A dealership has a problem if his or her parts inventory turns too slowly or too quickly.
Many dealerships’ biggest asset is their parts inventory.
Not keeping a watchful eye on that can lead to poor inventory turns, aging stock, gluts and shortages that hurt return on investment.
Management can perform a few simple tracking procedures as a month-end ritual to ensure the parts department maximizes ROI. Let’s look at what can be done.
Turns are based on how many times a year the stock turns. To quickly figure the gross inventory turn, multiply by 12 your cost of sales for a given month. Then divide that annualized cost of sales by the month-end inventory value.
Here’s an example using a $100,000 cost of sales and an inventory value of $200,000 at the end of the month:
$100,000 times 12 months equals $1,200,000 divided by $200,000 equals six turns per year.
If the inventory turns too many times, it may indicate insufficient stocking to properly service customers’ vehicles. It could result in technicians waiting for special-order parts. That causes delays, hurts customer satisfaction and ties up valuable bay time.
A slow inventory turn indicates the inventory value is too high. Aging and idle inventory could contribute to the slow turn. The dealership-management system stocking levels could be set too high. Or an overzealous parts manager could be ordering too much. Either way, this is money that could be put to a better use.
Part of the monthly ritual to help protect your inventory is looking at parts that haven’t sold in a given period of time. The DMS month-end inventory report should give this figure broken down into separate time frames.
The time frames usually are seen on the month-end report are given as a total dollar figure as follows:
- Parts not sold over 12 months.
- Parts not sold nine to 11 months.
- Parts not sold six to eight months.
- Parts not sold over three to five months.
- Active parts sold up to two months.
The total of these categories should equal the total inventory value and each category should give a percentage of total inventory. Most dealerships pay particular attention to the parts not sold after 12 months.
Aging parts naturally have a negative impact on ROI and tie up capital. A consistent increase in aging usually indicates poor internal practices of the parts department.
Major factors usually associated with aging inventory include:
- Special order procedures and policies.
- Not taking full advantage of factory/vendor return programs.
- Poor inventory control practices.
- Looking up the wrong parts.
- Not using other means for selling aging parts (i.e. other dealers, eBay, parts brokers, parts locators).
Part of the monthly ritual for checking on the health of your parts inventory is to get a true inventory total value. But which value is more accurate, the physical or ledger?
Mistakes can be made on the books when recording inventory value transactions just as mistakes can be made recording perpetual inventory transactions by the parts department.
Waiting to take a physical inventory once a year to match the physical with the ledger value increases the chances of large inventory shortages or overages.
Reconciling the physical to the ledger at the end of each month substantially minimizes the chances of a yearly surprise and helps correct errors early on. Even if every transaction in a given month is 100% accurate, the physical and ledger likely will never completely match.
A simple worksheet to reconcile the physical to the ledger value, used at the end of each month, can help ensure accuracy and correct mistakes made during the month.
Nothing set in stone reveals what is a perfect inventory turn. As far as aging and idle inventory, ideally the amount would be zero for 12 months. The variance between physical and ledger value once it’s reconciled should be minimal.
Look for negative trends when tracking inventory. Find the root cause. Then create an action plan to protect your valuable inventory investment.
Fixed-operations expert James Clausen is a veteran of the auto industry. He can be reached at email@example.com.