Watch Your Purchases

Parts managers are constantly monitoring the sales side of their inventories. But there is another side equally important, and that's receipts.

Typically, the focus is on months-no-sale (MNS). This is what parts managers are told to watch. The opposite of months-no-sale is months-no-receipt, or the last time the part or parts were purchased.

As parts managers analyze the dealer parts inventory sales performance, they look at the sales movement of the inventory.

A general example of months-no-sales categories (this can vary depending on the Dealer Management System) is 0 to 3 MNS, 4 to 6 MNS, 7 to 12 MNS 12 + MNS (obsolescence).

As closely, parts managers should be looking at the months-no-receipt side of the inventory for the same movement categories. Monitoring the months-no-receipt can indicate whether the inventory has hidden excess tying up working capital that can otherwise be invested in other selling parts or in building inventory width, further maximizing the investment profitability.

At least one DMS provider has been prominently expressing months-no-receipt as well as months-no-sale on its month-end summary report. The receipt performance appears right after the sales performance. The problem is, since the focus is constantly on sales, parts managers tend to ignore or don't understand the information provided by analyzing the receipt categories relative to the sales categories.

Using the following inventory movement categories as a guide, here's an example of what I'm talking about:

The 0 to 3 movement category indicates that the parts department may have been running out of parts that are in constant demand because the receipts are considerably less than the sales.

On the other hand, the 4 to 6 category shows that receipts exceeded sales. Even more alarming is the 12+ (obsolescence) movement category. When looking just at the sales side for this category the percentage of obsolescence is about 7%. However, when the receipt side is taken into consideration, it increases to about 11.5%, considering the excess inventory purchased 12 plus months ago.

How can this happen? Here's an extreme example, but nevertheless emphasizes what may have occurred.

Let's say the parts manager purchased 200 sets of brake pads and sells two sets per month. The manager's purchase roughly translates into a two-year supply.

As long as the parts department is selling two sets of pads per month, the inventory value on the sales side will show up in the most profitable category 0 to 3 MNS.

However as the purchase ages, the remaining inventory value on the receipt side will age accordingly. If the purchase was made over a year ago then the receipt side will show the remaining balance of the purchase in the 12+ category.

When sales are greater than receipts for a given category, more inventory is sold than purchased. When sales are less than receipts, more inventory is purchased than sold.

Comparing the sales and receipts works towards getting them to within a few percent of each other, particularly in the most active inventory categories of 0 to 3 and 4 to 6. For the movement categories of 7 months and greater, it is best if receipts match sales or are a bit less than sales.

If you utilize a DMS without receipt information when month-end reports are run, contact your DMS provider to see how this information can be obtained.

Once the comparison of sales and receipts is made, run an excess stock or similar report to determine what parts have exceeded their best stocking level, and take appropriate action to reduce the quantities.

Also examine reorder points and days' supply settings to ensure they are supporting sales without contributing to excess stocking conditions. Finally, review purchasing processes and policies.

Gary Naples is a parts consultant to dealers and manufacturers. He's authored two books on parts management. He's at 570-824-1528/[email protected].