Years ago someone gave me a book called Windows for Dummies. It was not designed for ignorant people, but to explain Windows in laymans terms so that the user could better understand how the system worked. A lot of my work is in training newly appointed Dealer Executives in the management of their Parts Operations. Since the majority of these folks come from the Sales side of our business I have been able to reach out to them through analogies relating common elements in the Parts world to those of Sales.
Like most Profit Centers in our business there are two main areas of concern: Net Working Capital and Personnel. Lets discuss both of them in some detail.
Unlike the new and used vehicle inventories in most dealerships today, the Parts Inventory is totally owned by the store and is usually the largest concentration of Net Working Capital. Lets look at the similarities between Parts and Sales.
Months/Days of Supply
Much like Sales, the size of the Investment is measured as a function of the current sales rate, either in days or months. Just like Sales, this will vary tremendously depending on the rate of demand. A $500,000 inventory compared to a current sales rate of $250,000 (at cost) will be a 2-month supply. The same investment at a demand rate of $300,000 will now have a 1.7 month supply with no change in value, so management has to be careful not to make snap judgments on the size of the Investment based on a short term demand rate.
Much like the vehicle inventory, the parts investment has to be analyzed for which units are selling to see what portion of it is truly turning on a regular basis. True Turn is the measurement that isolates the sales from stock only, annualizes that value and divides it by the Investment. This removes the sales that were not from stock, such as Special Orders and Emergency/Customer Purchases. It also takes into account the level of Obsolescence which has no current movement. This is the measurement of the effectiveness of the Investment financially. The objective for this measurement is to be between 3.5 and 7.0 True Turns. Too low indicates Surplus Stock and Obsolescence; too high indicates an inadequate inventory which limits sales and Gross Profits.
Level of Service
This is the other measurement of the Investment, only this time we are looking at what percentage of piece sales are coming from stocking part numbers. We take Actual Sales plus Lost Sales to arrive at Total Demand; then we deduct Emergency Purchases and Customer Orders, which are parts we did not have in stock and had to acquire for the customers. The resulting value is then divided by the total pieces sold to determine what percentage came from parts we should have had on hand. The objective is to provide at least 85% of all piece demand from on-hand stock.
This is a term used to describe that portion of the Investment that is no longer selling regularly and needs to be removed. It is usually measured in terms of Months No Sale or Months No Receipt. There are many different opinions on what constitutes the point at which a part becomes obsolete, and the DMS systems are not always accurate in their measurement, since they only measure one criteria or the other, not both. At M5 our standards are set with the following:
- Technical Obsolescence is parts that have been on hand for more than 3 months and have not had a completed sale in 9 to 12 months. These parts have a 15% probability of sale at 9MNS and less than 1% by the time they reach 12MNS. Unless they are protected by a manufacturer program such as RIM or ARO, the process of disposal should be considered at this time.
- Absolute Obsolescence is parts that have been on hand for more than 3 months and have not had a sale in more than 12 months. The probability of sale here is nil and these parts should be disposed of as soon as possible. Unlike used vehicles, you cant simply wholesale the stale stock and move on. The use of Brokerages and Internet are effective, and similar to taking vehicles to auction, youre better off getting what you can for the dead stock and buying something you can sell now. We advise reserving funds to allow for this, since Obsolescence is inevitable in every store, no matter how well the Investment is managed.
Written by Jim Richter
This is Part 1 in a two-part article, Continued next week in Part 2!