The average dealership has a substantial portion of its working capital invested in parts. Yet, some dealers show marginal interest in or understanding of parts department performance.
The “wealth effect” — created during economic prosperity when business and cash flows are brisk — can cloud even the best dealership management's judgment.
When things are good, you feel good. The downside is that telltale signs of both potential and imminent problems may go ignored or unnoticed.
This can be especially true of a fragile asset like the parts inventory. While considerable money can be made selling parts, a lot can be lost if the inventory is mismanaged, particularly if purchasing is not planned and obsolescence continues to grow.
It extends beyond the parts department. Timely repairs performed in the service department rely on an efficient parts department. Good service sells vehicles. Eventually, a sluggish or mismanaged parts inventory will hurt the entire dealership.
The task of maintaining a parts department that supports dealership objectives while providing a satisfactory return on investment does not begin and end with the parts manager.
Quite the contrary. It takes a collaborative and proactive effort on the part of the dealership owners, senior management and the parts manager.
The average dealership has a substantial portion of its working capital invested in parts. Yet, some dealer principals and senior managers show marginal interest in or understanding of parts department performance measurements.
Perhaps it's because less than 10% of the dealer principals and senior dealership management rise out of the parts and service ranks as opposed to those from the vehicle-sales end.
Still, the sheer scope of the average parts investment should command constant attention, regardless of managers' backgrounds. Profit is important, but profit erosion is almost always symptomatic of a sick inventory. It usually does not develop over night.
No other department in the dealership is granted such freedom for spending dealership money, as is the parts department. It makes sense to become a more involved in this major investment, beyond glancing at financial reports.
Totally deciphering the parts departments' computer-generated monthly management report is not senior management's job. That's the parts manager's job.
However, operational vigilance can easily be maintained if there is an understanding of key parts department measurements.
These are: gross inventory turns, true inventory turns, purchase performance, level of service, obsolescence levels.
Gross inventory turns
This is the ratio of goods' cost of sales in dollars to the average inventory value in dollars over a given period of time.
The drawback with gross inventory turnover as a measurement is its inability to truly represent inventory efficiency. Its calculation relies on all the parts department sales rather than those from stock.
Therefore, it is not an entirely accurate picture of inventory performance. Still, gross turnover is an important inventory indicator which analysts and banks use. So it has its place as an inventory measurement tool.
Dealerships on daily stock orders should have a gross inventory turn of at least six. Those on weekly stock orders should have a gross inventory turn of at least four.
True inventory turns
True turnover is the only valid indicator of how well the dealership's inventory investment meets customer demand.
Unlike gross inventory turns, sales originating from emergency purchases and the like are not used in the calculation of true inventory turns. Parts sold directly from stock provide the maximum in gross profit and net profit earning potential from low acquisition costs, earned discounts and any return reserve accrual.
Consequently, true turnover is an indicator of how profitable the dealership's investment in parts inventory actually is because it measures customer demands immediately filled from the dealership's parts department's shelved stock.
Dealerships utilizing daily stock orders should have a minimum true turn ratio of no less than five. Those dealerships with weekly stock orders should have a minimum true turn ratio of no less than four.
Some common factors to examine when the turn measurements fall below the minimum level are: high obsolescence or excess stock; poor purchasing habits; constricted part number coverage; and excessive stock of slow-moving parts.
The cost of goods sold in the parts department is relative to purchasing habits. Most importantly, those parts purchased via stock order (stock order performance), regardless of the vendor, result in optimum profit potential.
Yet, emergency purchases, which have higher acquisition costs and provide the least profit earning potential are necessary and do have their place.
Efficient, responsive and profitable inventory performance strikes a balance between purchases for stock replenishment and emergency types necessary to fill immediate customer needs.
The recommended guides for purchase performance (stock order performance) are: dealerships on a weekly stock order — 75%-85%; dealerships on a daily stock order program — 85%-95%.
If the performance in any situation is below the desired level the inventory system parameters and guides may be suspect or there may be improper manipulation of the computer-generated stock order.
If the performance is above the desired level, the computer data input could be suspect (garbage in; garbage out), and lost business could be evident due to a failure to meet immediate customer demands.
Level of service
Level of service measures how well your parts department is filling customer demands from stock.
For example, if your level of service is 90% that means whenever customers — internally or externally — request parts, the parts department can do that nine of 10 times.
This is a powerful measurement tool of inventory efficiency as long as the data used to calculate level of service — total demands, lost sales, and emergency and critical purchases — is correct and complete.
Moreover, there is a direct correlation between parts department level of service and service department performance. When the parts department level of service is high, the service department is in a better position to complete more repairs faster, thus, increasing labor hours billed while producing a higher level of customer satisfaction.
An approximate range for level of service to strive for is 85%-95%. Parts departments utilizing weekly stock orders tend to be on the lower side and those utilizing daily stock orders should be on the higher side.
Obsolescence, perhaps more than anything, can debilitate profit and performance associated with carrying inventory.
A part sitting around for more than 12 months has little chance of being sold. Even if it is sold, holding profits absorb all the profits.
Actually, examination of obsolescence should begin at six-months-no-sale so that action can be taken before 12-months-no-sale. When unsold parts hit six months, the probability of a sale drops 65%-70%.
For dealerships on a weekly stock order, parts 12 months and older should be no more than 10% of the total inventory. Those on a daily stock order should be at about half that.
The best way to control obsolescence is through efficient purchasing and attention to inventory control guides and setups and unsold special orders.
As for reducing obsolescence, full attention should be given to all manufacturer return programs. Only about 30% of the dealers take complete advantage of return programs offered by the manufacturers.
Gary Naples provides parts consulting and training to dealers and manufacturers. Based in Wilkes-Barre, PA, he's written two books on parts management. He's at 570-824-1528.