Invested In Parts Or Junk? – Part 1

Jim NewsletterThis is Part 1 in a two-part article. Be sure to check back next week for Part 2.

The most common question a new client asks when I first start working with them, is “How good is my parts inventory?” I can appreciate where the question comes from because most Dealer Executives don’t know how to evaluate their investment. They are often confused by the overly simplified and sometimes contradictory information they receive from their District Managers, 20 Groups, NADA articles, newsletters, and financial advisors. Each of these “standards” will attempt to measure the quality of the inventory based on one or two narrow criteria. The most common ones are as follows:

  • Level of Service – This is most commonly expressed as the Fill Rate; but what do you measure? Are you concerned with dollars, part numbers, or pieces? Every retailer is surveyed for their ability to complete repairs on the first effort, and parts availability is often a contributing factor. What is most important to you? The ability to provide any part that you sell 2 or more times annually, creating a very broad selection? Or ensuring that you never run out of parts that you sell 12 or more of each year, focusing only on high volume sales? The process and investment to accomplish each of these two objectives are quite different, and both will have a dramatic effect on the investment.
  • Obsolescence – What do you consider Obsolescence to be? Most people will equate some age point to this. Some will tell you as low as 6 months without sales, and others as high as 12 months. Age is a factor in the initial determination of the Phase-Out process, when you begin to remove a formerly selling part from stock. One of the quirks of our Dealership Management Systems (DMS) is that aging can be hidden by the lucky sale of an old remaining piece, thereby making the balance of the stock of that part number to appear current. I had the opportunity to do a Buy-Sell analysis for a client, and found that very few of the pieces in stock were aged over 9 months, even though the percentage of parts in Automatic Phaseout (AP) was very high. It turns out the Parts Manager had been very busy inputting Lost Sales on these numbers to make the stock comply with the buyers’ terms. The truth is that you must also examine the stocking statuses that the inventory is grouped into, and ensure that these are set up correctly, before you can determine what portion of the investment is truly obsolete.
  • Turns – The old accountant’s traditional measurement was a simple one of sales divided into the inventory value, yielding what is called Gross Turn. This is useless for the purposes of determining the quality of the investment since it does not identify what portion of it is selling, and what is sitting idle. A better measure is the calculation of True Turn, which factors in the stock order efficiency. Unfortunately, this too can be misleading, since a franchise on Daily Stock Order (DSO) can purchase enough each day to hide the relatively slow moving stock in this calculation.
  • Days/Months of Supply – Much like Turns, this indicator can be misleading since it has no way of telling you what portion of the investment is working for you. Furthermore, it is tied into a fluctuating financial target based on last month’s sales-at-cost. This can quickly be distorted by a few unusual high ticket warranty jobs, or big wholesale crash sales which typically do not come from stock.

The first step in analyzing a parts inventory is to determine what it is expected to do.

  • Do you, as management want to be aggressive? By this is meant the desire to satisfy a high percentage of all demand from stock. This increases your investment, but also improves your operating profits since you have acquired these parts the most cost effective way. It also may provide additional discounts and will improve return capabilities.
  • Does it include wholesale? Are you talking about crash only? Or both crash and mechanical?
  • Are you looking to primarily support customer paid service, or warranty, or both?
  • Do you want to be conservative? By this is meant the desire to only stock high demand volume parts, and rely on outside purchases and Special Orders for the balance. This reduces your investment, but also reduces your operating profits since your cost of acquisition for parts you don’t stock rises dramatically. It also limits your return capability, which is usually based on Stock Order purchases.

The simple truth is that an aggressive position requires investment. These key decisions should be made in advance to control the development of the inventory. Sadly, most inventories have evolved into an unplanned collection rather than a structured investment. Rarely is a Business Plan in place for the parts department, especially one that establishes objectives and a marketing analysis. When you take into account the fact that the parts investment is all net working capital, you have to wonder why good business judgment has not been involved in its creation. The first step then is to get management to commit to a direction and a Plan. From the Plan you can now develop an inventory that meets its needs. Once this is accomplished, you can now examine what is on hand, and determine how well it is working for you.

About the Author