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Summary: This month, Professional Carwashing & Detailing® asked Robert Roman, a former carwash operator and president of RJR Enterprises, to take a query from an anonymous reader who wants to know which wash is a better bet; a conveyorized operation or an in-bay automatic?
Question: I’m looking into a new investment. Should I put my money into a conveyorized carwash or an in-bay automatic?
Robert Roman: Consumers can have different car-care needs at different times, but washing the outside of a vehicle is the common thread among all types of professional carwashes. As such, the carwash investment decision often becomes what is the best type of system to service the varied needs of consumers.
In order to answer this, investors need to evaluate how different carwash systems stack up. This is usually accomplished with conventional accounting methods based on standard or activity-based cost, but the concept of throughput accounting may be better suited for this purpose.
Throughput accounting is a management accounting system based on the theory of constraints (TOC). Developed in the 1970’s, TOC is now being used more frequently in the practical aspect of making decisions in situations when constraints exist.
The application of TOC allows for a shift from cost-based decision-making to making decisions in which system throughput, constraints and capacities at critical points are key elements.
TOC is based upon the assumption that every business has at least one factor that inhibits its ability to meet its objective. The normal objective for a carwash business is to maximize profit.
The first step in applying TOC is to identify constraints. TOC defines three operational measurements to evaluate whether a business will make money now, as well as in the future.
Throughput: This is the rate at which the carwash generates money through sales (selling price minus materials).
Throughput replaces output in TOC because output is a variable that can be manipulated by equipment manufacturers and distributors to make financial accounting statements appear more attractive to investors.
Investment: This includes total system investment (land, buildings, equipment and inventory).
Operating Expense: This includes everything else which keeps the carwash running; utilities, labor, maintenance, repairs, depreciation, taxes, amortization, etc.
TOC allows for three measures that can be used for the purpose of evaluating decisions.
- Net Profit = Throughput minus Operating Expense.
- Return on Investment (ROI) = Net Profit/Investment.
- Productivity = Throughput/Investment.
Given these measures, individuals can make decisions by examining the effect of those decisions on the company’s overall throughput, investment and operating expense. A decision that results in increasing throughput, decreasing investment or decreasing operating expense will generally be a good decision.
Although TOC is often used in production management to support decision making for the continuous improvement of processes such as solving bottleneck, inventory and scheduling problems, the same logic can be applied to carwash investment. For example, given a certain level of volume (sales), should the investor use a conveyor or an in-bay automatic carwash system?
As shown in Table 1, investors can encounter a number of constraints as they wrestle with the investment decision. With the exception of the weather and the random arrival of customers, the principal constraint for an automated carwash is the time available on the machines involved in the cleaning process.
The next step is to identify the production capacities of the machine, not always simple or straight-forward.
With a conveyor system, theoretical production capacity is often expressed as 10 cars per hour for every 10 feet of conveyor length. This value can be affected by line speed, roller spacing, type of wash process, operating procedures and other variables.
Therefore, it is possible to have different capacities for different conveyor systems. Table 2 (found on page 20) provides some examples of conveyor capacity based on manufacturers’ claims to wash and dry “up to” some level of cars.
In queuing theory, the service time for a carwash includes the time between cars and the time necessary to complete one car. Consequently, the selling function, since it precedes the conveyor, must at least match the service rate of the conveyor or the entire system will not achieve its potential.
Identifying the production capacity for an in-bay automatic system can also be difficult. Unlike a conveyor or product layout where the components are arranged according to the steps required to wash a vehicle, in-bays use a fixed-position layout that keeps the vehicle in one position while materials and equipment are brought to the vehicle.
Fixed position layouts may require less space, but they tend to have lower capacities because the service time is usually not constant. Table 3 (also found on page 20) provides some examples of in-bay capacity based on manufacturers’ claims to wash “up to” some level of cars per hour.
Machine time can also be affected by extra services. For example, an on-board dryer with a cycle time of one minute would reduce the service rate for a 30 car-per-hour in-bay to 20 cars per hour. Multiple soap applications, tri-foam, spot-free, etc., can also reduce the “up-to” capacity.
Although this can be overcome to some extent by having a long wash-bay so that one vehicle can be dried while another is being washed, capacity is still governed by machine service time. For example, an in-bay automatic with a process time of five minutes has an acceptance or service rate of 12 cars per hour regardless of how long the wash-bay is.
Our example (Table 4 on page 22) assumes that the investor has a site where the potential is 40,000 carwashes per year. With an average price of $8, total sales are $320,000.
Since TOC ignores output in the classical sense, we will need to make some assumptions with regard to machine time and peak operating conditions. Although there are exceptions, most consumers clean their vehicles during the daylight hours. Since daylight varies by time of year, we will use 9 hours per day, for the sake of argument, to normalize and derive average demand and demand for the peak operating hour during the peak carwash season.
This assumption is necessary in our model because conveyors can have different forms of queues and in-bays can have different configurations (single or multiple bays with on-board, free-standing or stand-alone dryer).
In our example, investment represents the land, buildings and equipment necessary to accommodate a stand-alone facility capable of completing the exterior carwash service. This did not include setbacks, detention or the space for finishing area, vacuums or vending.
The amount of land was determined with the minimum criteria necessary to accommodate entrance lane, turning radius, wash-bay, equipment room and escape lane. Land was assumed to cost $10 per square foot. Based on these assumptions, the cost of land was $70,200 (conveyor) and $82,600 (dual in-bay).
The cost of buildings was determined with an average construction factor in dollars per square foot for conventional block (finished quality) plus average factors for site improvements and soft costs in terms of dollars per square foot of land. Based on these assumptions, building costs were $125,000 (conveyor) and $218,000 (dual in-bay).
The cost of in-bay equipment varies considerably by manufacturer, design and process. The advertised retail price for most touchless in-bays does not include a dryer, upgraded POP, spot-free, softener, hot water or accessories. These options can add $60,000 to as much as $85,000 to the cost of the base machine. Investors must also add the cost of electrical, mechanical and plumbing work to erect and install the equipment plus shipping costs and sales tax.
Average equipment costs
Process Type / Average Price / High End
Friction / $40,000- $53,000 / $65,000
Touch-less / $55,000-$65,000 / $80,000
Hybrid / $60,000-$70,000 / $80,000
Conveyor equipment also varies considerably in cost per linear foot based on design and wash process. Typically, friction has the lowest cost followed by hybrid and touch-less.
However, the advertised retail price for conveyor equipment usually includes just about everything that is necessary to operate the system with the exception of POP devices, signs, accessories, installation, delivery and sales tax.
In our example, the in-bay included the average base price for two high-speed units (touch-less), the average cost for the options package as described above, plus erection and installation.
The equipment cost for the conveyor included the average cost for a 60’ touch-less system plus gated auto-sentry, signs and an accessories package.
The cost for reclaim, underground tanks, shipping, delivery and sales tax was not included. Based on these assumptions, equipment costs were $226,000 (conveyor) and $305,000 (dual in-bay).
Conveyor = $421,200
Dual In-Bay = $605,600
Operating expenses include everything besides the material cost that we described earlier. These expenses were based on the cost per car values provided in the International Carwash Association’s Cost of Doing Business reports.
Conditions and terms included amortization over 25 years, an interest rate of 7 percent and an investor contribution of 25 percent. The depreciation schedule included a straight-line trajectory for equipment and buildings.
Although in-bays are touted as a 24/7 business that requires minimal management attention, they do not operate in and of themselves. Labor is needed for housekeeping, maintenance, breakdowns and administrative duties on a daily, weekly and monthly basis.
With an absentee owner, this means paying for a maintenance service contract and hiring a part-time person to handle the mundane chores. With the exception of a conveyor at a gas/c-store, most exterior conveyors use attendants to help maximize operations and financial performance.
In our example, in-bay labor included 41 cents per car plus $100 per week for administration. Labor for the conveyor included $100 per week for administration plus $28,000 for a full-time attendant (54 hours per week).
Based on these assumptions, operating expenses were $162,300 (conveyor) and $189,900 (dual in-bay).
Our results show that the dual in-bay has a slightly higher throughput, but the 60’ conveyor has lower investment and operating expenses. The analysis indicates that the conveyor provides a higher net profit and return on investment and has a higher productivity ratio based on 40,000 cars per year at an average price of $8 per car.
|60’ Conveyor Touchless||Dual In-Bay Touchless|
We have also shown that throughput analysis can be an effective evaluation tool when throughput, constraints and production capacity are key elements in the decision making process.
Robert Roman is a former carwash operator and is president of RJR Enterprises (www.carwashplan.com), a leading consultant to the carwash industry. Robert is a member of the International Carwash Association and PC&D’s Honorary Advisory Board.