THE (F)LAW OF AVERAGES
In a previous article, I explained why looking at average days for delivery of parts neutralizes outliers, and that the word “average” should be a four-letter word.
Averages can be very misleading when used to compare different data sets, or when there are numerous outliers in the data. The problem is that the collision industry has historically measured performance in averages: Average Paid Claim Severity, Average Percentage of Parts Dollars by Part Type and Average Part Price.
Before the pandemic, I spoke with a collision repairer who was told he was at risk of being dropped by an insurance DRP partner because his Average Paid Claim Severity was higher than other participating shops in the area. His was a smaller shop, with no ‘fast lane’ for minor repairs. I told him that may be his problem: if other, larger shops had the space to complete same-day bumper repairs, with an average repair cost of a few hundred dollars, they would have a much lower Average Paid Claim Severity for that insurance carrier.
The same applies for a very common metric in our industry: measuring parts performance by average percent of parts dollars. A simple example is that if you have $1000 in parts on an estimate, and one of those parts is a $200 aftermarket part, using this metric means your aftermarket utilization is 20%. If you find a less expensive aftermarket part, say for $100, your spend goes down to $900 and your aftermarket utilization 900/100 is now 11%.
Average Part Price is another common, and very flawed metric to measure parts performance.
The actual claims in the exhibit above show that there isn’t a tight correlation between Average Part Price and Alternate Parts Performance. Averaging the part price of collision repair parts on an estimate where a molding clip is 45 cents is in the same parts list as a $450 hood illustrates why Average Part Price is so misleading. A far more accurate measure of parts performance is the discount from OEM MSRP list. This precisely measures each part’s performance against OEM MSRP and accounts for OEM price matching when part measure by part type does not.
With the inflation in claims costs, accurately measuring parts performance is more critical than ever and clearly, using averages can yield very flawed results. When you look at your collision repair Key Performance Indicators, how many employ the ‘flaw of averages’?
PartsTrader’s Chief Innovation Officer