This is Part 2 in a two-part article. If you missed Part 1, you can read it here: Part 1.
After the Business Plan is completed, the next step is to examine the organization of the inventory. It is important to organize the stock into groups (Sources) that are purchased and sold similarly, so that the Return on Investment can be properly reviewed. This is where you can really begin to see how well the inventory is working, and what changes are necessary in order to make it more efficient. It also has to be built around the franchisors’ PDC service capabilities and order frequency.
- Phase-In. In layman’s terms this is the setting in the DMS that advises the Parts Manager when to begin ordering a part for stocking purposes. It measures Total Demand (Sales plus Lost Sales) over a pre-determined time period. Some systems also allow average sales over a specific time period. In the case of a few very basic systems, which only measure piece sales, it can bring parts into stock improperly. There are many different ways to establish this critical point, and they are largely governed by the aggressiveness of the desired levels of service to the target customer(s).
- Phase-Out. This is where you determine how long a part will be kept in stock. It is typically based on how many pieces are sold over a pre-determined time period, as well as how long the part goes without any sales at all. An example of an aggressive setting would be to stock a part having 2 or more sales annually. An example of a more conservative setting might be returning parts that don’t sell at least 6 pieces a year. Once again the business plan guides you to making the proper settings.
- Depth of Supply. This is usually expressed as a desired stocking level calculated by average days of sales. Factors that enter into this setting are the quality of service from the PDC, local distributors such as Motorcraft and ACDelco, and stock order frequency. The trick is to not run out of any part that you sell from stock, while never having more on the shelf than you need for the current level of demand. When you take into account the fact that many franchises can have over 350,000 active part numbers in service, this becomes a daunting task since each part number stands on its own until you bring it into stock. This is probably one of the most valuable services that your DMS provides.
Now you can finally see what you have on hand, who you plan to sell it to, and how good your investment is based on the criteria you established as a result of your business plan. Ideally, no more than 15% of the inventory should be composed of parts you have little likelihood of selling. Looking at your DMS Parts Management Report you will see the following designations from the Investment:
- Automatic Phase-Out (AP). This designates parts that used to sell regularly, but no longer meet your sales rate criteria, and therefore should be returned to the respective vendor.
- Non-Stock (NS). These are usually unsold Special Orders. They can also be new accessories and some service parts for new models, such as filters and brake pads. Often times there are ordering and diagnostic errors in here, as well as some undesirable speculation. Collectively, these are parts that have yet to earn their way onto your shelves, and generally should only be purchased to fill specific orders.
The other 85% of your investment should be selling within your pre-determined levels, once again based on the Business Plan. If you fall within these basic guidelines then you probably have “enough”, provided that you’re not running to competitors (Emergency Purchases) to replenish stock in between factory orders, and that your Customer Orders are consistent with your Non-Stock purchases, assuming that they should be one and the same thing. If you haven’t developed a Business Plan for your Parts Operations yet, that is the first place to start.