This is Part 2 in a two-part article. View Part 1 >>
Phase Out Parameters – Every part eventually reaches a sales level where it no longer makes economic sense to keep it in stock. Some people would like you to have certain parts “just in case” there’s a need for it, and with the debatable exception of some maintenance and campaign items this does not make sense. There are 2 primary criteria used to calculate the point where a part is phased out of the DMS inventory.
- Time. This is usually expressed as a specific period where there is little, or no demand for a part. Some will recommend 6 months, others 9 months, or even 1 year. If you are in a seasonal market you may want to use 9 months to allow for overlap when analyzing “no demand.” When calculating for reduced demand the norm is typically 12 months, since most DMS can calculate this easily.
- Levels of Demand. There is a point where, after deducting the cost of ownership which is estimated at 20% annually, low levels of sale do not allow for net profitability. For example, if you average 30% Gross Profit for the entire department, and deduct 20% for your cost of ownership, then that only leaves 10% GP before cost of sale and departmental overhead for a single annual sale. Most of my clients find that they need to sell at least 3 pieces per year just to be marginally profitable. Caution should be taken not to set this too high or you will cut yourself off from re-qualifying Auto Phaseout parts, as well as starting up the Special-Order devil again.
Lost Sales – I can’t stress this aspect of modern parts management enough. As we said earlier, the major benefit from your DMS is its ability to forecast. A Lost Sale should start the analysis process. It allows you to begin testing a part number without ownership, something a Special Order can never do. There are safeguards in most DMS that allow multiple demands within a month, but consider them all to be one demand period for the purposes of Phase In. If you assume that an inquiry for a particular part is driven by true need for it somewhere, and that you only have a chance of making the sale if you have it, then the cost of NOT POSTING the Lost Sale becomes enormous. The DMS lives off demand posting, and demands are only Sales and Lost Sales. Which one makes the most economic sense?
The Human Factor
The Parts Manager – If the DMS could truly think for itself, then there would be no need for human intervention, and we all know that does not happen. However, many of you spend an inordinate amount of time “correcting” its recommendations because you don’t trust it or can’t understand why it makes such crazy calculations. Most of the time this goes back to settings that are not appropriate for your business model. Many new managers inherit settings from their predecessors, who in turn got them from someone else who was there ahead of them. There was no effort to answer the questions we covered earlier, leading to a setup that works improperly, and little understanding of how changes can improve future calculations. The result becomes one of trial and error, with the emphasis on error. If you accept the fact that the primary responsibility of the Parts Manager is to manage the inventory investment, then you also need to acknowledge the need for that person to be able to configure and adjust the DMS properly, and as needed. Where does a Parts Manager find help with this? There are many resources available to them:
- DMS Schools – The major DMS providers have off site and online training for their products. While they do not dig into the underlying daily needs of the department, they do provide explicit instructions in the operation of their systems and software. Every Parts Manager has a responsibility to become proficient in the use of their DMS.
- Franchise Schools – These are good for new managers. It teaches them the unique traits of the franchise, as well as the Terms and Conditions which influence the decisions on stocking and returning parts.
- Professional Support – Every Parts Manager lives and works in a very confined environment. There is constant demand for their time all day, and little opportunity to see other ways to get the job done. One of the most frequent issues I see is a lack of time management skills. This often causes a manager to focus on sales and neglect the inventory management aspect of the job because there is “never enough time” for it. Outside help can help identify those areas that need improvement, and provide suggestions, training, and alternate solutions toward solving problems.
When all is said and done, it is the Parts Manager who makes the day successful. If you’ve planned properly, designed the settings in the DMS to match your needs, prompted your staff to post Lost Sales aggressively, and provided quality time in your day to do your administrative job as well as the selling job, you should be looking at Levels of Service of over 85% for part numbers and pieces and a True Turn of 4.5 or better. If you aren’t there yet, get help. You owe it to the store, and yourself.