Idle inventory is wasted capital, which diminishes return on investment and ties up assets that can otherwise be used to boost profitability.
Let’s focus on methods to reduce waste and maintain a healthier parts inventory. Two ways to get a handle on aging inventory are instituting policies that minimize idle stocks and following timely procedures.
Big contributors to idle inventory are special-ordered parts that are not installed in the shop or picked up by the customer. Most dealerships have a policy that special-ordered parts must be prepaid and are not returnable.
Besides retail counter customers, there should also be policies for customer- pay repairs, wholesale customers and internal orders.
When a customer-pay vehicle is in the shop waiting for a part that has to be ordered, what are the chances of the customer changing his or her mind after the parts have been ordered?
First, a policy should be instituted that if a customer-pay vehicle leaves and a part is ordered, the part must be prepaid. What about customer pay-vehicles staying in the shop, waiting for special-order parts? It’s difficult to have every customer-pay job in the shop pay in advance.
Set a policy that the parts manager must review the ordering of every special part over a certain price. The manager can decide on whether the part needs to be prepaid.
Another big factor aiding and abetting idle inventory is ordering the wrong part. Causes include miscommunication or counter people making a catalog error.
Institute a policy that management has to be informed of a special-ordered part over a certain dollar amount. Management should double check with the customer or technician for any miscommunication issues.
Management should also double check the parts catalog, ensuring a vehicle identification number was used for catalog accuracy.
We’re back to the main culprit facilitating idle inventory. Warranty-related special orders usually are the biggest offender.
Obviously we can’t ask our customers to prepay special-order warranty parts. We can however institute processes and procedures to get the customer back in the shop to have them installed.
First, the customer should be notified by phone and mail when the parts arrive. The notification should have some urgency to get them back in the shop quickly.
When notified by phone, preferably by their service advisor who has a relationship with the customer, an appointment should be made. The advisor should note parts will only be held for a specific time.
The mailing should also have an urgent and prominent statement such as, “Your special-order parts will be returned to the factory 30 days after they have been received.”
Staying on top of special-order parts is essential for maintaining a clean inventory.
At least once a week, go through the special orders and address parts older than two weeks. It may be necessary to mail or phone the customer to say parts will be returned to the factory on a specific date if prior arrangements are not made.
If the customer exceeds the specific factory return date without making prior arrangements, tell the service advisor. If the factory allows it, return the parts. If not, put the part in inventory where there’s a chance of selling it.
Incentives and Penalties
Parts managers should receive an incentive for maintaining a low idle inventory and penalized for the opposite situation.
Create a reserve for idle inventory that’s taken out of the monthly profits. Use that reserve to scrap idle inventory. If there’s reserve left after the idle inventory is scraped, put the extra reserve back into profits as an incentive for maintaining a healthy inventory.
Parts counter people can also share the incentive. Let them know they will be rewarded for following policies, procedures and processes designed to minimize idle inventory.
Fixed-operations expert James Clausen is a veteran of the auto industry. He can be reached at email@example.com.