This is Part 3 in a four-part article.
- Consignment Cabinets
In the early 1980’s, Toyota Motor Sales USA developed a process of utilizing parts consignment cabinets to stimulate wholesale parts sales. It was referred to as the “STAR” program. This program was designed for a multitude of reasons, but there were two particular issues that were addressed:
- There was a concern that there were a large number of non-franchised repair facilities performing repairs and services on Toyota vehicles.
- There were a substantial number of after-market vendors and suppliers that were beginning to offer quality non-OEM parts at a discounted price in comparison to factory OEM Toyota parts. Basically, they were concerned that the franchised vendor was losing the sales to the above-mentioned wholesalers.
The premise of the program was for the manufacturers to offer storage equipment at a reduced price, or even free in some cases, to the dealers. The dealers in return would offer these cabinets to select “wholesale” accounts, stocked with fast moving, typically maintenance, items. The manufacturers were providing the bin storage equipment and the dealer would provide the parts.
These wholesale accounts were typically oriented toward mechanical repairs, such as service stations and independent service facilities. The dealer, in cooperation with the wholesaler, would agree to what items would be stocked, the quantity that would be stocked and the total value of the inventory to be stocked.
PARTS MANAGERS ARE typically analytical and logical by nature. It did not take them long to learn several very important lessons. The first issue that came to light very quickly was that the more of these cabinets you had in the field, the more time it required to maintain them. Someone from the dealership had to visit the consignment cabinet on a regular and consistent basis and determine what was being sold, how many were sold and what was needed to replenish the cabinet.
At first, there was a tendency for the complexion of part numbers that were in inventory in these cabinets to change drastically during the initial 30 days. Some items were not selling as anticipated, some items were selling more, some items were selling less and some items were selling that were not maintained in the cabinet. After the inventory of the cabinet was verified and agreements made as to what, if any, changes would be made, the wholesaler had to be invoiced for the used items. In addition, the items that were used or exchanged then had to be delivered to the wholesaler. For the cabinets to maintain maximum effectiveness, maintenance of these cabinets had to be performed bi-weekly, and in some cases even more frequently.
BUT AN EVEN more interesting revelation was made as the age of the cabinets increased. Who maintained the liability for these items on consignment? In theory, the wholesaler was responsible for any loss or theft. The dealer went so far as to issue “contracts” that were supposedly binding. But the simple facts of the matter were that until that money was in the dealer’s pocket, the dealer had a liability.
LASTLY, THE PARTS manager had to address the issues regarding inventory counts for the purpose of conducting physical inventory. In essence, the parts manager had many different alternate bin locations for several hundred different part numbers in the inventory. This could prove to be extremely interesting when trying to perform the inventory variance reports at tax time.
IN SUMMARY, THIS really was a very good program. It was well thought out in advance and the tools were in place to manage and monitor the program. The issue became that this process was a high operational technique that required constant monitoring and management to be effective and limit the potential exposure to the dealership. The transition time and distance between the wholesaler and the dealership could be several hours and sometimes take days to complete the cycle of seeing all of the cabinets, restocking and invoicing all of the wholesalers.
Potentially, the cabinets would increase receivables as well as increase the payables. Procuring the initial inventory mandated a large capital outlay at the beginning of the program with an unknown time frame for the return. The wholesale consignment cabinets offered many advantages to both the dealer and the wholesalers, but there were several inequities that developed in the actual application.
ONE POTENTIAL APPLICATION of the consignment was not addressed by the majority of the dealers. Who is the largest wholesale account that the dealer is involved with daily?—their own internal wholesale account, their service department. Could this concept be applied to the dealer’s own service department and would the same inequities apply? Why would a parts department want to use this “sales” strategy in their own facility? Let’s examine this:
- Quick-Lube Services
The manufacturers as well as the dealers are promoting quick-lube services to the customers. The premise is to keep the customer returning to the dealer for all of the service work, including lube, oil and filter operations.
Thousands of dollars are being spent promoting and advertising quick-lube operations. Some of the advertising goes as far as to promote “29 minutes or less or the next one is free.” In order to achieve this rapid turnaround time, it is very important that the technician be able to get the vehicle in the shop, perform the service (generally with a visual inspection) and get the vehicle back to the customer. Some dealers have gone as far as to implement “manual” or handwritten repair orders expressly for the quick-lube operations to help expedite the process. Yet in many cases, the technician is still forced to go to the parts counter to procure the oil and the filter. In some cases that can prove to be one of the major factors that prevents the technician from meeting the 29-minute deadline.
- Preventive Maintenance Services
There has recently been an even greater focus on capturing increased volumes and levels of preventive maintenance services. The maintenance operations are being performed repetitively and with greater frequency. Traditionally, 60% or more of the customer pay operations performed in a dealership are maintenance-oriented. In this type of environment, the technicians are traveling to the parts counter to procure the same type of parts (filters, tune-ups, fluids, etc.).
- Space for the Parts Counter
How many technicians are at the back parts counter at any given point? Have you ever noticed how they seem to come in “wads”? How many parts counter people does it take to handle your volume of technicians? If you have the manpower to satisfy the demand, do you actually have the space for the parts counter people to function effectively? In some markets, multiple franchises are consolidated into one facility. The technician counts are increasing in those facilities, yet the available space for technician parts counters does not increase.
- Proximity of the Parts Counter
How far is it from the last technician’s work area to the parts counter? How many trips are made to the parts counter daily? The only commodity in the service department is “time.” The ability to produce billable flat rate hours is contingent upon a technician turning wrenches in their work area. If they are walking back and forth to the parts counter, it could potentially be damaging to their ability to produce hours.
All of these examples have at least one common denominator. How do you get the needed parts into the technician’s hands as quickly as possible? Potentially, consignment cabinets could offer assistance in achieving this.
BEFORE RUNNING OUT to your service manager and dealer principal and telling them that you have figured out “the way” to overcome the above-mentioned issues, there are several questions that you must ask and answer:
- How many of these cabinets do I need to implement?
- What am I going to put into these cabinets?
- How am I going to control the selling process?
- How am I going to control the inventory process?
- How am I going to maintain the cabinets?
HOW MANY CABINETS do you need? Each dealership is different. The number of cabinets needed is dependent upon the size of the operation as well as the organizational structure. Will it benefit the quick-lube operations to have a supply of oil, oil filters and air filters on hand at their work area? In an advanced production environment, will there be a benefit to the team or group having a consignment cabinet in their work area? What will the benefits be in a traditional production environment? Are there currently technicians in the shop that could possibly benefit by having a consignment cabinet in their work areas? Will it require one cabinet per technician or could several technicians work out of one cabinet?
There is no right or wrong answer. The question should be, “do the benefits outweigh the known liabilities?”
WHAT TYPE OF parts will you want to make available in these cabinets? How many times does a technician come to the parts counter for brake fluid, washer solvent or shop supplies such as carburetor cleaner, brake cleaner or penetrating spray? When considering the development, these types of supplies should be considered as well.
But what type of parts and, more specifically, what part numbers should be stocked in these cabinets? Most computer systems possess the ability to sort the inventory by how many times the part number has been sold over a given period. It would be logical to use this information when determining what to stock in the cabinets. Naturally, you would want to stock the items that are the fastest moving part numbers due to the fact that they have a proven record of selling.
Most of the manufacturers provide quick reference guides to the parts departments for determining the specific application for any given vehicle. It is in the parts department’s best interest to provide these reference materials in the consignment cabinets.
UPON MAKING THE commitment to utilizing the cabinet approach in your service department, it must now be determined how the billing, reconciliation and maintenance process will occur. From a parts department’s standpoint, the most important component is how the parts are charged on the repair order.
Different computer systems may offer solutions for how to handle this process. Some of the computer systems allow the parts department to automatically “attach” the parts value to the repair order when the specific operation code/number is used.
There must also be consideration for how to accomplish this in a manual environment or when the computer system will not allow the parts to be attached. One option is to use an inventory sheet, which could be in a two-part carbonless document. The technicians use the document when an item from the cabinet is used. In order for this process to be “technician friendly,” it is advisable that the form be pre-printed with as many of the applicable part numbers as possible.
Upon completion of the vehicle, the technician is responsible for taking the repair order with the attached document to the parts counter. The parts counterperson then removes one copy of the inventory sheet and bills out the parts as indicated on the inventory sheet.
It is very important that the parts department maintain the “opening” inventory of the cabinet as well as any additional items that are added to the cabinet. Once a week, the parts department is responsible for performing an inventory reconciliation as well as restocking the cabinet with any used items. The service advisor then confirms that all items are on the repair order when closing the ticket. At that point, the service advisor removes the last copy of the inventory sheet and forwards to the service manager.
The service department is responsible for any discrepancy in the inventory. As in any operational technique employed in the parts or service department, there are pluses and minuses. Consignment cabinets have offered a potential solution to an ongoing issue of how to provide the necessary parts to the technicians in the most expedient manner.
Written By David Dietrich