor Vehicle Safety Act provides NHTSA with the authority to prescribe safety standards for new motor vehicles and new motor vehicle equipment sold in interstate commerce—a category that includes aftermarket crash parts. Although NHTSA has the authority to regulate aftermarket crash parts, it has not determined that these parts pose a significant safety concern and, therefore, has not developed safety standards for them.

Another legislative issue pertinent to your business is that January of this year marked the first EPA deadline for local and state compliance, which includes compliant paint booth, approved gun-cleaning equipment and painter training. You can find these guidelines here: www.epa.gov/collisionrepair.

According to CCC, all collision repairers were required to file the first of several notifications with the EPA (or their local environmental agency) by January 2010 as part of the EPA’s new automotive refinishing and stripping regulation, whose complete compliance deadline is March 2011.

Although these clean air mandates may help reduce paint costs in the long-term, there is an upfront investment in equipment and training that can strain an already tight budget.

Look to your state and national associations for guidance on these regulations.
One of the biggest legislative actions lately has been the repeal of the McCarren-Ferguson Act. 
There are two pieces to this: 1) First, it amends the act by by eliminating the federal antitrust exemption that has been in place in the insurance industry for more than 60 years. 2) The second element to this is whether insurance companies should continue to be regulated by each state, or whether the federal government should assumeresponsibility for regulation.

A source from the Massachusetts Auto Body Association points out that during the Bush administration, the Justice Department did not file a single case against a major firm for violating the anti-monopoly law. But the current administration has made its intentions clear to restore more stringent enforcement of anti-monopoly laws, which could have a bearing on McCarren-Ferguson.

Assistant Attorney General Christine Varney said in testimony to Congress that “there are strong indications that possible justifications for the broad insurance anti-trust exemption in the McCarren-Ferguson Act when it was enacted in 1945 are no longer valid today.”
Insurers claim that the the anti-trust repeal would hurt smaller insurers, who benefit from underwriting data that’s shared among insurers. This also relates to the issue we discussed earlier about which data can and should be shared and which data shouldn’t.

Those we spoke with say this anti-trust repeal would likely have NO IMPACT on the day-to-day operations of collision repairers. One shop owner says that from a philosophical standpoint, insurers should play by the same rules as everyone else.

This repeal of McCarren-Ferguson is seen as more of a shift toward more federal oversight of insurers. One ASA official, whose group supports this repeal, says that “state regulation has failed,” adding that the industry in most states is barely monitoring legislative activity, let alone pushing for change.

But state associations beg to differ, however; one that we interviewed says, “It’s been argued that the collision repair industry doesn’t have the resources for a decentralized effort in all 50 states, but the reality is that the industry doesn’t have sufficient resources for a federal effort, either. Even assuming a best-case scenario where the entire industry was able to unite and agree on a specific course of action, it would be extremely difficult to go up against the well-oiled and well-funded insurance lobby.” In 2007 and 2008, the insurance industry spent almost $150 million per year on its lobbying efforts, second only to the pharmaceutical and health care industry. How can the industry compete with that?

Due to the sheer of volume of cases that federal legislators deal with, state associations believe that these cases can more likely rise to the top at the local and state level, which is another argument against federalization of the insurance industry. These same people attest that state legislators live and work in the communities they govern, and it’s not uncommon for members to know and work side-by-side with these residents in other local endeavors, like school boards and city governments.

But to counter this local and regional legislative focus, some associations say they could better serve the industry if lobbying efforts can be unified at a national level. Unlike state lawmakers, all 535 members of Congress have at least one staff person who is responsible for insurance issues, someone more likely to understand the intricacies of insurance law. Also, federal agencies offer more pay and prestige than state agencies. They also say consumer advocacy groups will be more likely to share the views of insurance issues on a national level.

The Consumer Federation of America and the Center for Economic Justice sent a letter to House and Senate leaders calling for broader insurance oversight. An SCRS Board member says a federal charter would make it easier for insurers to compete internationally, but on the level of claims settlement regulation, there could be problems. Currently, state associations are more in favor of keeping claims settlement regulation at the state level.

As shop owners and businesspeople, you should focus on both the local and the federal legislation going on around you. I’ve only touched on a few, but there are a multitude of issues you should be monitoring. And you can find much of this information through your associations.

A number of those invested in this industry are lobbying for large-scale change in some manner, but it’s more likely to happen in small victories. Remember that the economic climate will not change overnight. Claims are down, miles driven are down, and the way consumers approach insurance is changing by the day. It’s important to avail yourself of technology and other tools at your disposal, but maintain focus on the customer.

Remember both the art and the business involved in collision repair. Thank you.

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