Why It Is Important To Conduct A Parts Physical Inventory At Least Once Per Year

Yearly physical accounting of the dealership parts assets is an important function in managing dealership capital investment and determining the salability of that investment.  Now there are some dealerships that don’t take an annual parts inventory.  They typically say it’s because their dealer wants to save the expense. But the real question is, “Does it really save the dealer an expense?”  Let me tell you a brief story…

Recently I had a client whose former manager had been doing “the count” for the last several years. He always provided the “reconciled” numbers to the accounting office. This past year his parts manager refused to hand over the counter pad to support the inventory “numbers” he turned into accounting. The controller got very suspicious.

As a result, they asked for my services for me to validate some of the practices that were discovered during the annual inventory count. They had also learned that the parts manager had been selling parts on eBay. Some parts were “scrap” parts the manufacturer had authorized to be thrown away. Some were new parts that had been purchased and charged directly to the “parts account”.  They even found some older “paper” catalogs from years gone by that were sold on eBay.

If you gave your employees a choice between participating in your company’s annual physical inventory and going to the dentist for a root canal, which would they choose? Which would you choose? The thought of spending the better part of a weekend in an unbearably hot (or freezing cold) building, trying to count every part, finding material that you can’t identify, and searching for other material that arrived in your building and then disappeared, is not most people’s idea of a good time.

So why do it? If you ask your controller (who usually runs around with a clipboard throughout the process) he or she probably says, “because the accountant requires it.” Unfortunately, most employees respond to this answer the same way they reacted when their mother told them to eat their spinach (“because I’m your mother and I said so”). They don’t see any advantage in doing a good job or being accurate. Most feel that the accountant is only going to use the numbers we provide on some government reports that no one is going to look at. Boy, is that all wrong, and YES, management knows better!

Everyone in your organization must realize that the primary purpose of a physical inventory is not to please your accountant or the Internal Revenue Service. It is to verify that the on-hand quantity of each item in your computer reflects what is actually on the shelf. The secondary purpose is to verify that the monetary investment the dealer has asked you to oversee is all still there!!

You need to remember that you are holding a large cash investment for your dealer. For example, you reconciled your inventory value and determined that you were $5,000 over the accounting value. Is this a good thing? Maybe not. When it seems too good to be true, it usually is. This could depend on how the manager documents the payables (what he has purchased). The accounting could result in not only overages, but shortages, as well. This could make the baby look ugly but all the parts are on the shelf. This could make it look like a financial disaster.

A physical inventory can seem like an overwhelming task. But just keep in mind that it’s a lot like painting a house. The quality and success of both depend on proper preparation. Take the time now to plan and prepare for your annual count and make your next physical inventory the most accurate one in your company’s history.

Any business needs a “checks & balances” process to monitor the validity of any inventory. You never want to think you have someone you can’t trust BUT don’t be naïve enough to think it could not happen to you.

Here are a few items to consider PRIOR to taking a physical inventory that will sure make your life easier when the time comes to count those parts:

  1. Develop a plan-a-graph of the department floor with the bin layout. This will help in determining which bins you have counted.
  2. Perform a daily, or at least weekly, PICS count (Perpetual Inventory Count system). You would rather determine that you have a negative situation now than at inventory.
  3. As you perform the bin counts above in step 2, clean and straighten the bins as you go. Are the bins labeled clearly?
  4. LOCK THE DOORS!! Remember that you are only a bank of cash. You probably handle more cash, except maybe used cars, than any other dealership department.
  5. Process your payables daily. Make sure the office gets them on a timely basis so it’s not a fire drill at the end of the month.
  6. Review all work-in-process monthly to determine why repair orders or counter slips are older than 30 days.
  7. Keep folder in your office of all returns made to GM or outside vendors still awaiting credit for the return items.
  8. Keep a folder of all outstanding “dirty” cores awaiting credit.
  9. Keep a folder of any parts you have “donated” or removed from inventory.

So again I ask the question… Do I really need to take parts inventory every year?

M5 has consultants with years of expertise in this area who can assist you with your inventory process. If you have an interest in our services, please contact our office at 205-358-8717. One of our experts will follow up with your dealership.

Written by Bruce Gamble

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