Parts in inventory are purchased with dealership working capital derived from a financial arrangement such as loans and lines of credit.
Although the cost of money may account for a significant portion of the holding expenses, it is only one aspect. You need people to manage the inventory and a method to keep track of it.
Inherent with having inventory are the other costs resulting from damage, theft and obsolescence. Here are some of the common expense categories and their approximate percent relative to the inventory value:
|Cost of interest on the capital investment||Current rate|
|Cost of storage||5% to 6%|
|Cost of the inventory control system||1.5% to 2%|
|Cost of the yearly physical inventory||1.5% to 2%|
|Cost of insurance and utilities||2% to 3%|
|Cost of personnel||3% to 10%|
|Cost of damage, shrinkage, loss||1% to 3%|
These can be considered visible or physical holding costs and exist whether a part in inventory sells or not.
It's critical that the inventory is managed to insure optimum profitability. Purchasing habits, inventory control practices, and programs to minimize obsolescence all play roles in achieving this.
It is similar to a dealership floor-plan rate. If cash weren't tied up in parts inventory, it would not just sit in an account. The most effective use of capital would be to pay down the floor plan, which mean interest savings for the dealership.
For most dealerships, the main holding expenses are the cost of capital, which is generally the rate at prime, people and inventory obsolescence.
Some dealerships can absorb different levels of inventory and still keep the holding expenses stable. Focus on carrying the right amount of parts inventory at the right time, having the parts availability to make the sale or make the repair, while minimizing obsolescence.
The fact that holding expenses are inherent to having a parts department should not discourage any effort to try and reduce them.
There is action that the senior management of the dealership should take, and there are things that the parts manager should do.
At the senior management level:
- Evaluate holding expenses at least annually to ensure that they are in line.
- Meet with the parts manager monthly to review the department's performance. Look at inventory turnover, return on the inventory investment, accumulation of special order parts, excess stock, non-stock parts, obsolescence levels and financial performance.
- Leverage purchasing power. For example, negotiate insurance costs, consolidate purchasing wherever possible in order to attain the lowest possible price.
- Encourage management training that helps department heads develop and employ effective techniques.
At the parts manager level:
- Maintain the correct staff level.
- Make sure all department personnel receive required training.
- Hold department meetings to discuss problems and ways to improve.
- Become as proficient as possible with the inventory-control system.
- Control and work to reduce unsold special order parts, non-stock parts and excess inventory.
- Control parts inventory obsolescence. This is the most volatile influence on holding expenses As obsolescence increases, the inventory holding expenses become more punitive. Any profits made from items that are selling will be lost to holding costs for items that are not selling.
- Review DMS guides and setups regularly. Optimize settings to reduce inventory depth, build inventory width, and reduce the likelihood of excess stock and obsolescence.
Gary Naples is a consultant to dealers and manufacturers. He's authored two books on parts management. He's at 570-824-1528/Gss83@aol.com.
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