July 2021: "The Cost Of NOT Reporting Lost Sales"

Lost Sales Reporting is not a new topic that we have featured in the past here at ACG "Smart Parts". Although, in my opinion, it should be the number one topic and priority of any Parts Manager as the primary focus of any Parts Manager is stocking the "Right Parts At The Right Time".

First and foremost, the only way that parts become Normal Stocking Parts is by recording parts demand. There are only two ways that demands are recorded and that is "Sales" and "Lost Sales". Sales will always happen eventually, but Lost Sales is an "elective" practice, or process.

If we choose not to record Lost Sales to industry guidelines of 5% - 10% of total sales at cost, we lose those recorded demands that can impact having the right parts at the right time and additional profits. After all, and just like in the Sales Department, it's much easier to sell vehicles we stock on the lot versus those vehicles we do not stock.

So, before we get into the cost and lost gross profits for lack of Lost Sales Reporting, we have to look at the definition of what qualifies as a Lost Sale. The right definition is also one of the reasons for lack of reporting in the first place. If you would ask ten different people what their definition of a Lost Sale is, you would most likely get ten different definitions.

In my opinion, the definition of a Lost Sales is an easy one as it all boils down to recording "Potential Missed Opportunities" as "demand reporting versus outcome" can truly make a difference. In other words, if there is an inquiry on any part, there should be an expected outcome. 

First of all, if there is a part inquiry, there must have been a vehicle out there that needed the part, whether the part is sold from stock, special ordered or located. If none of the previously mentioned happens, or the customer declines, it is a Lost Sale. 

Even if a Lost Sale is posted on a part that is not a Normal Stocking Part and the customer declines initially, but eventually does special order the part with a previous Lost Sale recorded, the "double demand" of a Lost Sale and eventual sale does not cause an issue.

In those occasions when "double demand” posting of a single part, it just "“ensures”" that the demand was posted, and Parts Phase-In occurs after demand in months criteria has been met. Total demand is affected but is controlled by the Parts Manager as parts do not just jump on the shelf.

It’s much easier to control those parts that do phase in to be considered Normal Stocking Parts as we can’t manage what we can’t see. After all, it’s the parts that we don’t see on the phase in report that could be missed and become Normal Stocking, Active Parts. 

So, What Are The Costs And Lost Gross Profits From NOT Posting Lost Sales?

Let’s get started…

First and foremost, the two major contributors for getting an idea of what we are missing out on from not reporting enough Lost Sales are parts “First Time Off Shelf Fill Rates” and “Time”. In other words, what percentage of the time do we have the "right part at the right time" and how much time are we losing.

Time is money as we all know and the added cost for not having the right part at the right time affects our Service Productivity and adds Acquisition & Holding Costs in the Parts Department. We don’t need a calculator to figure that there are added costs and lost gross profits as a result.

To get started, we will have to use some basic data to come up with approximate costs and lost gross profits. This basic data will include the typical, average dealership with current averages compared to industry guidelines and we will “do the math” to come up with the costs and lost gross profits.

Also used in this exercise is compiled dealership parts data from ACG “Smart Parts” over the past 10 years in approximately 100 dealerships throughout the United States and Canada. Data acquired by ACG “Smart Parts” listed below is prior to training and implementation.

Data also listed by ACG “Smart Parts” are approximations. Results after training, implementation and follow up resulted in at or above industry guidelines in all key areas listed below with Lost Sales Reporting at or above 10% of total cost of sales.

·       Average Parts Sales Per Month: $160,000.00

·       Average Parts Cost of Sales Per Month: $100,000.00 (37.5% GP Retention)

·       Average Number of Technicians: 10

·       Average Service Productivity: 100%

·       Average Customer Pay Effective Labor Rate: $100.00

·       Average Service Labor Gross Profit Percentage: 100%

·       Average Repair Order Count Per Month: 1200

·       Average Parts to Labor Ratio: 90% (Guide: 100%)

·       Average Customer Pay Parts Gross Profit Percentage: 40%

·       Average Service Labor Gross Percentage: 70%

·       Average ACG “Smart Parts” Data First Time Off Shelf Fill Rate: 40% (Guide: 75% - 85%)

·       Average ACG “Smart Parts” Data On Total Parts Purchases: $75.000.00 to Maintain a Industry Guideline of 45 Days Supply

·       Average ACG “Smart Parts” Data Stock Order Performance: 40% (Guide: 75% - 85%)

·       Average Lost Sales Reporting: 1.2% of Total Cost of Sales (Guide: 5% - 10%)

All the data compiled by ACG “Smart Parts” also have one thing in common, and that is a lesser than desired reporting of Lost Sales of 1.2%. As a matter of fact, many of these stores did not report any Lost Sales and are included in the above average.

The results of this lack of reporting and the “trickle down” affect comes into play on all the “Lower Than Guide” Percentages listed above in the ACG “Smart Parts” data categories. All can be traced back to little or no Lost Sales Reporting.

The lack of demands that could have been reported by Lost Sales posting is definitely evident as fewer parts actually “phase-in” to even get in front of the Parts Managers eyes to make the right decisions on what parts to accept on phase-in as Normal Stocking Parts.

Now, let’s do the math and the results of the “trickle down” affect of the lack of Lost Sales Reporting, keeping in mind that time is a big factor to added costs and lost gross profit as time is a “perishable” inventory, especially in the Service.

Service Productivity:

If we use the data provided above and if First Time Off Shelf Fill Rates are at 40% versus the guide of 75% - 85%, and utilizing the data, the Service Department would have a net loss of a minimum of 15% in productivity due to low First Time Off Shelf Fill Rates from chasing and ordering parts.

Part of the reason for the First Time Off Shelf Fill Rates at a below average of 40% in these dealerships used in this study is manufacturers that offer a Vendor Managed Inventory, (V.M.I.). Most manufacturers that offer a V.M.I. only cover approximately 48% - 52% of their total parts numbers.

Much of the 48% - 52% are parts considered to be "A" and "B" ranked parts which are considered to be "fast moving" parts. But what about all those "C" and "D" ranked parts that may sell anywhere from 12 - 36 times annually? Those parts tend to be missed or not included as V.M.I. qualified parts.

These parts missed or excluded from V.M.I. qualified parts are also the "meaty" type parts. Parts such as gaskets, hoses, switches, modules, head bolts, lifters, fuel system parts, etc. These are also usually the parts that carry a higher gross profit margin as they are usually "captive parts".

If the Parts Manager solely relies on utilizing the Manufacturer's V.M.I., all those other parts not qualified are not usually stocked. The only way to pick up those "meaty" parts is to utilize the Dealer Management System with the proper set ups.

That being said, if the Parts Manager is relying solely on the Manufacturer's V.M.I., they can only achieve a First Time Off Shelf Fill Rate of approximately 50% if the V.M.I. is maximized. It seems the overall goal becomes being compliant, or "obedient" to the manufacturer just for the sake of "protecting" the inventory.

We end up just holding parts to eventually return while missing out on opportunities. We should be buying parts to "sell" and not to just protect and hold for 12 months or more. Achieving "First Time Off Shelf Fill Rates" to industry guidelines can only be achieved by maximizing both the Manufacturers V.M.I. and our own D.M.S. with the right set ups.

So, what does this all add up to?...

A loss of an average of 7.3 Billed Hours would be lost combined with 10 technicians due to “down time” and overall Service “Cycle Times”. The Lost Productivity adds up to at least 45 minutes per day, per tech. I have actually had many Service Managers say that time goes much higher than the 45 minutes stated.

Net Results: A loss of approximately $800.00 in Parts & Service Gross Per Day, $17,000.00 Per Month and over $200,000.00 annually.

Are we awake yet?...

Parts Discounts & Allowances:

Once again, utilizing the data provided above, if the Stock Order Performance Guideline is 75% - 85% and the average data collected by ACG “Smart Parts” indicates that the average dealer, prior to training and implementation was at 40%, there is a deficiency of at least 35%.

This deficiency adds up as well for those "unrealized" discounts, allowances and return reserve that is supposed to be used for reducing obsolescence, but unfortunately, those return reserves get used up for returning Special Order Parts. 

And with the average manufacturers’ parts discounts being at 3.5% on Stock Order Purchases and another 3.5% for Return Reserve, the average parts gross loss can be staggering. That’s not even counting the additional cost of Parts Special Orders and Handling.

Net Results from Lost Gross on Stock Order Performance: $2,450 Per Month, $29,400.00 Annually.

Special Orders – Acquisition & Holding Costs:

Utilizing the above data once again, if we are Special Ordering Parts 60% of the time, the Acquisition & Holding Costs on those additional Special Orders can add up rather quickly. On top of the lost time and gross profit in the Service Department from lost “Cycle Time”, the problem just gets worse.

Let alone that many of these Special Orders don’t get billed out and returned, they are actually in our inventory with NO Demands posted as the sale didn’t happen and the Lost Sale wasn’t recorded as we “assumed” that the part would be installed and billed. As an added note, approximately 10% or more of all Special Orders are scrapped or returned to the manufacturer.

Lastly, many manufacturers charge a handling fee for all Special Order Parts Returns and if our Return Reserves are low due to low Stock Order Performance, the cost is on the dealer, no matter which department pays for it.

Net “Cost” Result from Special Orders Above Guide:  $2,625.00 Per Month, $31,500.00 Annually.

Obsolescence Accrual:

We all know about this one, but just how much is it costing us and how much gross are we losing for carrying too much obsolescence? We also know that all parts will eventually become obsolete, but the big question is how much MORE obsolescence are we accumulating from the lack of Lost Sales Reporting?

We do know one thing though and that is that the more we Special Order Parts, the more the obsolescence grows. So, I guess my question is…Why do we want to add to the frustration, cost and lost gross profit from Special Orders?

There of course is a cost from all obsolescence, whether by natural causes, or if we created the mess in the first place. That cost is also represented in the Inventory Acquisition & Holding cost calculation which is 25% - 30% of the total inventory cost, whether Active or Obsolete.

Net Cost of Obsolescence with Data Provided: Minimum of $25,000 Annually, Obsolescence Only

Overall, we just focused on just these four areas, but the cost of not reporting Lost Sales to industry guidelines or better, reveals that the impact on gross profits and costs are very evident. I know that there are many other factors that we could add into the equation over and above Acquisition & Holding Costs.

Costs such as mistakes in ordering, pay plans including commissions, other gross retention issues, staffing, etc. can also be added into the mix, but those are all speculations, which in my opinion do not really hold a true dollar value when it comes down to looking at the true expense and lost gross profit from not reporting Lost Sales to industry guidelines.

All the above information does have a direct connection to Lost Sales that ultimately affect the dealer’s investment and gross profit opportunities, including Parts Gross and True Turns. Return on Investment is our primary function as Parts Managers along with being profitable.

Not only the Parts Department Profits are affected as we impact the profits of all dealership departments. Lost Sales Reporting is the only category that can impact all areas of the Parts Department including profitability, performance and ultimately, the Parts Inventory Investment.

The above exercise with the average dealership reveals that there are approximately $261,000.00 good reasons in dollars that we should consider, or perhaps “reconsider” on just how important Lost Sales Reporting is...Question is...

"How Important Is Lost Sales Reporting To You?"

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...

June 2021: Winding Down From Covid-19: "What Have We Learned?"

If I was to say that it hasn't been a challenge over these last 18 months during the Covid-19 Pandemic, I would be far from the truth. Even though we aren't through the woods just yet, we are definitely winding down and there has definitely been some great lessons that we all have learned.

In our own personal lives, we have weathered trials, tribulations and turmoil that hopefully, we never have to endure again. On the other hand, we have also weathered and survived, (hopefully) a very difficult time in our industry.

This is especially true for "Smart Parts" Managers as our everyday routines have been turned upside down as even the simplest of tasks such as keeping our shelves adequately stocked with Normal Stocking Parts has been a challenge.

We have had to "think on the fly" just to provide the level of service that our customers expect as well as keeping our dealership owners profitable while protecting and "turning" their second highest business asset.

Of course, the Parts Department isn't the only dealership department that has suffered as supply chains have been interrupted as well in the front end New and Used Vehicle Inventories. Even our Service Department sales and retention has been interrupted as the customer's overall buying power has been reduced during this pandemic.

The first two questions that has to be on everyone's mind is...when will this pandemic end and how will it affect our industry going forward? And probably the most important question should be...

"What Are We Going To DO Going Forward?"

The one thing that has been a constant throughout this pandemic after working with several dealerships, both in-store and remotely is that dealer owners are resilient and will do what it takes to not only "survive" these times...they are are actually "growing" in many ways during these times.

As for the Parts Department, we have adapted and made the necessary modifications and adjustments throughout the pandemic as life goes on as we continue to do the what we do, which is stock and sell parts no matter what the situation.

After the initial impact months of Covid-19, and in my opinion, we have actually grown and gotten busier in our industry. Some of our dealers have actually had record months during this pandemic as they met this crisis head on found ways to even grow during these times.

In this issue of ACG "Smart Parts", will look at five key areas that have significantly changed in our Parts Departments due to the Covid-19 Pandemic. Perhaps some of them will be changed for good and be the new "normal" going forward.

All this being said, and with our focus on how we manage our automotive dealerships going forward...it's time to ask the Million Dollar Question...

"What Have We Learned From Covid-19 And What Are We Doing Different Now?"

Here We Go!...

Number One: Health & Wellness

I think it goes without saying that this has to be our Number One area that has impacted all of us, whether at home, at work, traveling, going to the grocery store, or any other form of social contact. It has changed us all and perhaps for the rest of our lives.

The automotive dealership is no exception as dealerships in general are cleaner, more sanitized, safer and more accommodating for customers and employees. Health and Wellness, in my opinion, has always been taken for granted and this is one area that I see that will not change going forward.

We are all much more aware of our surroundings and perhaps even a little kinder to others as we respect everyone's "space" even though "social distancing" was and is a tough thing for all of us to adapt to, but we all did what we had to do and from this experience, we all learned valuable lessons going forward. 

Lastly, in my opinion, the biggest lesson that we learned and one good "takeaway" on this area is respect for others. Providing a clean and safe environment has gone to new heights and for good reason, even though I believe we are ready for choice on the mask thing.

Number Two: Expense Management

One thing for sure that Covid-19 has led to is dealer owners are now running "leaner" than ever before. Surviving this pandemic led to perhaps the biggest sales drop in the automotive dealership than ever before. Dealers had to do what they had to do to survive, even if it meant lowering employee counts.

Dealer managers in every department had to "slim down" their departments from an employee standpoint. Even if it meant more duties & responsibilities for those remaining on staff, including all the managers. Multi-tasking became the new normal as expense management came to the forefront with declining sales.

The re-structure of the dealers employee base, which is the highest expense category also led into more expense management in semi-fixed and fixed expense areas as well as dealers tightened their belts wherever necessary.

This is another category that I think will remain a focus going forward as dealers. For the most part, we started to see sales and profits rise as we pulled out of the initial crisis after five or six months. In many dealerships, the rise in sales and profits saw record net profits due to dealers lowering their expense categories along with the rise in demand from customers.

The net result is that dealers realized that they can actually "get more with less", and that's a good reason to continue with the same mind set going forward. Many dealer have actually told me that they should have done this years ago, but it took a pandemic for them to realize they could actually do more with less.

Number Three: Adapting To Change 

Since the Covid-19 Pandemic began, we started to see a major shift in the way we operated our Parts Departments. All of a sudden, even keeping the simplest supply of the parts we need the most was not so easy anymore. Supply chains from the manufacturers and other vendors were interrupted as the "trickle down" affect began.

Even though we are still feeling the impacts, "Smart Parts" Managers had to "think on the fly" in order to keep up with demand. This also meant that we had to make changes in our Dealer Management Systems, (D.M.S.) to adapt to new "lead times" and even reach out to other suppliers to restock our shelves.

Even though we felt a drop in sales initially, slowly the demand raced back as the automotive industry in general is an "essential business". Overall, our transportation industry, though interrupted and modified, still needed to go on in every capacity.

Making the appropriate changes in our D.M.S. was essential and unfortunately, some of these necessary changes were not made resulting in a back log of backorders and delays. The overall results were staggering as service traffic suffered immensely, even though demand was beginning to rise as we all adapted to life during the pandemic.

For those "Smart Parts" Managers making the right decisions "on the fly" has resulted in record months in the Fixed Operations in many dealerships. With the combination of running leaner and meaner, as well as doing what it takes to provide the best customer service possible, no matter what the odds, has ironically resulted in some of the best increases ever.

Number Four: Increased Need For Training

In my opinion, there is one thing in common for those dealers that have actually increased their sales and gross profits over previous years prior to the pandemic is that they knew their staff had to work "harder and smarter".

Managers in every department not only had to adapt with less staff during the pandemic, they also had to think of better ways to grow. They knew they had to be smarter and have a better "quality" of employees instead of "quantity" of employees.

We have experienced this first hand here at ACG Smart Parts & Smart Service Training as the influx of dealers coming on board for training in the Fixed Operations has never been higher. Not only Fixed Ops Training, but the "right" training whether live or remote with expected results.

A big portion of this training had to also adapt to providing training remotely as travel was reduced during the early stages of Covid-19. Developing a program that would fit the dealers needs while abiding to Covid-19 Guidelines provided new opportunities in training for dealers going forward.

In the area of "Smart Parts" Training, the need for Parts Managers to know every aspect of even the basics of how managing parts goes beyond just how long we've been a Parts Manager. It requires knowing the basic concepts and the math of managing the parts inventory.

Having a Dealer Management System, (D.M.S.) and perhaps the Manufacturers Vendor Managed Inventory, (V.M.I.) to manage our parts inventory isn't enough. We have to understand how they operate in order to have "the right part the first time". Parts is a "moving target" and requires constant management as no system is designed to "set it and forget it".

Number Five: The Parts Department's "Elevated" New Role

In my opinion, our role as "Smart Parts" Managers has never been higher than it is right now. With up front New & Used Vehicle Sales diminishing from the impacts of the pandemic and vendor supply chain issues, Service Absorption is where dealers are turning even more attention to than ever before.

Even though, for the most part, Parts Departments are very profitable, they are actually the most profitable department by percentage in most dealerships today. Even though most dealers already know this, what many didn't realize is how the Parts Department impacts the overall dealership profitability, especially in the Service Department.

With all that Covid-19 brought us, one thing it definitely exposed was Service Department Productivity  being reduced due to lack of parts, or should I say the lack of the "right parts at the right time". In my opinion, this exposed the need for more parts training as previously mentioned.

We couldn't just rely on our experience as Parts Managers to "manage" parts as we always have, we had to go further and find out how the math really works in the Parts Department. We found out that we can't just rely on our computers, we have to know how the Set Ups & Controls really operate.

Unfortunately, in many, many dealerships today, the D.M.S. Set Ups and Controls are simply wrong and don't follow basic math. The best thing about math is that it doesn't lie and there are no opinions, whether in the D.M.S., or in the Manufacturers Vendor Managed Inventory, (V.M.I.).

Parts Managers need to know how to calculate Gross and True Turns, how to read our Inventory Management Reports in general and most importantly, how obsolescence happens in the first place as obsolescence has to be controlled "before" it happens.

Lastly, our dealers need us now more than ever before and they realize that we have to "elevate" our Parts Department's role in the Fixed Operations to a new level. Being profitable in the Parts Department is one thing, but this "elevated" new role goes much further.

In my opinion, Covid-19 exposed the need for our "elevated" role as dealers realized that it's not just important for their Parts Departments to be profitable, they found out how the Parts Department actually impacts the overall dealership profitability, especially in the Service Department.

Let's welcome this elevated role and take these lessons we have learned from the most recent past and take our Parts Department to new heights with even higher expectations than just profit. Let's help carry the load for our dealers and take what we have learned and used it.

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...

 

May 2021: Protecting The Parts Inventory Investment

In any business that includes product, goods, or "inventory", having good "Asset Management" practices is essential to the overall success of any business and that can't be more true than in the automotive dealership. 

In the case of the automotive dealership, these assets include the two biggest "assets", which are the Used Vehicle and Parts Inventories. In most dealerships, the Parts Department is the second highest asset, but then again, in some dealerships, the Parts Department is the highest asset in total stated value.

The real question is as in any inventory asset is...

Is this inventory asset really "liquid", meaning...is it really "worth" the dollars represented on the dealer financial? 

Even though we show specific amounts of these parts inventories on Page One of the Financial, could we really "exchange" that figure into real cash? One thing for sure though is that we have to insure that amount shown as well as all the other "acquisition and holding costs" that go along with that amount shown.

Whether we can turn that amount into cash or not, these acquisition and holding costs still apply. Industry acquisition and holding costs on any inventory, including in this case, the parts inventory, can be as high as 25%-30% of the total parts inventory investment each year.

When calculating these acquisition and holding costs on the average dealers parts inventory, these costs include, but not limited to are;

• Labor to manage the parts inventory
• Storage space costs & rent
• Insurance costs
• Inventory maintenance costs, i.e. physical inventory counts, cataloging, data processing, etc.
• Depreciation & Obsolescence
• Lost opportunities

That being said, "Protecting The Parts Inventory Investment" has to start with Asset Management, which leads us to breaking down just how we manage this asset. Just like our own personal assets that most of us have such as our homes, automobiles, boats, etc., they all have to be managed to protect the investment.

Believe it or not, we all have "acquisition and holding costs" with our personal assets and I'm quite sure we are all well aware of those costs. So why wouldn't we also consider these costs when managing the dealers second highest asset?

That being said and most importantly, we have to take "ownership" in managing the dealers assets just like we do with our own assets. All the practices in managing our own personal assets need to be applied to the dealers assets. This simple "mind set" will lead to better results in "Protecting The Parts Inventory Investment". 

"Now it's time to break it all down and find out how we are going to protect this valuable asset AND give our dealers the highest return on investment expected profit levels..."

Here We Go!...

Investment Security:

First and foremost in protecting the parts inventory investment is securing the investment. Even though securing the investment may sound simple and obvious, ask yourself these questions...

• Are all my entrances and exits to the Parts Department locked and secure at all times?
• Can anyone access the Parts Department other than approved personnel?
• Do technicians walk in and out of the Parts Department throughout the day?
• Are all outside parts storage units locked and secured?
• Are there any parts outside of the Parts Department, including dirty cores?
• Is your Parts Department a general storage area for filing, used office furniture, tire and wheel take offs from the Sales Department, etc.?
• Are parts delivery drivers coming and going in loading areas without management supervision?
• Are parts employees monitored when leaving the Parts Department daily?
• Do you have a camera monitoring system installed in and outside the Parts Department?
• Do I have parts reconciliation issues and variances at the end of each year?

These are just a few questions we all need to ask ourselves because I'm quite sure that we all follow these practices when protecting our own personal assets in our homes. Once again, why aren't we applying these same practices in our Parts Departments?

I think anyone of us can ask these above questions about protecting our own assets in our homes and I  would suspect that we all have these basic practices in place in order to protect our own personal assets. Protecting assets of any kind require basic principles and most important is accountability.

Housekeeping:

Here is another practice that most of us follow each day in our personal lives. Unfortunately, in many dealerships Parts Departments that I visit, basic housekeeping practices are not followed. Parts on the floor, shipping and receiving areas untidy, damaged inventory, paperwork scattered and unorganized, safety guidelines not followed, etc.

This is usually a sign that parts inventory accountability and reconciliation is also a problem. If we can't "account" for what we have on our shelves, then most likely there will be parts inventory variances between the Ledger Balance and Controlled Balance Inventories.

Poor housekeeping practices also leads to safety issues as these hazards of parts on the floor, entrances and exits partially or totally blocked can lead to injury and perhaps worse in case of fire or other unexpected occurrences. 

In my opinion, the problem with all this is not just a lack of accountability, but also just simple complacency, as each day just seems to repeat itself and we overlook these same things each day. I believe we should have the mindset that each day, we might have "company" over and we want our homes to be tidy and presentable.

Lastly and most important on this subject, if we have good housekeeping practices, it is much easier to insure accurate inventory counts when reconciling the two parts inventory amounts, both the Controlled Balance and the Ledger Balance in the Accounting Department. 

Obsolescence:

When it comes down to "Protecting The Inventory Investment", it's not a surprise that we have to include parts obsolescence in the overall equation. Quite simply, if we don't control our parts obsolescence, we are not protecting the dealers' initial parts investment.

Once parts become "obsolete", meaning those parts with no sales after twelve months, there is a 98% chance that those parts will never sell again. Thus resulting in essentially no return on the dealers investment and no real inventory protection on those obsolete parts because they have little or no value.

Even though all parts will eventually become obsolete, we have to control these amounts from getting down into that category in the first place. In order to control the obsolescence, we have to have the proper Dealer Management System, (D.M.S.) Set Ups & Controls.

These proper Set Ups & Controls include parts "Phase-In" and "Phase-Out" Parameters, Stocking Levels such as Best Reorder Points, (B.R.P.), Best Stocking Level, (B.S.L.) that follow the math based on current and annual piece sale ranges.

Plus, if we utilize a Vendor Managed Inventory, (V.M.I.) from the manufacturer, if offered, we have to especially be aware of not just accepting every part and the amount that they recommend because the V.M.I. group demand may not match the dealers D.M.S. demand.

By the way, on the topic of letting the manufacturer control my parts inventory with their Vendor Managed Inventory Set Ups & Guidelines, I'm quite sure that the the dealer does not let the manufacturer control their new vehicle inventory.

 So I guess my question is..."Why Do We Let Them Control Our Parts Inventory?"

If not properly managed, these recommended and perhaps excessive V.M.I. amounts alone can add to the dealers parts obsolescence, resulting in a lack of parts inventory investment protection. Parts obsolescence not only increases our inability to protect the inventory investment, it also adds to the dealers "acquisition and holding costs".

Increased obsolescence also lowers the dealers Gross & True Turns which affects not only the dealers Return On Investment as it also impacts the dealers parts profitability as well. The added "acquisition and holding costs" from obsolete inventory still carries the previously mentioned costs detailed earlier in this category.

Accountability & Training:

Even though this subtopic is our last one, it's most likely the first and foremost essential in "Protecting The Parts Inventory Investment". Unfortunately in many dealerships today, the Parts Manager is not trained properly in Standard Dealership Accounting Practices. 

In order to have accountability, we have to be first trained in how we "account" for this asset in our daily operations. Proper ordering, receipting and posting practices have to be followed and in the right order to meet reconciliation requirements between the Controlled and Ledger Balance Inventories .

Also, all the previous subtopics have to be followed and adhered to in order to have accountability and reconciliation. Our parts staff also has to be trained in these basic accounting practices if in the positions of shipping, receiving and posting parts inventory.

Cost adjustments both in receiving and billing parts can highly impact inventory amounts that can ultimately affect our ability to protect the parts inventory investment and parts profitability. Basic training on specific guidelines in all the above categories can not be overlooked or assumed.

Proper "paper flow" between the Parts Department and Accounting Office has to be controlled, reconciled and authorized by the Parts Manager each day without exception. Verifying vendor parts invoices with the proper amounts and to the proper accounts is where it all starts in order to insure the two inventories are reconciled to minimal or no variances. 

As we can all see, "Protecting The Parts Inventory Investment" goes far beyond just "standing guard" over the parts inventory, it requires that we all "take ownership" of the dealers investment, just like we would with our own personal assets.

Now that we see what it really takes, can we honestly answer this original question?....

"Am I Really "Protecting The Parts Inventory Investment", or Am I Really Just Standing Guard Over It?"

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...

  

April 2021: Drilling Down Parts Gross Profit Opportunities

As we move on to April 2021, ACG "Smart Parts" once again will devote our topic to "Drilling Down" yet another Key Performance Indicator, (K.P.I.) that directly affects our overall performance, duties & responsibilities in our role of Parts Manager.

Parts Gross Profit is obviously not to be taken lightly in these "Drill Down" categories as Sales & Gross is our primary reason for being in business in the first place. Even though the Parts Department is usually the most profitable department in the automotive dealership by percentage, many Parts Departments still fail to achieve dealership and industry expectations.

There are many reasons for not achieving dealer and industry expectations as markets and competition varies across the nation. Another factor in not achieving these expectations could also be due to where our parts profits come from in dollars even though we may not necessarily achieve the industry guidelines by percentage.

Even though maximizing profit may not be measured only by percentage as we really can't spend a percentage, but we can spend gross, I still believe that there is more out there. Many volume Parts Departments may also depend on the "back end" gross by achieving manufacturer discount and "cash back" levels to attain overall gross profit expectations.

Aside from those volume Parts Departments though...the average Parts Department has to combine both areas of Gross Profit Dollars and Gross Profit Retention Percentages. Achieving the ultimate goal in both categories requires it's own set of Guidelines, Duties & Responsibilities by the "Smart Parts" Manager. 

Let's start our "Drill Down" of the Parts Gross Profit Opportunities with our current industry guidelines on the Parts Gross Profit Retention Percentages in all five categories of Customer Pay, (Repair Orders & Counter), Warranty, Wholesale and Internal Pay Types.

Customer Pay Parts Sales - Repair Orders: 40% - 42%

Customer Pay Parts Sales - Counter Retail: 40% - 42%

Customer Pay Parts Sales - Counter Wholesale: 23%

Warranty Parts Sales - Repair Orders: 28% - 40%

Internal Parts Sales - Repair Orders & Counter: 40% - 42%

The first thing that I want to point out is the wide range of the Gross Profit Retention Percentage Guideline on Warranty Parts Gross Retention. For years, the Warranty Parts Gross Percentage Guideline for most manufacturers was Cost + 40%, which leaves a Net Gross Profit Percentage of 28%.

Now, with many states mandating that the manufacturers pay at least MSRP on Warranty Parts, or perhaps an "uplift" on Warranty Parts based on average Customer Pay Mark Ups to as high as 190%, or even higher. Thus, the industry guidelines vary in the Warranty Parts Gross Profit Retention Percentage.

Now that we have established the Parts Gross Profit Retention Percentage Guidelines, let's find out where we can maximize and most importantly, "manage" our Gross Profit Opportunities to expected levels...

The one thing that has always amazed me is that many Parts Managers, or even other department managers often find out at the end of the month that they did not achieve expected Gross Profit Levels. However, when the Dealer Financial becomes available, it's too late because we can't go back and fix it.

The time to manage and achieve expected gross profit levels is "before and during" the month and we have to have our own set of guidelines, checks & balances with "end goal" in mind. That being said, there are many ways to accomplish this as we list them individually as we move on.

Here We Go!

Parts Pricing Escalation Matrix

Even though utilizing a Parts Pricing Escalation Matrix is far from new, the surprising thing to me is that even though many, if not all Parts Managers utilize a matrix, they still fail to achieve expected Gross Profit Retention Percentages. Kind of makes me wonder..."What's The Point?"...

When you think about it, if we create a "cost plus", or even a "list plus" matrix and looking at the math, the matrix has to achieve expected gross profit levels. So how do we end up with less at the end of the month? In my opinion, if we are utilizing a matrix that does not achieve our goals, then we have the wrong matrix.

Or perhaps we do have the right matrix, but due to underlying factors, we haven't properly "managed" our Parts Escalation Matrix and our Overall Parts Gross Profit Opportunity in this category. What many may not know, there is a "science" to creating the right recipe for a Parts Escalation Matrix.

Having the right "recipe" actually starts with our "Escalation Price Levels", and not necessarily the percentage of mark up from cost or list, which I prefer cost always as cost is a constant and I can better manage my gross.

Managing the "Escalation Price Levels" is where it all begins with one simple fact and that is that 80% of our parts sales at cost are between the $10.00 - $40.00 cost ranges. That being said, there in lies are biggest Gross Profit Opportunity if we focus on more levels in that range. The actual percentage of mark up may vary from dealer to dealer and market areas.

Parts Discounting

Our biggest gross profit "killer" whether we utilize a matrix or not is Discounting & Overrides and this is where we have to "manage" our Pricing Policies. If our Parts Counter Staff is overriding our parts matrix or pricing strategies, we first have to ask ourselves why.

If our Parts Escalation Matrix doesn't make sense, or is over inflated, you can guaranty that people are overriding the matrix to what they seem makes sense. This leads to inconsistent pricing as each Counter Person thinks differently with their own opinion as to what that part should sell for.

If we are not running a DMS Exception Report each day to see if anyone is overriding our Pricing Policies & Strategies, then I guess we won't know if there was a problem until the end of the month when it's too late.

The Parts Escalation Matrix has to make sense where we can get a little more "all the time" instead of a lot more "some of the time". In other words, if I have a part that has a MSRP of $34.87, then I could definitely get $37.45 for that same part, as long as the part is a "captive" part and not a "competitive" part.

This would also result in fewer, if any overrides from my Parts Counter Staff and we would also achieve more consistent profit "all the time". Customer Perception and Customer Retention is what it's all about because if the customer "perceives" that they are paying more than they should, they will not buy and perhaps never come back.

"So!...Where should we apply the Parts Escalation Matrix and where should we not?" 

Weighted Average Pricing 

The answer to the above question is a simple one as we should only apply the Parts Escalation Matrix to "captive" parts only and all other competitive parts should be "weighted" to arrive at one sale price for that particular part. In other words, all oil, air and cabin filters should all be sold at one price with a "fixed average" back end gross.

The way we achieve an average overall Gross Profit Retention Percentage on all oil, air and cabin filters is by combining all the piece sales at cost from the top 10 filters, and combining the overall sales at cost and essentially combining them all down to one overall "average" individual cost on all of the top 10 filters in each category.

Once we have established an average cost for all the filters, we can now apply a "cost up" percentage to achieve an overall average, competitive gross profit percentage while selling all at the same retail price. The other benefit to "weighted parts averaging" is that it's much easier for the Service Advisors to present and increase overall closing ratios.

The "Sea Of Gross"

The other area that we have to manage daily is what I call "The Sea Of Gross" which is where all the approved journal entries in Accounting get charged back to gross. It is not uncommon to see Parts and Service Discounts and perhaps even some expenses charged back to the gross which lowers expected Gross Profit Retention Percentages.

We could be tracking along rather nicely through the month at expected gross profit levels, then all of a sudden..."BAM!"...once the Financial is out, the Gross Profit Retention Percentages just fell below what we have been tracking all month.

If we are going to have expected charge backs to gross, we should know what they are and plan accordingly by making the appropriate adjustments in our Parts Escalation Matrix and Overall Pricing Policies & Strategies. 

In my opinion, there shouldn't be anything charged back to gross in the first place because if we have an expense account for these charge backs, we can then "manage" the expense to expected guidelines. If we just charge it back to gross?....it just gets lost in "The Sea Of Gross"...

Discounts & Allowances/Inventory Adjustments

Both of these categories are deceiving, but they are a part of Drilling Down Our Parts Gross Profit Opportunities. First and foremost, these two categories are primarily "paper money" categories as they are mostly entries on our Accounting Ledger Balance and our Financial Statements.

In the category of Discounts & Allowances, these entries add to parts gross profit, even though we do not actually realize the "cash" itself until when we actually "sell" the part. So, if we have a part that has a cost of $10.00, but we received a discount of $2.00, that profit is not actually realized until we sell that part.

If we purchase parts solely to "pad" our Discounts & Allowances category, while inflating our parts inventory and adding to our obsolescence, we are only fooling ourselves as that money never gets realized, even though it shows it on paper. 

On the other hand, if our Parts Gross and True Turns are at industry guidelines, we are actually seeing that money turn with the additional profits realized. If our Gross and True Turns are not at industry guidelines, then we never actually realize that profit.

In the Inventory Adjustment category, we can actually realize an investment profit on our parts inventory if we achieve an "uplift" at the end of the year that is considered profit by reconciling the Controlled Parts Inventory on our DMS versus the Ledger Balance Inventory in Accounting.

Parts Training

It all comes down to training, and not only for our staff as Parts Managers need to be well versed and trained in Business Accounting, Asset Management and Sales. In order to achieve expected Gross Profit Retention Percentages, Overall Gross & Net Profit Levels, we have to manage it like it was our own business.

We have to have a trained staff in managing our Parts Gross Profit Opportunities as well as we can't watch everyone at all times, but we can hold them accountable to all Policies & Procedures in the Parts Department, especially when it comes down to Managing our Gross Profit Opportunities.

The "Bottom Line" is if we are not achieving our goals and expectations in our Parts Gross Profit Opportunities, then we don't have the right "recipe" for success. Each market is different for sure, but we can achieve our own goals and expectations if we ask ourselves this one final question...

"Are You Maximizing Your Gross Profit Opportunities?

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...

 

 

 

 

March 2021: The "Trickle Down" Affect Of Lost Sales And Emergency Purchases Reporting

If there ever were any two topics, when it comes down to managing the Parts Department that get"beat up" and "beat down" so much, in my opinion, they would have to be Lost Sales and Emergency Purchases Reporting and in that order for a reason.

Before we think about not reading through this whole article because we may think that these two topics aren't anything new...I would challenge anyone reading through to it's entirety to think again. Once again...you may think you "know it", but the real question is..."How Good Are You At It?"

This previous question can't be more true and evident when we evaluate just how well we report Lost Sales and Emergency Purchases and how important they really, really are! Before we get into definitions, we have to look at what they represent in the first place.

The first thing that we all have to realize is that there are only two reasons why we don't have the part in the first place and those two reasons are...

"Either I Never Stocked The Parts In The First Place, Or...I Ran Out!"

It's just that simple as either the part didn't have enough "demand" to qualify for parts phase-in, or...we ran out of a part that we normally stock for whatever reason. If we ran out, maybe we need to adjust our Stocking Levels, or perhaps, these "stock outs" could have been caused by manufacturer back order, or cross ship.

Either way, wouldn't we want to know how we ran out?...and where we should go the replenish this "stock out" situation? If we never stocked the part in the first place, should we not "want" to record that need, or demand?

Recording Lost Sales and Emergency Purchases accurately goes way beyond the obvious reasons that we all know. Do we actually know how much these two categories impact sales, gross profit, service productivity and customer retention?

Do we actually know how much these two categories actually impact the dealers second highest asset and parts inventory "true" turns? Do we know how important parts training is when it comes down to the proper definitions and accurate reporting in each of these categories?

I will go out on a limb to say that "accurate" Lost Sales and Emergency Purchases Reporting are the two most important categories that we, as Parts Managers have and need if we want to provide the highest customer service while turning the dealers investment at it's highest potential.

It's Time to Examine this "Trickle Down" Affect of Lost Sales and Emergency Purchases Reporting and the Impact They Have on all the Key Performance Indicators, (K.P.I.'s) in Managing the Parts Department.

Let's start with Lost Sales...

Even though Lost Sales and Emergency Purchases Reporting go hand in hand...Lost Sales Reporting is the first of the two that can have an impact many Key Performance Indicators, (K.P.I.'s) as parts enter our D.M.S. through the process of parts phase-in in order to attain Normal Stocking Status.

Parts phase-in is the process of recording "demands" into the D.M.S. and there are only two ways to record demand and they are Sales and Lost Sales. Sales will always happen, but if we are not reporting Lost Sales at the recommended guideline of 5%-10% of our total sales at cost, we are missing potential demands for parts phase-in.

It would be like not recording "Ups" in the Sales Department when customers arrive at the dealership to shop for New & Used Vehicles. If we don't record those "Ups", much like Lost Sales in Parts, we never  get a true feel of what our customer demand really is and what we should have on the lot, or on our shelves in the Parts Department.

As far as the definition of what a Lost Sale truly is, there are of course many opinions, but the bottom line is that if we are not meeting the guideline of 5%-10% of total sales at cost, then I guess we may just may have the wrong definition. 

There is no harm in reporting a Lost Sale that eventually becomes a sale, or "double posted" because the D.M.S. focuses primarily on "months with demand" no matter how many demands are recorded within a given month.  We can also control our "total demands" considered for parts phase-in to account for those times that parts are "double posted" in error, but either way, there is no damage done.

The bottom line is that no matter how many demands are posted, or double-posted, the part will not just jump on the shelf. All parts that qualify for part phase-in have to be reviewed by the Parts Manager for final approval. 

We can't manage what we can't see and I would rather see the part phase-in and suggested on a stock order as opposed to not seeing the part and missing potential sales for lack of Lost Sales Reporting below recommended guidelines.

So!...What does this all mean and how does the lack of Lost Sales Reporting "trickle down" and affect the all important Key Performance Indicators, or K.P.I.'s?

The lack of Reporting Lost Sales accurately and to the recommended guidelines goes far beyond what you may think. The "trickle down" affect for the lack of, or inaccurate Lost Sales Reporting can and does have a negative impact on the following Key Performance Areas...

• Parts Gross Profit Percentages
  
• Parts "First Time Off Shelf Fill Rates"
• Service Productivity
• Inventory True Turns
• Stock Order Performance
• Inventory Investment on Normal Stocking Parts

Even though not Reporting Lost Sales accurately and to recommended guidelines results in lower expectations in all of the above, you can almost guaranty there will be a "rise" in another area and that is parts obsolescence.

The result of not utilizing the D.M.S. as designed and reporting Lost Sales accurately and Emergency Purchases for that matter, obsolescence is guaranteed to grow as the D.M.S. cannot provide accurate information without accurate input and most important, we can't fix what we can't see, especially in Parts.

Let's move on to Emergency Purchases...

In my opinion, Emergency Purchases has got to me the most under-utilized, misinterpreted and mismanaged function of all the areas of Parts Management. The industry guideline for Emergency Purchases Reporting is 10% or less of total purchases.

This can be misleading because a lack of reporting at perhaps 1%-2% is well within guide of 10%, but can we honestly say that our Emergency Purchases for any given month was actually and truly 1%-2%? That would just tell me that Emergency Purchase Reporting was not accurate.

Common sense would tell us that 1%-2% just doesn't make sense as we must have had to chase some Normal Stocking Parts that we ran out of, or perhaps even a part we did not stock like a set of brake pads that we felt we should have had. 

But due to lack of Lost Sales Reporting and overall demands being posted, these brake pads didn't phase in to the inventory as a Normal Stocking Part. Another example may be that we ran out of a Normal Stocking Part and perhaps on Back Order from the Manufacturer.

No matter how we slice it, there are Emergency Purchases, whether we record them or not and the lack of reporting these Emergency Purchases "hand cuffs" the Parts Manager to fixing the problem of why we ran out in the first place by potentially adjusting Stocking Levels to prevent future "stock out" situations.

On the opposite side of Emergency Purchases Reporting is "over" reporting Emergency Purchases. First and foremost, we have to have the right definition of just what parts in this category actually qualify to even be receipted as an Emergency Purchase.

First of all, we should be only receipting, recording and reporting Emergency Purchase on "Normal Stocking Parts" that we ran out of and had to chase for a customer. Remember earlier, I mentioned that are only two reasons why we don't have the part.

Emergency Purchases receipting should not be utilized for any parts that we are not considering to stock in the first place such as aftermarket parts for other makes and models. Those parts should be receipted as "Other Purchases", or "In & Out" Purchases, Unusual Purchases, etc., depending on the D.M.S.

The simple reason why we should isolate the Emergency Purchase category for "stock out" situations on our Manufacturer's Normal Stocking Parts only is because if we do run out, we can print the report, research why we ran out and "fix it" by adjusting Stocking Levels, seasonal parts, etc.

We also have to be careful not to record Emergency Purchases on parts we had to chase from another vendor to "replenish stock" due to manufacturer back orders, limitations or factory shutdown. These are still stock orders, or supplemental stock orders as the only thing that changed was the resource where we purchased these parts to replenish stock.

So now let's look at the "trickle down" affect for the lack of, or inaccurate Emergency Purchases Receipting & Reporting and how it can have a negative impact on the following Key Performance Areas...

• Parts Gross Profit Percentages, (Higher Cost of Parts)
  
• Stocking Levels & Days Supply, (Stock Outs)
  
• Service Productivity & Cycle Times, (Longer Parts Wait Times)
  
• Inventory Reconciliation, (D.M.S. vs. Ledger Balance)
  
• Inventory Posting Variances, (Cost Variances)
  
• Stock Order Performance, (Lower)
  

This "one-two punch" of Lost Sales and Emergency Purchases Reporting are still on the front line in the matter of importance today as they were years and years ago, and perhaps even more so as today's parts "life cycle" is far lower today than years ago.

We have a much shorter life span of today's parts and we have to capitalize early on as parts are phasing out much quicker than ever before, especially after seven or eight months with no demand. We have to utilize our tools that our D.M.S. offers and use them wisely and correctly.

Let's be the "Smart Parts" Managers that we need to be by not taking Lost Sales and Emergency Purchases lightly because the bottom line is...the final "trickle down" will be profits...

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...

 

 

 

February 2021: The Five Steps To Taking "Ownership" Of The Parts Department

Welcome to ACG "Smart Parts" for February 2021, our second issue of the New Year. In this issue, we will be taking a different look at how we need manage our Parts Departments going forward and beyond the Covid-19 Pandemic. 

In my opinion, the Covid-19 Pandemic has taken many Parts Managers, and other dealership managers for that matter, out of the normal comfort zones and complacency. That being said, I believe it's time to put a different spin on how we manage our Parts Departments.

Imagine if you will that you are no longer the Parts Manager of the dealership and you are actually the owner of let's say "Bill's Auto Parts Store". You are no longer a part of the dealership chain of individual businesses within a business. You are no longer tied into the other departments and you are now a "stand alone" business.

Even though in this analogy you may not be affiliated with the vehicle manufacturers, even though you may be affiliated with other corporate vendors such as Napa, Autozone, O'Reilly's, etc., which we could consider as the vehicle manufacturer in this "Ownership" analogy. 

You no longer have to deal with Service Managers, Collision Center Managers, Office Managers, or even the owner anymore because "you are it". You run the show and you are responsible for operating a "stand alone" business entirely on your own.

Some things wouldn't change though as you will still have to get up each day, deal with the "ins & outs" with different customers, answering phone calls, computer systems and working with employees, ordering parts for stock and customers, only this time, they all work for you.

In my opinion, now that we have a consensus of where we are going with this "Ownership" analogy, there has to be some questions that perhaps we never considered in the past in our roles as Parts Manager and not necessarily "Ownership".

We would perhaps ask the initial question on what we may do differently, but more specifically, we would perhaps ask ourselves a few more questions such as...

"What Are The Risks Of Ownership...Both Assets And Liabilities?"

"Will I Be Able To Pay Stock Replenishment Bills From The Vendor?"

"Will I Be Able To Pay The Bills, Get A Paycheck This Week For Myself And My Employees?"

"Do I Have Too Many Employees, Or The Right Employees?"

"What About Parts That Are Going Obsolete, How Will I Protect Myself?"

These are just a few questions that I know that I would be asking myself and probably quite a few more. Just from these questions above, I believe "Smart Parts" Managers are now seeing a different light of where we are going with this analogy of taking "Ownership".

In our current roles as Parts Managers, we don't have to ask any of these questions because these responsibilities fall on the dealer owners and we don't have these risks or liabilities, but perhaps we should and here's why...

First of all, in most dealerships today, the Parts Inventory is the second highest dealer asset next to the Used Vehicle Inventory. That in itself is reason to take more "ownership" because, if not managed properly, it can put the dealer under water.

The Parts Manager and the Used Vehicle Manager are the two people that could put the dealer out of business if these assets are mismanaged. The "mind set" of taking ownership has just begun in our analogy.

Now, we need to ask ourselves the biggest and most important question of all...

"How Can We Take Ownership Of The Parts Department?"

Let's get started...

 Step One: "It's Your Money!"

First and foremost, it's your investment and as a business owner, you are in it for a reason and that reason is profitability. You are in it to make money and further your careers, family, life style and with that comes the risks of ownership.

The inventory investment has to provide this profit so you have to make sure you have the "right parts at the right time", (where have I heard that one before!). You also have to be able to afford it when it comes down to managing expenses, assets, personnel and the "bottom line".

Some other differences from being the Parts Manager to being the owner is how you buy, what you buy, your pricing strategies, and the biggest one in my opinion is how you service your customers. As a business owner, you are now in the front line with your customers.

As a Parts Manager, we are, for the most part, behind the scenes and primarily, not dealing directly with the customer as most customer interaction in most dealerships is done in the Service Department, Sales Department, or Collision Center.

The only exceptions would be Counter Wholesale and Retail where we do interact with customers directly and ironically, in these two areas, and in many Parts Departments, we seem to be more willing to give discounts, resulting in lower profitability.

In many Parts Departments today, the "over-the-counter" Retail Sales Gross Profit Margins are lower than the Customer Pay Repair Order Parts Retail Gross Profit Margins, which should be the same. If we were in our "Ownership" mode, would we be discounting those parts just because they are "face-to-face" customers?...Probably Not!

Step Two: Parts Purchasing Guidelines

Here's another big one when considering our "mind set" between being the Parts Manager opposed to being a business owner. As a Parts Manager, we may be dealing with many manufacturers' that require us to maintain certain compliance levels on parts purchases. As a business owner, we just may have a different "mind set" on what parts we actually purchase to stock on our shelves.

Even though Corporate Vendors such as Napa, AutoZone and O'Reilly's may also have Stocking Policies and perhaps a better Return Policy, we still have to pay that parts bill at the end of each month. whether as a Parts Manager, or a Business Owner.

So, I guess my question here is....

"If I'm paying the parts bill, whether as a Parts Manager, or a Business Owner...would I buy parts just to have them sit there, or would I be buying parts that are going to sell?"

It just seems that when we are in the role of Parts Manager, we never seem to get the big picture. If we aren't the ones actually paying for those parts, we tend to be complacent with whatever the manufacturer wants us to stock, even though it's so called "protected".

Maybe if we were the ones who are actually signing those checks to our parts vendors, or the manufacturer, we just may have a different take on what we stock, whether protected or not, that's cash flow going out.

That being said, we may also want to "trust" our own Dealer Management System, (D.M.S.), with the proper settings of course, more than we trust someone else with our money, in this case, the manufacturers, or corporate vendors.

With that in mind...this leads right into Step Three...

Step Three: Protecting The Investment

"Ownership" really takes the front stage in this category if you are an "owner" versus being a Parts Manager. The parts inventory investment now becomes the most critical asset and the performance of this asset even more critical. 

As a business owner, your assets and liabilities come to the forefront and the performance of this asset and the lesser the liability will determine the success of the business. No longer will these assets and no longer will these liabilities fall on the shoulders of the dealer. You are now in the forefront of all ramifications, whether positive or negative and no one but you will assume the risks.

That being said, and if you are responsible for the asset of the parts inventory, you need to protect this inventory asset. Now, we again may look at things differently from the Parts Manager side versus the "Ownership" side because now...it's your asset.

As a Parts Manager, do we look at protecting the dealers asset like we should?...are there open doors to the Parts Department?...can technicians walk in and out as they please?...are the back doors to shipping and receiving secured?...are parts going out the back door without accountability? 

Housekeeping is another issue when thinking about taking "Ownership" of the Parts Department. Once again, if you had your own store and you had "Ownership"?...would you tolerate what you see in your own Parts Department as a Parts Manager?

Here again...if you are a business owner, would you let these basic security issues go unattended? Of course we wouldn't, but it's amazing how many dealership Parts Departments that I have visited even recently in the last year or so that literally have no security when it comes down to protecting the investment.

Unfortunately, the reason for this lack of security and investment protection is simply because the Parts Manager is not directly liable, or held accountable. Sorry to say, but it's true and if you had "Ownership" of this parts inventory asset, this would never happen.

Another thing that should never happen in taking ownership as opposed to just being the Parts Manager is obsolescence. As a business owner, in my opinion, I would never tolerate parts obsolescence as the acquisition and holding costs, frozen assets and lost profits would threaten my existence in business.

Turning inventory, which leads to profitability is what it's all about when you have an inventory, whether parts, clothing, electronics or any other type of inventory. It's all about turning that inventory, no matter what the inventory in order to make a profit and lower your liabilities while keeping your assets liquid. 

So, as a Parts Manager, should we just keep on trusting the manufacturer with your inventory asset, or should we take more control of that parts inventory asset and making sure that our D.M.S. Set Ups & Controls are working the way they should?

After all...what did we do before we had all these Vendor Managed Inventories, (V.M.I.'s) offered by the manufacturer? Did we not create our own Stock Orders on our own D.M.S.? Did we not fall into the trap of letting the manufacturer control our Stock Orders?

More importantly...and if you had ownership and if you were a private business owner of your own parts business...would you ever let someone else control you inventory asset and cash flow? The answer to that one is..."I think not!"

Step Four: Financial Responsibility

We mentioned earlier about the initial parts inventory investment, turning the inventory, managing assets, expenses and the overall responsibility of "Ownership" and running a business, but if we are to be a business owner, we need to know the basics of managing a Financial Statement and Basic Accounting.

Unfortunately, many of today's Parts Managers lack basic Accounting and Financial Training, which I put the blame solely on the dealer. After all, and as I mentioned earlier, Parts Managers and Used Vehicle Managers are primarily the only managers that can put a dealer out of business.

These two managers control the two biggest assets in dealerships today and next to the Office Manager, or Comptroller, should be the two most trained managers in the area of basic Accounting and Asset Management without question.

If you look at how Parts Managers got their positions today in the first place, you will find that they ended up in their position because of tenure in the Parts Department, or perhaps they were the next in line, or even someone from another department that has been a loyal employee.

It's sad, but true, especially when you consider that this position as Parts Manager is one of the most critical positions in the dealership, even though many dealer owners may disagree because of overall dealer sales and profits...after all...Parts Is Just Parts!

In my opinion, the Parts Manager and Office Manager should work "hand-in-hand"  and have the same training in Dealer Accounting. They should be "cross-trained" in many areas such as Parts Sourcing Integration, Sales & Cost of Sales Accounting, Parts Inventory Reconciliation, Inventory Ledger and Controlled Parts Inventory Balances.

I'm quite sure that if we had "Ownership" of our own parts business, we would be well trained and up to speed on Basic Accounting, "Checks & Balances", Financial Statements, etc....which leads to my next question which is...

"Am I A Business Owner Or A Parts Manager?...Or, Should I Be Both?"

Step Five: Training

Even though it's our Number Five Step...I can't understate how important Parts Training is. Think about it...if you had "Ownership" of your own parts store, would you think that having the right staff with the right training was important?...of course!

We would definitely want to employ a staff that was properly trained, with the right parts knowledge and most importantly...retain them and pay them according to their skills and abilities. I would also want to "incentivize" them because...believe it or not...they are in sales!

How different is that concept?...As Parts Managers, how often do we think about incentivizing our parts staff? In most dealerships today parts employees are paid a salary, or hourly with little incentive, or bonus. Most are just "punching in & punching out", collecting a paycheck and working the clock.

If you had "Ownership" of  "Bill's Auto Parts Store", would you rather have your employees selling, or just putting their time in, punching in and punching out each day? In my opinion, this is something to consider when taking "Ownership" of the Parts Department.

Another point to consider in this area of training is...

"Are We Training To Grow, Or Are We Training For Show?"

Quite simply...if we are a business owner, we should always be training to "grow" the business, and not so much training someone "for show" just to fill the position. After all and once again...if I'm the Parts Manager and not the business owner...the dealer is paying for this position and not me. 

In my opinion, training is the key to successful "Ownership" as we can't do it alone and people are our biggest asset. More importantly, and as a business owner, we all need to "do our job" and hold each other accountable. 

We are in the retail business and there are no guarantees, subsidies, grants, or charities that will supplement our industry. We sink, or we swim and the strong once again will survive, even during and beyond a pandemic.

It's time to take "Ownership" in our roles as Parts Managers and manage the Parts Department as if it were our own and provide our dealers the support they need from us, especially in these times. After all, the strong will prevail and will grow stronger going forward.

  If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...

 

 

 

 

 

 

January 2021 - An ACG Smart Parts Perspective: Parts E-Commerce Going Forward

Welcome to 2021 and our 130th Edition of ACG "Smart Parts!"

First and foremost, ACG "Smart Parts" wishes all of our readers a very safe and prosperous New Year. As we "hopefully" wind down from the Covid-19 Pandemic, we look forward to new horizons along with new opportunities in 2021 and beyond.

Our first issue of the New Year will be focused on a topic that is not new, but as time goes on, E-Commerce Marketing is becoming the "new wave" going forward. Even though E-Commerce has been out there for approximately 30 years, it has grown even stronger in the last 10 years.

In my opinion, even though many of us have heard or have been well aware of this new phenomenon, many also don't really know enough about it or have a clear understanding of what it really is or means. Even though some are already active, or have participated, we still may not have a clear understanding.

In this issue of ACG "Smart Parts", we will go into the details of E-Commerce and how it really works. Also, we will look at the inception and history of E-Commerce, and perhaps most importantly, we will define and interpret it's true meaning.

We have gathered data from various industry analysts and "bloggers" to break down E-Commerce Marketing along with our own perspectives here at ACG "Smart Parts". With this combined research and perspective, we hope to provide our readers a better understanding of how it all works.

First and foremost, we will start out with the history of E-Commerce and then move onto the definition from industry analysts. We will look at the E-Commerce industry in general and how it relates to the parts industry.

Our definition and breakdown comes from semanticsscholar.org with their great article titled; "The History of E-Commerce", written by Yan Tian, from the University of Missouri and Concetta Stewart, from Temple University and reads as follows;

"E-Commerce or Electric Commerce, also known as E-Business, refers to the transaction of goods and services through electric communications. Although the general public has become familiar with E-Commerce only in the last decade or so, E-Commerce has actually been around for over 30 years"...

They go on to say...

"There are two basic types of E-Commerce which we may or may not be familiar with. The first is "business-to-business", often referred to as "B2B" and the second is "business-to-consumer", or referred to as "B2C".

Another definition comes from a recent blog from www.nChannel.com, which defines E-Commerce as follows;

"E-Commerce encompasses any commercial transaction that involves the transfer of information across the internet".

Now that we have a basic definition, it's time to move on to how E-Commerce plays a huge role in the automotive parts industry and more importantly, how does it affect the everyday Parts Manager in our automotive dealership today.

Are you ready "Smart Parts" Readers?...because "Here We Go!"

First and foremost, in order for us to put all this into perspective in our world, we have to know how E-Commerce has entered into our automotive parts market. Our first clue comes from an E-Commerce website that deals in automotive parts in general in the aftermarket.

The website is "websitemanager.com" and here are some of the "features and benefits" while shopping for auto parts at their website;

• Individual Year/Make/Model Lookup
• Mobile Friendly Design
• Guided Searches Which Allows Filtering & Keyword Searches
• Automatic Data Updates
• Affordable Pricing

If you think about it, the one thing that has kept us separate from the rest is "cataloging". Sure, price can be an issue when we talk about competition, but we have always had the "goods" because we would have to look the parts up in order to get the part number in the first place.

Now, cataloging has pretty much gone public and the everyday parts entrepreneur can go online with their computer or smart device to look up their own parts. This leaves the only a few items left, which is cost, availability and how quick can I get it.

With the exception given to those manufacturer specific, dealer only applications that only a true parts expert can handle, (which I know many and truly respect), the majority of parts applications can now be researched by pretty much anyone who has a computer or smart device.

And this, in my opinion is where E-Commerce comes into play in our automotive parts industry from a manufacturer and dealership standpoint. With the partnership of E-Commerce Platforms, along with the manufacturer, and dealership encryption rights, it has all become "full circle".

Automotive dealerships can now sign up with an E-Commerce company that can bring more opportunity to reach a much bigger market than ever before. With affordable E-Commerce pricing, automotive parts departments can expand their sales and gross profit opportunities.

Not only that, automotive dealerships can also utilize these E-Commerce companies to reduce and perhaps rid parts obsolescence entirely. But like anything else there comes that old proverbial phrase which is "risk versus reward".

Dealership Parts Call Centers are also expanding due to E-Commerce websites, or perhaps even with their own E-Commerce websites to increase their marketing platforms. Volume parts sales has definitely found a partner with the concept of E-Commerce.

Question: "What Are The Risks And Rewards From E-Commerce?"

To me, this is what it all boils down to...when we consider the investment, the cost of maintaining the investment, turning parts inventory, profit margins and overall profit...is E-Commerce the way to go? Let's look at some of these "advantages and disadvantages" of E-Commerce;

Once again, our research comes from www.nChannel.com and we appreciate their contribution to this month's article...

Let's start with some of the Advantages from E-Commerce Marketing...

• Fast "Go To Market Time"
• Low Start Up and Monthly Costs
• Shoppers Shop Online First Up to 87% Of The Time
• Ability To Target Specific Customers 

Disadvantages from E-Commerce Marketing...

• Lower Profit Margins
• Operating on "Rented Land", (i.e. operator rules, additional fees)
• Higher Competition
• Added inventory costs, (i.e. acquisition and holding costs)
  

The bottom line is that most shoppers are doing their shopping, searching, and comparing before they buy most products and services. The result is that in order to be "profitable" utilizing E-Commerce, volume has to be first and foremost, much like front end vehicle sales.

This means that we have to have a different perspective when comparing overall gross dollars versus retained gross percentages. After all, we can't spend a percentage, but we can spend gross dollars and that's the difference in my opinion with E-Commerce Marketing.

Speaking of price, I believe that there will be an "added" pricing level moving forward. In other words, when we look at our pricing policies, including the manufacturer, we always see a Suggested List Price, Trade Price, (Wholesale) and a Cost Price.

With E-Commerce, I think we can also add another price in that equation, which would be much like a "Distributor Price" which would lower gross percentages across the board. Now, we have to consider, perhaps new guidelines between List, Trade and Cost by adding another pricing level.

Current guidelines dictate that Retail Retained Gross Profit Margins at 40%-42%, 23% for Trade, or Wholesale with Cost as the constant. Now, with E-Commerce, higher competition, demand and higher volume, these guidelines that we have used for years may have a much lower retained gross percentage expectation moving forward.

With E-Commerce added into the mix, it wouldn't surprise me if the wholesale parts gross retention percentage guideline of 23% moving even lower if E-Commerce comes into play with the added customer reach and higher competition.

Or maybe, the wholesale parts gross retention percentage guideline stays at the 23% we are all familiar with and another parts gross retention percentage guideline is added at perhaps 15% for "volume parts" dealers that achieve specific sales numbers and levels that qualify and meet criteria in parts wholesale.

If this perspective becomes reality, this is where, in my opinion, those that do "dive into" E-Commerce for increased sales volume and the added "back end" money need to consider the added costs and risks that we haven't even mentioned yet.

The one key element that has to be considered is Inventory Gross and True Turns. If we are actively involved in Parts E-Commerce, the parts inventory must turn at industry guidelines or better. After all, purchase discounts posted into the "Discounts & Allowances" line on the dealer's financial are actually never realized until we sell the parts.

In other words, if I were to purchase a part that normally costs $10.00 for $8.00, resulting in a $2.00 discount, I never really receive that additional $2.00 profit, or discount until I sell that part. If that part doesn't sell, it would just result in a $10.00 increase to my parts inventory asset and a fictitious $2.00 profit of my financial.

If the parts inventory doesn't meet annual parts turn guidelines, acquisition and holding costs have to be considered into the "risk versus reward" category. Acquisition and holding costs are often overlooked as they don't appear on any financial page. Current industry acquisition and holding costs, (for any type of inventory) can exceed 25%-30% of the total inventory value annually.

On the other hand, this actual "back end" money can be realized as money back to the dealer when incorporated into the overall dealer's incentives offered by the manufacturers including front end sales and if all compliance levels have been met in the front and back end.

One last key element to an E-Commerce partnership, or developing your own E-Commerce website is "flow through" which includes Parts Call Centers, Warehousing and Distribution to meet customer demand. Availability, Delivery Efficiency and Customer Service will always lead over pricing, even though price plays a huge factor.

Amazon Prime is a great example of Customer Service and Availability as many of us experienced through the holidays and all the way through the Covid-19 Pandemic. They maintained all the key elements to a successful E-Commerce Business while always expanding their customer reach.

Here are some key questions, in my opinion that should be considered before "diving into", or venturing into E-Commerce Marketing....

• How much sales volume would have to be obtained to make it profitable?
• What would be the "True Cost" of Parts E-Commerce Marketing?
• What factors need to be considered when measuring this "True Cost"?
• How much is it costing to hold and maintain this added inventory?
  
• Is this E-Commerce profit "tangible", or just discounts that we don't see until these parts sell?
• Who are we competing with and what customers are we trying to reach?
  

In my opinion, volume will be the key in the successful E-Commerce Marketer as the old saying or term that relates to "risk versus reward" may now become "risk versus reach" because E-Commerce will require a much bigger and wider market base in order to benefit and achieve desired profit levels.

"Who's got it and when can I get it?" will be the future with price coming in third in this new race into this new decade. Having the right part at the right time has always been the key. Now, the new focus will perhaps be..."Who's got all the parts all of the time?"...

One thing for sure and in my opinion will never change, no matter what technology brings, or how the internet has expanded us globally, and that is "delivering the customer promise". Competition and expanding markets will always grow, and even if demand increases, the customer remains the same.

2021 is here "Smart Parts" Readers!....Let's Get Busy!