Wednesday, March 11, 2020

March 2020: Parts True Turn: "Is Yours Accurate?"

One of the most inaccurate and often times understated "Business Ratios" on our Parts Monthly Summary, or Management Reports is Parts True Turn. Sad thing is that many dealers and parts managers don't actually look at this number stated on the report.

Even worse, many dealers and parts managers don't pay much attention to this Key Performance Indicator, (K.P.I.) unless the Parts True Turn number is brought up in conversation perhaps at a 20 Group Meeting, or when we see our parts obsolescence starting to rise.

In my opinion, there is nothing more important than the Parts True Turn number from an investment standpoint. I'm quite sure many dealers look at their new and used aged vehicle inventory, so why would the parts inventory be any different?

The answer to that question is really quite simple as many dealer owners or principle don't have the time, energy or even worse...the desire to look at their parts inventory the same way as their new and used vehicle inventories. 

If we do have that mindset, then we might as well just throw in the towel because that one K.P.I. of Parts True Turn going unnoticed, or cared about leads to a "trickle down" of mass proportions. As a matter of fact, the biggest effect is Missed and/or Lost Opportunities in the overall Fixed Operations Gross Profit.

Some may disagree with me on that one, but let's take a look at some of these "trickle down" effects that Parts True Turn, or should I say the "lack" of proper parts inventory True Turns of at least 5.0 times, (current industry guidelines) annually.

Each one of these Missed and/or Lost Opportunities in the overall Fixed Operations Gross Profit can be linked to less than desirable Parts True Turn Numbers. Which in fact, effects our Service Absorption percentages and our break even number of units on the front end.


Let's break it down with my list of Missed and/or Lost Opportunities...

  • Increased Parts Obsolescence
  • Lower Parts Return on Investment
  • Higher Acquisition and Holding Costs, (25% - 30% of Total Inventory Value)
  • Lost Parts Gross Profit due to Emergency Purchases
  • Lost Gross Profit from Lost Service Productivity and Cycle Times,
  • Low "First Time Off Shelf Fill Rates"
  • Lower Manufacturer Purchase Discounts and Accrual Amounts
  • Lower Customer Satisfaction and Retention Percentages
  • Lower Service Absorption in the Fixed Operations and Break Even Units

The above effects of less than desired Parts True Turn numbers are directly linked and I could probably find more as these are just a few. The biggest one to me in the above list is the Lost Service Productivity by not having the right parts on the shelf the first time.

Unlike the parts inventory, time is a perishable inventory and just fifteen minutes of lost time from a technician due to low Parts True Turn numbers can cost as much as $50.00 to $100.00 in lost parts and service sales for just one tech that we can never get back.


So, let's define and breakdown this term we call Parts True Turns and how parts are even classified and/or qualify in this category.


I mentioned earlier that there is a possibility that some dealers' Parts True Turn number may be understated, especially if you are a dealer that utilizes the manufacturers Vendor Managed Inventory, or (V.M.I.). This is due to many parts purchased on these programs are not entered into the D.M.S. as Normal Stocking Parts, which is the key ingredient to measuring Parts True Turn.

In order for a part to "qualify" in the Parts True Turn number is the part has to meet phase-in requirements. Many parts purchased from the Manufacturer's V.M.I. Program may meet "their" criteria for phase-in, but not necessarily the dealer's phase-in requirements. Thus, on these instances, the parts need to be manually phased-in, or given a status on Normal Stocking, or Active.

Let's now take a look at the actual definition, or "formula" for accurately measuring Parts True Turn. After reading the actual "formula", we will break it down in "layman's terms" as you will see from the actual definition, or "formula"....Here Goes!...


"Total Stock Order Receipts for the Last Twelve Months - Divided By - Sales at Cost for the Last Twelve Months - Divided By - Average Inventory Investment for the Last Twelve Months"

That's a lot to absorb if you are reading this for the first time! It all begins with Stock Order Receipts and the sale of parts that qualify for Normal Stocking Status, or Active Status to begin with. That's where it all starts as I can actually "manipulate", or even "miss" parts that are considered for Normal Stocking or Active Status.

In "layman's terms", True Turns could be calculated based on sales at cost of Normal Stocking or Active parts divided by total parts sales at cost annualized. Stock Order Receipts can be deceiving as many parts managers actually order Special Order Parts as part of their Stock Orders, thus giving us...again...inaccurate and higher True Turn numbers.

I can actually go back to the parts phase-in process as well which is where parts first qualify for Normal Stocking or Active Status. If my parts phase-in criteria is not set up properly, I could actually be "understating" or even "overstating" my Parts True Turn. We have to have the right number of total demands recorded, (Sales and Lost Sales) over the right period of time.

For example, if my phase-in criteria was set for just one or two "hits" or demands over a extended period of time, I could be seeing a higher True Turn number and would be "overstated". On the other hand, my parts phase-in criteria could be too restrictive by requiring many more "hits" or demands over a period of time, thus giving me a lower True Turn number.

In my opinion, in order to realize an accurate Parts True Turn number and to achieve expected or desired results on my monthly reports AND at an industry guideline of 5.0 or above, I would need to do the following...

  • Install the proper phase-in criteria in my D.M.S. of either 2 or 3 demands in 6 months or less
  • Properly record Lost Sales at 5% - 10% of total sales at cost
  • If utilizing the manufacturer's V.M.I., insure all parts purchased are receipted as Normal Stocking or Active Status
  • DO NOT order Special Order, or Non-Stock parts with less than 2 or 3 demands, (pending phase-in requirements) as part of a Normal Stock Order.
  • Special Orders and Non-Stock Parts need to be ordered separately and receipted separately from Normal Stock Orders
  • Eliminate & Control Obsolescence over twelve months to 0%
  • Control Stocking Levels of Normal Stocking or Active Parts to the proper Best Reorder Point, (BRP) and Best Stocking Levels, (BSL) to prevent overstocking Normal or Active Parts.

Bottom line is that we first have to have a deep interest and concern for our True Turn number, especially if you are the dealer, trying to achieve the proper Return On Investment from my parts inventory.

If I am a "Smart Parts" Manager, this IS our bottom line when looking at our Parts Inventory Business Ratios. As we now know...so much is riding on our Parts True Turn number at 5.0 times minimum annually...if we haven't done so already....it's time to "Turn It Up!"


 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...













Thursday, February 6, 2020

February 2020: Stocking Status: "Is Yours Accurate?"

As we continue on into this New Year, we will be focusing on many parts "Key Performance Indicators", (K.P.I.'s) and more importantly, we will be looking at how these K.P.I.'s are calculated and if they are really accurate.

In my opinion, one of the biggest and probably one of the most talked about Parts K.P.I.'s is "First Time Off Shelf Fill Rates". Next to Lost Sales, "First Time Off Shelf Fill Rates" is one category that I receive more questions about and how we measure it correctly.

Most Dealer Management Systems, (D.M.S.) contain information that "should" lead us to our "First Time Off Shelf Fill Rate" percentage, but unfortunately, even though the information may be available, it's most often times inaccurate.

As a matter of fact, many Dealer Management Systems, (D.M.S.) don't even calculate "First Time Off Shelf Fill Rates". One of the main reasons is that many Dealer Management Systems are not set up to calculate this K.P.I. with the proper information needed to calculate this percentage in the first place.

The first key element to calculating "First Time Off Shelf Fill Rates" is which parts "qualify" to be even considered in this K.P.I. This is where it gets tricky because how do we really know what parts were sold on the first visit?

The most common answer to that question should be the parts that are considered "Active", or "Normal Stocking Parts". So, the next question should be..."How does a part become Active or a Normal Stocking Part and what exactly is the criteria?"

In my opinion, when calculating "First Time Off Shelf Fill Rates", only those parts that we normally stock should be part of the equation. Even though, technically, I could have a "Non-Stock" part sold on the first visit such as a Special Order part that was never sold initially.

I could also have a Normal Stocking, or Active part that was not on the shelf on first visit because I ran out and had to make an Emergency Purchase. Thus, giving us inaccurate results when calculating "First Time Off Shelf Fill Rates".

This is where "Stocking Status" comes into play as every part number in our system has to have a classification, or "Stocking Status" whether we normally stock the part or not. So, if we are to even begin to calculate our "First Time Off Shelf Fill Rate", we have to have the separation between normal stock parts and non-stock parts.

To even get close to an accurate "First Time Off Shelf Fill Rate", we need to have some guidelines and the only guideline we have, in my opinion is "Normal Stocking or Active Parts". That being said, the only way these parts can meet that guideline is to meet the individual dealer's D.M.S. guidelines for parts Phase-In.

"So, why do I believe that the "Stocking Status" in many stores is inaccurate?"

As I just mentioned, in order for a part to achieve "Normal Stocking Status", or "Active Status", these parts must qualify and meet the D.M.S. Phase-In Criteria. If parts do not meet Phase-In Criteria, they are considered as "Non-Stock" Parts. Much like Special Order Parts, or maybe parts manually forced in by the Parts Manager.

Total demands meaning Sales or Lost Sales less than the Phase-In Criteria selected for potentially stocking parts. Normally, we would like to see some activity, (Sales and/or Lost Sales) of at least a few times over the course of selected months before considering parts for potential normal stocking status.

Now, here's where it gets a little dicey and it's also the reason why I believe that many, if not most Dealer Management Systems, (D.M.S.) "Stocking Status" is inaccurate. If it's true that parts need to meet the D.M.S. Phase-In Criteria in order for a part to meet "Normal Stocking", or "Active" status, then we have a problem.

This problem will also "trickle down" to properly calculating a true "First Time Off Shelf Fill Rate" if we are using the calculation of sales, (at cost) of "Normal Stocking" and "Active" parts. We must have an accurate "Stocking Status" in order to even come close to an accurate "First Time Off Shelf Fill Rate" K.P.I.

The first "inaccuracy" is if the D.M.S. Phase-In Criteria isn't set up properly as I have witnessed even most recently. In other words, I have seen D.M.S. Phase-In Criteria set for just one demand, (Sale or Lost Sale) in just ONE month over the course of twelve months in order to qualify for Parts Phase-In and "Normal or Active" Stocking Status.

I'm quite sure that just ordering a Special Order Part one time will not convince me to stock that part, but the D.M.S. only does what it's designed or programmed to do. So, if this was the case, every part would qualify for "Normal or Active" Status and all these sales at cost would be considered in the "First Time Off Shelf Fill Rate" K.P.I., which, of course would not be accurate.

The second "inaccuracy" on Stocking Status are the many, many parts that we purchase utilizing the manufacturers' Vendor Managed Inventory, (V.M.I.) such as GM's RIM Program, FCA's ARO Program, Parts Eye, etc. to manage and replenish their parts inventories.

Many, if not most of these manufacturer V.M.I.'s manage individual dealers' parts inventories based on dealer group criteria including Parts Phase-In and Overall Stocking Levels. In other words, if the Parts Phase-In Criteria is met on a group level, then it becomes a "qualified" V.M.I. part. 

Here in lies the problem....even though a part may meet the "group" criteria, they may recommend a particular dealer to stock the part just because it has met the "group" criteria, and not necessarily the individual dealer's Parts Phase-In Criteria. Once you "pull the trigger" on that part one time, maybe on a Special Order, now that part is recommended for normal Stocking Status.
 
I don't know about you, but before we even had the manufacturers' controlling our stock orders, I know I wouldn't stock any parts that didn't meet "my" D.M.S. Stocking Criteria, Stocking Status and Stocking Levels. As I have often said...I am not buying parts to hold and protect...I am buying parts to sell and meet proper gross and true turn numbers.

Even if the part hasn't met the individual dealer's recommended Phase-In Criteria, it has met the "group" criteria, these parts end up on the shelf, even though they may be "protected" by the manufacturer for return down the road if these parts don't sell.

What many Parts Managers don't know is if they purchase ANY part on the manufacturers' V.M.I. "that has not met" their own individual D.M.S. Phase-In Criteria, those parts will come into the parts inventory and D.M.S. as a "Non-Stock" part and will not be included in any "First Time Off Fill Rate" calculation.

This would mean that the Parts Manager must change the Stocking Status of these parts over to "Normal or Active" Stocking Status manually. I'm quite sure that we are buying these V.M.I. parts to replenish and/or stock and not ordered as Special Orders for certain customers.

I have visited many dealerships, even to this day where as much as 70% of their parts inventory was in a "Non-Stock" Status because many of their V.M.I. parts purchases were receipted as "Non-Stocked" because these V.M.I. purchases did not meet the dealer's D.M.S. Phase-In Criteria, which was also inaccurate in many of these dealerships.

I have personally assisted Parts Managers in changing the Stocking Status of literally thousands of part numbers from a "Non-Stock" Status back over to a "Normal or Active" Stocking Status because so many of their part numbers were purchased under the Manufacturer V.M.I. Program that did not meet their own D.M.S. Phase-In Criteria.

Calculating an accurate "First Time Off Shelf Fill Rate" can only be accomplished if the Stocking Status of all parts are accurate to begin with. Even though I believe that there is no 100% accurate "First Time Off Shelf Fill Rate" calculation because there will always be exceptions as I have mentioned above.

I DO believe though that we can be very close to 100% if the Stocking Status of all parts are accurate and correct, properly accounted for, including those parts purchased on the Manufacturer's V.M.I., (if offered). We also have to be "honest" and report "Emergency Purchases" on those parts that we normally stock, but run out of on occasion.

Emergency Purchases should only be posted on those parts we normally stock, but run out of. Now we can calculate an accurate "First Time Off Shelf Fill Rate" that is as close as it can be. Even though it is also true that we could have an Emergency Purchase and a Lost Sale on the same transaction, we can still benefit from posting both.

Only the Emergency Purchase "receipt" will separate the two and still allow us to record the Lost Sale for the added demand, while accounting for the "out of stock" situation that eventually needs to be "backed out" of our "First Time Off Shelf Fill Rate" calculation.

We must also ensure that we are only reporting Emergency Purchases on those "Normal or Active" parts supplied by our manufacturers' and not those parts purchased from outside, or aftermarket vendors as those parts purchases should be posted as "outside" or as "in and out" purchases.

If we do follow these principles and guidelines, we can pretty much use this following formula to "properly" calculate our "First Time Off Shelf Fill Rate"....

Total Sales, (at cost) of Normal or Active Parts Divided by Total Sales, (at cost), Minus Emergency Purchase Receipts

If we are going to measure any Parts K.P.I., we need to make sure we are not just "believing what we see" on our D.M.S. Monthly Management Reports, we need to make sure that we are reporting, receipting and recording all of the necessary information accurately and correctly in order to achieve desired results.

"Is Your Stocking Status Correct?"

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...







Monday, January 6, 2020

January 2020: "A New Decade...A New Beginning"

It's hard to believe that not only are we approaching a new year, we are approaching yet another new decade. It seems like it was only yesterday, we were celebrating "The New Millennium". Our auto industry has not only survived the "ups and downs" for over 100 years, it has continually evolved over time.

Unlike many ideas, industries, or "fads" over the years, our industry still continues to evolve and expand into one of the leading industries in the world. Along with this continued growth and evolution comes the need and excitement for more...each and every year. 

It requires us to continually keep up with the competition and the desire to do something different with new ideas and ways to stay one step ahead. It also requires us to have a solid base of people, standards, guidelines, processes and a reputation just to stay in business.

In last month's issue of ACG "Smart Parts" we took a look back on the year as we do each year in December to gather and research the facts of what, in this case, 2019, revealed in our industry. We looked at the results that affected the automotive dealership, including and especially our parts departments.

In this issue, we will combined what we learned in 2019 along with a personal perspective that will collectively give us a "hands on" view of what happened in 2019 along with the facts and research on our industry that we collected last month. 

Even though we shared the research and facts of what 2019 brought us in last month's issue, I believe what's even more important information to share is what we actually experienced in 2019. Experiences from the people that are actually out there, day in and day out, working in our industry.

In my opinion, these personal experiences have led me to believe that we need to focus and change our way of thinking going forward. The "playing field" has changed and we need to have a new game plan to be successful and that game plan involves people, not just market swings.

Throughout my travels in 2019, I have spoken with and shared many experiences with literally thousands of people in our automotive industry. These people include; manufacturers, industry analysts, consultants, aftermarket vendors, dealer principle, department managers and dealership employees at every level.

In my opinion, the most important people in our industry are our people. The people working behind the scenes that are often forgotten are the ones actually driving the "engine" to our business. Sales people, service advisors, service & body technicians, parts staff, office staff, BDC staff, receptionists, greeters and shuttle drivers are the ones making it all happen.

I guess my above view is important to me because I've worked in those same trenches for many years in fixed operations from the counter level all the way up to fixed operations management. With these combined "in the trenches" experiences and current position, I believe I am pretty qualified to share the following overall perspective....

Here We Go!

As we start to combine the past and a look into the future with the research and facts learned and my personal perspective, we will look at, in my opinion, the most important areas that will determine and impact our success going forward, especially in the fixed operations.

People:

"A New Decade...A New Beginning" can not start without people, especially those mentioned above that are working in the trenches. In my opinion, our employees are not only the most important asset we have, we also have to look at how important hiring, training, developing and keeping them is. 

The hiring, training, developing and the retaining of all our employees starts with the proper pay plan. If you don't know it already, people "work" their pay plans whether "working" the clock, if paid by the hour, or whatever commission pay plan their on.

The challenge is to develop pay plans that "work" for both the employee and the dealer. Incentives for hourly employees will just result in "punching in and punching out", while incentives, for all employees involved, whether directly or indirectly will drive better results. Even office staff could benefit from incentives in their roles.

I also believe that all managers and direct sales staff should include a hiring process to include Personality Profiles to get the right "fit" on their behavior patterns to their environments that meet the position. Even though conducting Personality Profile are not a reason or requirement for hiring employees, it's a great tool to match the individual to the right position.

Technicians...we all know that it's difficult to find and keep technicians, so why are we still sticking to the old ways of trying to find them? With our older, experienced generation of technicians slowly fading away, we should be using their experience and knowledge to train younger, newer technicians. 

Their brains are our biggest asset as we could develop newer pay plans for them to train new technicians. The end result could perhaps be more billable hours on a number of younger technicians to offset their training expense. Developing the right apprenticeship program could benefit all involved and could actually lengthen the career of the older more experienced technicians.

Parts staff should also have incentives built in their pay plans as opposed to the normal salary and/or hourly based pay plans. Believe it or not, parts counter staff are salespeople and they should have individual and department incentives based on dealership goals and expectations.

Overall, dealership employee wages and overall compensation continue to grow each year. With this continued increase with wages and compensation in all dealership positions, the importance of hiring the right person for the right position can't go without notice.  

Customers:

Some may agree or disagree, but in many ways, our customers have changed over the last several years. They are more informed with social media in the areas of product knowledge, pricing, selection, demands and most important...their time. Customer retention is nothing new, but what is most surprising to me is that no one really talks to the customer!

In many dealerships that I have witnessed, the separation between employees and customers has gotten even worse with the evolution of "Express Service". Less time with the customer and the attitude of "get it in and get it out" has resulted in the customer feeling the same way..."get me in and get me out!"

The sad thing about this is that customer "avoidance" has replaced customer "engagement" as the separation of employee and customer evolves. To me, there is nothing more important than the "customer and client" relationship.

The Sales Department is not exempt either as I see more and more vehicle "spot deliveries", on line vehicle purchases, satellite vehicle purchases, etc. I realize customers want convenience and in some cases avoid the sales experience altogether, but eventually, in my opinion, we are just saying "Hello" and "Good Bye" to our customers at the same time.

In many dealerships that I have witnessed, customers are "recognized", but not really "known". By this I mean that many dealership employees seem to acknowledge and recognize their customers, but not many really "know" their customers. In some cases, and most shocking, many dealership employees actually try to "avoid" their customers.

Even though I don't necessarily agree with performing a personality profile on all our employees, I do believe that every dealer employee should be exposed to some form of interactive training that will help them "get to know" their customers. Wow!...what a concept! After all, gaining customer trust by engaging them is the best "closing tool" there is.

The Manufacturers:

If there is a number one standout that never seems to never stop evolving and changing, in my opinion is the vehicle manufacturer. Focuses ranging from manufacturer incentives for loyalty, compliance and requirements have seem to replace basic support to the dealer. 

Even though some manufacturers requirements and incentives vary, selling vehicles and parts are what they are in business for. It just seems to be getting harder and harder to meet their guidelines as they add more requirements and compliance between all departments to push volume on their end. It's much tougher today to be a smaller dealer then it was years ago.

In my opinion and from what I have witnessed in many dealerships, especially in parts, maybe we should just forget about compliance, which I call "obedience" and go back to the way we used to do it years ago. You can never "out buy" your growing obsolescence. That math doesn't support the facts, especially if you are a smaller dealership.

In other words, why should I buy another $10,000.00 in parts I don't need just to gain $300.00 - $400.00 in discounts, accruals and return reserves resulting in overstocking parts that I won't sell just to return them down the road?

In many cases, you would be better off buying parts that you do need as recommended by your own D.M.S., thus avoiding overstocking parts and building obsolescence. The expense from acquisition and holding costs will far, far outweigh any incentive the manufacturer may offer. Do the math and you just may realize that incentives may actually be costing you.

 Recommendation: Don't Become The Manufacturer's Second Warehouse!

The Parts Department:

This past year was a very busy year for me in the area of parts training and for good reason. In my opinion, dealers are becoming more and more interested in their Parts Departments and the need for additional training for their Parts Managers.

Even though every Parts Manager that I have met in the past and especially this past year are extremely talented, intelligent and in the right position, there is definitely a training void. With that said, what's missing in most cases is what they don't know.

Many Parts Managers have not received the proper training on the basics, which I call "Parts 101". Parts Managers have seemed to go "under the radar" by dealers when it comes down to training compared to training with other dealer managers and departments.

The results of this "lack of training", I'm seeing parts inventories accruing more obsolescence and overstocked quantities than I have ever seen before. In fact, recent studies on a large number of dealers revealed that over 25% of dealers sampled have obsolescence in excess of 25% and another 25% in overstocked parts.

Obsolete meaning parts that have no sales over 12 months, and overstocked quantities meaning active parts with too many parts than needed to meet demand. In other words, I may have 10 sets of brake pads of one particular part number when only 4 sets are needed to meet proper stocking levels.

I'm also seeing more and more Parts Managers not utilizing their own Dealer Management System, (D.M.S.) to it's full potential. Especially if you are a dealer that is enrolled in the manufacturers' Vendor Managed Inventory, (V.M.I.). More and more Parts Managers are relying solely on their manufacturer's to determine what they should stock and how many.

Unfortunately, relying solely on the manufacturer to determine what to stock and at what stocking level results in too much of what we don't need and not enough of what we do need. Utilizing the in house D.M.S. Stocking Criteria, (if set up properly) in conjunction with the manufacturer's V.M.I. is essential.

This is why I've been so busy lately as many Parts Managers don't even know how to input the right criteria in their own system. Criteria such as Phase-In/Phase/Out Parameters, Low and High Days Supply, (Best Reorder Point & Best Stocking Level), Source Ranking by Piece Sales to even create an accurate stock order.

Once again, this is not the fault of the Parts Manager as the lack of proper training is where the problem lies. Every single Parts Manager that I have "shared the proper information" with, (I don't call it training), has benefited and on their way to a more balanced inventory and increased "First Time Off Shelf Fill Rates".

After All..."How Do We Know What We Don't Know?"


The Bottom Line:

Even though change is inevitable, we all have to adapt to the necessary changes that we listed above. We also have to make a profit to stay in business no matter what the changes bring. Thus, the importance of our first topic of "People".

If we decide to run our business as usual without recognizing our new generation of hires, our current employees wants and needs, the basics of customer interaction and creating relationships, then we just might as well hang it all up.

We also have to hire, pay, educate and train our managers to do what they were hired to do. Today's dealership manager has to have "ownership" in mind as if their individual department was their own business. This means that dealers need to provide the proper training and hold them accountable.

Sales, gross and expenses have to be managed to industry and dealership guidelines, measured and managed every day, month and year. Today's dealership manager can longer be just "the next one in line", or because they've been an employee for many years, or perhaps even "bought for a lower price".

In Perspective:

Our business has changed a lot over the years, but in some ways, it hasn't changed at all. The people I have met and worked with have not changed, they all want the same things, have similar values and work hard. The "lingo" as well hasn't changed over the years as you can always tell if someone works in our industry just by this unique language.

Lastly, Service Absorption is more important than ever going forward as the Fixed Operations role in overall dealership survival can and could be the difference of the name on the front of the building. Even the higher volume sales stores can't guaranty the future of sales. Customers can and always will determine our ultimate success in the future...

Happy New Year From ACG "Smart Parts"!!!

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...






























Tuesday, December 10, 2019

December 2019: "The Year In Review...Up Or Down?"

For many of us, we  seem to look forward to the end of the current year with high anticipation for the new year ahead. A chance to look back and to look ahead seems to bring back memories and at the same time...new visions of the year ahead.

This is truly the case here at ACG "Smart Parts" as we end each year with our December issue focused on looking back on the current year that was 2019 and then our January issue focused on the new year ahead and what we may expect in 2020.

This month's issue will be highlighted and focused on industry analysts' presenting their facts, figures and trends that shaped 2019 and the results we experienced throughout the year. In my opinion, the "ups and downs" and trends that we experienced in 2019 could possibly be signs to come in the new year ahead.

Our first resource comes from the U.S. Bureau of Economic Analysis, (www.bea.gov) as I wanted to first research and find out how we, as a country fare with other countries in the global market. With all the recent trade talks and negotiations, I was curious to see some trends and results that may indicate or show where we are compared to other countries.

On a global standpoint, 2019 had the United States as the "nominal" leader, (currency) in the world on Gross Domestic Product, (GDP). Even though the United States experienced a total GDP growth, through November, of 2.35%, compared to China at 6.14%, the "nominal" growth of over $21 Billion far exceeded any other country.

More impressive to me than the growth of $21 Billion, was total share of that "nominal" amount which was 24.8% of the total "nominal" growth currency or dollars in the whole world. Following the United States in this category were China, Japan, Germany and India coming in at number five.

The U.S Bureau of Economic Analysis also reported on Foreign Direct Investments in the United States as follows;

"Expenditures by foreign direct investors to acquire, establish, or expand on U.S. businesses totaled $296.4 Billion Dollars in 2018, up 8.7% over $272.8 Billion Dollars in 2017"... 

Further predictions into 2019 by years end are estimated to top $300 Billion Dollars by many industry analysts, which means that the trend continues to shift investments from overseas back into the Good Old USA....

So, What Does This All Mean Back Here In The Good Old USA?....

The answer to this question leads us to our second resource in this year end quest of our 2019 "Year In Review...Up Or Down?" Our second resource drills down and focuses on information, facts and trends that relate directly to our automotive parts industry in general, both dealership and aftermarket parts market areas.

According to IBISworld, auto parts revenues are "up" over $73 Billion Dollars in 2019, which represents a 0.3% increase over 2018 even though the number of parts retail businesses went "down" by approximately 1,400 in the U.S. while employment went "up" by approximately 140,000!!

Our first example of the "ups and downs" of what has happened this past year! Even though we see a drop in the number of businesses, we can actually see an overall increase in employment through this obvious consolidation, increased efficiency and expansion in overall business operations.

In addition, consumer confidence levels have reached all time highs over the past few years which means that the average consumer has more disposable income. Wages and earnings have also gone "up" in 2019 by .03%, which may also explain why consumer confidence levels continue to grow or remain at high levels.

Our last resource comes from Patrick Manzi, Senior Economist at the National Automotive Dealers Association, (NADA) with his NADA Data Mid-Year Report.

Even though this information and data is from his mid-year report, much of the information is "prorated" to year end trends and predictions until their final report for 2019 is released early next year.

There are currently 16,741 franchised automotive dealers across the country today that achieved combined Light Duty Vehicle Sales in excess of 8.41 Billion Units with sales that topped $518 Billion Dollars, which is "up" from $503 Billion in 2018.

Even though Light Duty New Vehicle Sales, (in units) went "down" and expected to drop at years end by 2%, the increase in sales dollars is directly attributed to the average selling price per new vehicle sold climbing to $36,402.00, which is "up" from the average of $35,249.00 per new unit sold in 2018 and $31,849.00 per new unit sold back in 2013, steadily climbing each your.

Light Duty Trucks once again led the way in sales with 70.3% of all Light Duty Vehicle Sales coming from truck sales. GM has taken over once again at number one with a 16.8% of the market share with Ford coming second at 14.3% of the market share. Toyota fell to number three with 13.7% and FCA, (Fiat/Chrysler) coming in fourth at 12.9%

Even though overall sales have and continue to go "down" by at least 2%, parts and service sales continue to rise and go "up" in 2019 as there were 162 Million Repairs Orders written, including body shop repair orders with total repair order sales over $62 Billion, "up" from $58.4 Billion in 2018.

This steady rise and climb in parts and service sales isn't just a fluke as parts and service sales have continued to rise each year dating back to 2013 when combined parts and service sales were at $42.3 Billion Dollars, which represents a 27.5% increase over the last six years, trending "up" each year. This trend upwards is expected to continue climbing in the years ahead.

Dealership jobs also increased as total dealership employment is "up" to over 1.1 Million Employees. Dealership jobs offered compensation significantly higher than other retail sectors as dealers continue to boast one of the highest average salaries of all industries.

Since 2010, parts and service sales in the average dealership have gone "up" an average of 5.4% per year on an annual basis. In addition to that, parts and service sales as a percentage of total dealership sales is "up" from 12.2% in 2018 to 12.8% in 2019.

Dealers net profits remained at 2.3% of total sales in 2019 as they were in 2018. Dealer net profits have steadily gone "down" since 2013 when dealers net profits were at 2.8% of total sales. Some of the reasons for the decline in net profits include higher wages for qualified employees and decreased profit margins.

Total parts and service sales per repair order is also "up" in 2019 to an average of $311.00 in customer pay and $343.00 in warranty parts and service sales per repair order. Once again, steady climbs each and every year since 2013 as customer pay mechanical and effective labor rates are also "up" to an average of $123.00 per flat rate hour.

Currently there are over 275,000 technicians employed in our automotive dealerships today, mechanical and body shop which brings the average per dealership to just over 16 service and/or body technicians per dealership.. This is definitely one category that we need to see go "up" each year as shop productivity is the "engine" that makes it all happen in the fixed operations.

Average parts inventories are "up" to $441,675.00 in the average automotive dealership, which could be a good thing or a bad thing pending average annual gross and true turns. If the average annual gross and true turns in the average automotive dealership is "down", this would represent a "not so good" thing.

Unfortunately, this information on annual gross and true turns was not available for this issue, but what I do know is that parts obsolescence has been on the "up" swing over the past several years. Dealer parts obsolescence along with overstock quantities have made it much tougher for dealers to achieve expected annual gross and true turns in many dealerships today.

Overall, I believe all the indications are obvious and pointing in the right direction after looking back on 2019. All the key indicators that would give us a peak into 2020 and to whether it will be an "up or down" year are quite evident. Personally?....I always prefer to be "up" beat and positive when looking forward.

Happy Holidays Everyone From ACG "Smart Parts!"

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...



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Wednesday, November 6, 2019

November 2019: Managing Parts Returns

It's hard to believe that after almost ten years of ACG "Smart Parts" issues, I haven't focused on one of the most important duties & responsibilities of a "Smart Parts" Manager and that would be Managing Parts Returns.

Even though Managing Parts Returns isn't anything new to us, I do believe that it has become much more important than it ever has before. One the main reasons that I believe that it is more important now than ever before is simply because parts obsolescence is growing at higher levels than ever before.

First and foremost, when we start talking about Managing Parts Returns, we have to understand that we had to "order" the parts first place, thus requiring the "return" of the parts in the end. This is why we have to start out the process of Managing Parts Returns with the root causes that lead to parts returns.

In order to manage parts returns, we must have "parts order" policies & procedures first that will limit and control the potential for parts returns. After all, the costs of having to return parts should be reason enough to want to limit and control the overall number of parts returns in the first place.

Managing Parts Returns "back in the day" was much simpler as parts in general had a much longer "life span" than parts do today. For example, the part  number for a set of front brake pads would fit several different vehicle models and for a longer period of time.

Now, we have several different brake pad numbers for the same year and make vehicle model, and for a much shorter period of time, thus reducing the "life span" of these parts in general. Therefore, we can't afford to keep these parts any longer than we have to and "phasing out" these parts much sooner then we ever did in the past.

Not an easy job anymore for sure, but whether we are talking about today or yesteryear, we still have to limit and control the number, amounts, and types of parts returns and it all starts with analyzing the "root causes" of how these parts end up as returns in the first place.

Let's start out by looking at the "types" of parts returns that today's "Smart Parts" Manager has to deal with and then we will look at some of the "root causes" for these returns in the first place. Keep in mind that Parts Returns are always going to be there, but if we can limit and control them, we are saving valuable gross dollars for the dealer, while protecting this valuable asset.

Common Types of Parts Returns: 

Daily Returns:  

These parts returns are usually those parts that we order "as needed", mostly from outside vendors for our Service and Collision Center Customers. Process also includes Standard Accounting Practices and a high degree of communication with the Office Manager to ensure proper sales, cost of sales accounting is maintained.

Weekly Returns:

Weekly parts returns can also include parts that may also include local outside vendors, but it may also be parts ordered more often to replenish "other inventories" other than prime inventory items filled by the manufacturer. Other types of returns may also include batteries, chemicals, tires, dirty core inventories, Collision Center Vendor returns, and perhaps even Special Order Parts with return requirements from the manufacturer.
 
Monthly & Annual Returns:

These are the parts returns that tend to cost the most as they tend to be controlled mostly by the manufacturer. They are also the parts returns that tend to go unnoticed with the least amount of control on how they got to the "return pile" in the first place.

Monthly and Annual Returns can also expose many weaknesses within the Parts Department such as; Improper Dealer Management System Set Ups & Controls, "Obedience", not "Compliance" to the manufacturers Vendor Management System's Guidelines, overbuying and overstocking of inventory,  and manual returns of Special Order Parts.

Bottom line is...if we are holding parts for returns, or have an excessive quantity and amount of these parts returns, we need to look at how they got there to begin with. It can also be an area that exposes how the dealers' obsolescence is revealing undesirable results. In order to "Stop The Bleeding" of obsolescence,  we have to stop how it gets there in the first place.

So!...Let's Look At Some Of The "Root Causes" For Parts That We Need To Return

In my opinion, if we really got down to the basics and wondered how we got to the point of having to return parts in the first place, we probably wouldn't have as many. Of course, we will always have to deal with this process of returning parts, but do we really need to have as much as we do now?

In order to limit and control these returns, let's first look at some of the reasons that we have them in the first place.... 
  • Mistakes in Ordering Parts, Whether by Parts Counter Staff, or Improper Information.
  • Parts Manager Training on Proper Dealer Management System Set Ups & Controls such as Phase-In/Phase Out Parameters, Stocking Criteria, (Best Reorder Points & Best Stocking Levels).
  • Parts "Over Ordering" above Best Stocking Levels to take advantage of Manufacturers' Promotions, or trying to avoid "Stock Out" situations.
  • No Parts Ordering Policy on who can order parts in the first place.
  • Lack of a Special Order Policy that doesn't require deposits or prepayment on Customer Pay Special Orders or presetting Service Appointments on all Special Orders.
  • Manufacturers' "Vendor Managed Inventories", (if applicable) setting Stocking Criteria that may meet the manufacturers' Stocking Criteria but not necessarily the dealer's Stocking Criteria.
  • Ineffective, or lack of use of the dealer's Dealer Management System, (DMS) to create in-house stock orders, thus relying solely on the manufacturer for stock replenishment.
  • Manual orders to replenish stocking inventories.
These are just a few areas that can impact the number and amount of parts returns that may be required. Keep in mind, that we haven't even started to talk about the costs and ramifications to the number and amount of these parts returns.

The costs of the number and amount of these parts returns can highly impact and add to parts inventory acquisition and holding costs which alone can amount to 25% - 30% of the total inventory value each year. On top of that, these "root causes" can "chew up" valuable accrual amounts earned through the manufacturer.

Other costs may include "dealer cash" from poor management of parts core returns, warranty parts held for approved return dates and discounts and allowances on parts purchases. Although, the biggest cost to the dealer is yet to be revealed with my next big question...

"Are We Buying Parts Just To Hold Them For Return Down The Road?"   

You heard the question right!...are we just buying parts that the manufacturer may recommend, or maybe that we order ourselves just to gain additional earned discounts & allowances? Only to hold them for a required period of time while it may be "protected" and send them back at no cost? Don't be fooled...there is a severe cost.

One of the biggest "untruths" of buying parts to earn additional discounts is that we really never realize the earned discounts until the parts sell. Even though it may show as 100% profit on the Dealer's Financial Statement...it is just "paper money", unless the the Parts Departments' Gross & True Inventory Turns are at or above industry guidelines of 8 Gross Turns and 5 True Turns respectively.

Which leads me to my next question...

"Are We Buying Parts Without Regard Because They May Will Be Protected By The Manufacturer Anyway?"

First of all, I would never buy parts to hold them for a period of time, just in case they may sell. Even though protected, there are acquisition and holding costs and valuable shelf space cost compared to parts that turn 5 - 8 times a year. Most important, my job as Parts Manager was to buy parts to "sell" and not to "hold" them.

Acquisition and Holding Costs Include, (but not limited to); 
  • Computers, Data Transmission, & Software Required to Access Inventory.
  • Facilities Access to Obtain Inventory.
  • Personnel to Facilitate and Acquire Inventory.
  • Required Office Supplies to Review, Edit and Record Inventory
  • Storage Space & Maintenance to Store Unsold Inventory
  • Insurance Costs of Inventory Value
  • Price of Damaged Inventory
  • Less Cash Available for Other Business Costs
  • Ordering and Shortage Costs
  • Rent or Equivalent to Maintain Inventory 
The process of "Managing Parts Returns" cannot be taken lightly, but as you can see, it can also be an indicator to a lot more than we may think. In my opinion, the worst thing we could do when it comes down to "Managing Parts Returns" is to add to the already existing procedure that we can't avoid.

Final Question....

"Are You Buying Parts Only To Return Them Down The Road?"

"I don't know about anyone else out there, but that just doesn't make logical sense to me..." 

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...

 



















Wednesday, October 9, 2019

October 2019: "Show Me How To Fix It!" - Part Five: First Time Off Shelf Fill Rates

Here we are in October and down to our last in our five parts series titled: "Show Me How To Fix It!" and in my opinion, THE most important Parts Key Performance Indicator, (KPI) which is "First Time" Off Shelf Fill Rates. Other than parts profitability, this one stands alone in determining just how well the parts inventory asset is performing.

Having the "Right Parts At The Right Time" is crucial not only for parts profitability, it is also crucial to supporting the Service Department's Overall Productivity, Customer Satisfaction and Overall Dealer Retention.

In many dealerships today, Parts Departments fail to meet expected "First Time" Off Shelf Fill Rates of 85% or higher. As a matter of fact, many fail to even achieve a "First Time" Off Shelf Fill Rate of even 35%. 

So, what does this mean?...

Quite simply, it means that the customer, or technician is only getting their parts on first visit approximately 35% of the time. The time spent bringing a vehicle in the shop, racking the vehicle and diagnosing the vehicle all comes to a halt if the part is not on the shelf on first visit.

Unlike parts, time is a perishable inventory that we can never get back so all the time spent right up to acquiring the part is gone. At this point, the vehicle is either taken off the rack, pushed or driven outside, only to bring it back in at a later time or day to repeat the process.

Studies have shown that low "First Time" Off Shelf Fill Rates of 30% - 50% can impact Service Productivity in a negative way anywhere from 15% to 25% overall. Not only that, if we are losing productivity, we are also losing Parts & Labor Sales and Gross Profits.

When we do the math to those percentages in Lost Productivity, then tack on our Parts to Labor Ratio numbers, Sales & Profitability, the Lost Gross Profit Annually can add up to hundreds of thousands of dollars in many dealerships today. I know this because I have done the math in many dealerships.

Now that we know how the end results can negatively impact all these areas, we now come to the all important million dollar question....

"How Do We Fix It?"....

As I have mentioned in many previous articles, in order to "fix" any problem or concern, we first have to identify the problem or concern first. How did we get to this point?, or even...How do I even start to move the needle upwards in achieving desired "First Time" Off Shelf Fill Rate Levels?

I believe it all starts by the fact that we are really confusing the issue in the first place. There are so many "fill rate" definitions, acronyms, opinions, calculations and terminologies out there, so why wouldn't we all be confused?

Here is a sampling, or list of terminologies out there given to us by various Dealer Management Systems, (DMS), industry analysts, consultants, parts managers, etc.
  • Off Shelf Fill Rate, (OSF)
  • Sales to Stock Ratio
  • Sales to Cost Ratio
  • Purchase to Sales Ratio
  • Stock Order Performance
  • Demand Fill Analysis
  • Same Day Fill Rate, (SDF)
  • Level of Service
  • Purchase to Fill Ratio
  • Fill Rate Analysis
Who wouldn't be confused?....which one of these is my "First Time" Off Shelf Fill Rate?

There are probably a lot more that I haven't mention, but I think you understand my point. Unfortunately, many dealer owners and even Parts Managers don't even know which one actually indicates the "First Time" Off Shelf Fill Rate. Actually, only a couple of the above examples come  somewhat close to the actual "First Time" Off Shelf Fill Rate.

The first thing that we have to determine is....

"What parts actually qualify to be even considered parts that sell on a first time basis and CAN be considered into the calculation of "First Time" Off Shelf Fill Rate?"

Here's my common sense approach to all this confusion...

In the first place, there are only two reasons why we don't have the parts on the shelf. The first one is that we never stocked the part in the first place and the second one is that we do stock the part, but we ran out. We definitely don't want the second one to happen as running out of a Normal Stocking Part is a very bad thing and embarrassing for the Parts Manager in my opinion.

If the above is factual information, which I believe it is, the parts that I am most likely to sell on a "first time" basis would be my Normal Stocking Parts on the shelf unless I experience a "stock out" situation. That being said, I would definitely consider these parts sales in my "First Time" Off Shelf Fill Rate Calculation, less those "stock out" situations.

If I am posting correctly and I do experience a "stock out" situation on a Normal Stocking Part and have to purchase a Normal Stocking Part as an outside purchase, whether another vendor or the manufacturer, I should be recording an Emergency Purchases on those rare occasions. Then I can subtract my Emergency Purchases from my "First Time" Off Shelf Fill Rate Calculation.

There are always going to be "exceptions to the rule" when calculating "First Time" Off Shelf Fill Rates. One example would be a part that I Special Ordered for a customer and they never picked the part up for whatever reason, thus becoming a Non-Stock part on the shelf. 

Then, another customer comes in and needs that same part down the road and I "technically" had the part on first visit, but because it is a Non-Stock Part, it will not figure into my "First Time" Off Shelf Fill Rate, but it will figure into my Same Day Fill Rate, (SDF)

Another example in reverse, I run out of a Normal Stocking Part and have to order it from the manufacturer, or vendor and I DON'T record an Emergency Purchase, technically that part is sold and recorded into the "First Time" Off Shelf Fill Rate calculation, even though it wasn't there on first visit.

In my opinion, Same Day Fill Rates are important, but if I have to wait 4-5 hours for that part, even though it's filled the "same day", I still lose valuable time inventory in the shop. That being said, achieving the correct "First Time" Off Shelf Fill Rate percentages is my prime objective as Parts Manager and not necessarily just focusing on "Same Day" Fill Rate, (SDF). 

Measuring Same Day Fill is good, but not good enough in some circumstances when we start drilling down and measuring Overall Shop Productivity. If the stall is down for a time and not producing, even measuring Same Day Fill Rate doesn't matter in many cases.

Okay!...Now Let's look at the definitions of "Fill Rates" in general!...

Overall Off Shelf Fill Rate:

The Overall Off Shelf Fill Rate can also be called Level of Service, Demand Fill Analysis, OSF, or any other acronym or definition that various Dealer Management Systems, (DMS) may call it. The definition though should still be the same, which is as follows;

"Total Sales at Cost Minus Lost Sales and Emergency Purchases"

As you can see with this simple definition, it doesn't matter whether the order gets filled today, tomorrow, next week or next year, the definition just indicates that the "demand" was filled, less Lost Sales and Emergency Purchases.

Bad part of this equation, or "Smoking Gun" if you will is that if I don't report Lost Sales and/or Emergency Purchases, I could look like a hero, but I would be just fooling myself with a very high and inaccurate (almost 100%) Overall Off Shelf Fill Rate. This category, unfortunately gets confused with "First Time Off Shelf Fill Rate numbers.

If and when that happens and I'm looking like a hero, you really have to ask yourself a question....

"Am I really providing parts to my customers on a First Time basis almost 100% of the time?"

The obvious answer is "No"....

Same Day Fill Rate:

The definition of Same Day Fill Rate is pretty obvious as these parts sales, whether Normal Stocking or Non-Stocking parts have to be filled in the same day of the request and invoiced on a repair order or counter sales ticket.

"Total Parts Sales at Cost Invoiced and Sold the Same Day of Request"


Again, an important measurement that we should monitor, but not the prime objective. Filling the demand the same day is a good thing, but how much time did it take to fill that order that same day. Plus, Same Day Fill Rates also include "First Time" Off Shelf Fill Rate Parts which could mask my overall objective. 

Lastly...

"First Time" Off Shelf Fill Rate:

Okay!....here's where some may differ from my definition of "First Time" Off Shelf Rates, but I have to look at this in a common sense approach and not from the perspective of a particular Dealer Management System, (DMS). Keep in mind that proper posting of Emergency Purchases are crucial to getting the right "First Time" Off Shelf Fill Rate calculation.

"Total Sales at Cost of Normal Stocking Parts Minus Emergency Purchases at Cost Divided By Total Sales at Cost"

Another extremely important thing to keep in mind is that all parts need to be in the proper "stocking status" category of Normal Stocking Parts and Non-Stock parts in the first place. Normal Stocking Parts meaning that these parts have met the DMS Phase-In Criteria and Non-Stock Parts that have not met Phase-In Criteria.

Lost Sales do not figure into this equation because Lost Sales only play a part in the "demand" category which means that Lost Sales are part of the Phase-In Process and not the sales category. Once a part phases in from total demands, (Sales and Lost Sales), then the "First Time" Off Shelf Fill Rate takes over from Sales at Cost of Normal Stocking Parts less Emergency Purchases.

Emergency Purchases DO play a heavy role in the proper "First Time" Off Shelf Fill Rate Calculations as Emergency Purchases of especially Normal Stocking Parts that we run out of need to be "backed out" of "First Time" Off Shelf Fill Rate Calculations for obvious reasons....After all, I did not have it the first time...whether I normally stock the part or not!

Bottom line is that if we do want to measure our TRUE "First Time" Off Shelf Fill Rates, we need to have a common sense approach in order to get common sense results. Don't let your Dealer Management System, (DMS) dictate results that may not be true.

Make sure that your DMS has ALL your parts categorized properly as Normal Stocking Parts vs. Non-Stock Parts, especially if you are utilizing a Manufacturers Vendor Managed Inventory, (VMI) which allows parts to enter your inventory as "Non-Stock" inventory.

Accepting these parts into inventory that have not met your DMS Phase-In Criteria will result in adding more "Non-Stock" Parts into your inventory that will not qualify in "First Time" Off Shelf Fill Rate Calculations as they are technically "Non-Stock" Parts, even though you are purchasing these parts to replenish inventory.

If you do accept VMI Parts into your inventory, you MUST manually change the stocking status to "Normal Stocking Parts" in order for the system to properly calculate your TRUE "First Time" Off Shelf Fill Rate. Keep it simple and keep it right....

If you want accurate "First Time" Off Shelf Fill Rate Results, and have the "Right Parts At The Right Time"....85% - 90% of the time?...you have to "Get It Right And Do It Right The First Time!"

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...























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Wednesday, September 4, 2019

September 2019: "Show Me How To Fix It!" - Part Four: Parts Gross & True Turns

When we start talking about "Parts Gross & True Turns", we are actually referring to Parts "Definition of Terms", which is Habit Number Two in ACG Smart Parts "Eight Habits of Highly Successful Parts Managers".

Having the proper "Definition of Terms" is vital when we are measuring the Parts Departments Inventory Performance. We already know that Sales & Profitability ultimately determines the success of the Parts Department much like it does with all the other departments within the automotive dealership, but the Parts Department also has to perform as the dealers number two asset.

Monitoring and measuring the Parts Departments "Gross & True Turns" is almost like measuring the dealers Parts Financial Net Profit Analysis. Similar to the dealers New & Used Vehicle Inventory, managing the Parts Inventory could be a "make it or break it" category that could determine the ultimate success or demise of the dealership.

In all actuality, the only two people in the dealership that can determine if the dealer "sinks or swims" are the Used Vehicle Manager and the Parts Manager. Mis-management in one or both departments could mean the end of business for the owner.

Measuring "Parts Gross & True Turns" incorporates the definition itself, proper calculation and managing these terms to their potential. We also need to know what drives these "Definition of Terms" and of course, how to manage them in the right direction.

Let start out with the proper definition of both these terms and why each one is important. I will also provide a "Layman's Term" in regards of each one of these definitions, both Gross & True Turns...

First....let's start with "Parts Annual Gross Turns"....

"Total Sales At Cost For The Last Twelve Months - Divided By - Average Inventory Investment For The Last Twelve Months"

Sounds pretty simple right?....Let me give you the "Layman's Term" of how we can actually define the "Gross Terms" calculation. The example I will use is if I had an average monthly Parts Inventory Value of $100,000.00 along with average parts sales at cost of $100,000.00 over the last twelve months.

Here's what we would end up with for annual Parts Gross Turns;

Average Monthly Parts Sales at Cost = $100,000.00 X 12 Months = $1,200,000.00 - Divided By - Average Parts Inventory of $100, 000.00 = 12 "Gross Turns" Annually.

Here's the key thing to remember in this equation...the above calculation refers to average "parts sales at cost" monthly, then annualized for a total of $1,200,000.00. The equation DOES NOT say if these parts sales at cost are actually from my own inventory.

In theory, I could actually sell $100,000.00 in part sales at cost without even selling one single dollar at cost from my own inventory. I could actually have $100,000.00 in "dead inventory" and had to buy all those parts that I sold at cost from outside sources.

So, Why is Measuring "Gross Turns" So Important?

Measuring "Parts Gross Turns" is extremely important because it gives us our marketability number as far as just how much I should carry in "Inventory Dollars" to support my market area. The current industry guideline for Parts Annual Gross Turns is "8 Gross Turns". So, how did they come up with that number?....

If we use the above example that resulted in 12 Annual "Gross Turns", and then apply the industry standard, or guideline of 8 Gross Turns, we will come up with the following results;

Annual Sales At Cost = $1,200,000.00 - Divided By - 8, (Industry Guideline) = $150,000.00.

In this example, this would mean that my "Desired Inventory Value" should be $150,000.00, whether the inventory "value" was junk or not. It would also represent that my "Months Supply" of parts at cost would be 45 Days, or a 1.5 Months Supply, ($1,200,000.00 - Divided By 8 Gross Turns)....again, industry guidelines, much like the New Vehicle Inventory.

So, if we use the above example again where we experienced an annual "Gross Turn" of 12, our Parts Inventory would be "under-stocked" in value by $50,000.00, because the actual "Gross Turns" were too high at 12 "Gross Turns" annually.

If "Gross Turns" are too high, again, much like the example used above, the end result could be Lost Sales from lack of inventory and perhaps higher costs due to chasing parts at a higher cost and Lost Service Productivity. Again...much like losing sales and gross in the front end Sales Department for not having the right vehicle on the lot at the right time.

This is why some dealers don't get it because they focus more on "Parts Annual Gross Turns" and they seem to like it when their Parts Department experiences higher "Gross Turns", when it actuality, they are losing sales and gross. This is where they should shift their focus on to "Parts Annual True Turns". That being said?...

Let's Move On To "Parts Annual TRUE Turns"...

For simplicity reasons....we will be using the same above example in our "Parts Annual True Turn" calculations, but with just a little twist. But, before we get to that, let's look at the actual "Parts Annual True Turn" definition....

"Total Stock Order Receipts For The Last Twelve Months - Divided By - Sales At Cost For The Last Twelve Months - Divided By - Average Inventory Investment For The Last Twelve Months".

If you figured that one on your own, you are a better person than I am. Calculating "Annual Parts TRUE Turn" depends highly on proper ordering and receipting on parts that are actually ordered and receipted as "Stock Order Purchases. 

In other words, we must not fool ourselves by ordering and receipting parts that may be actually "Non-Stock" parts, or "Special Orders" parts, just because we added those parts to our "Daily Stock Order". If we did do that, we would be falsely counting those parts in the "Parts True Turn" calculation.

We have to ensure that "Non-Stock" and "Special Order" parts are separated from what we truly order to replenish parts for re-stocking purposes that have met all "phase-in" criteria for "Normal Stocking Parts".

Now that we have covered that part, let's look at the same above example that will have a little twist, but will give us our actual "Parts True Turn" number. Also, keep in mind that the industry standard, or guideline on "Parts Annual True Turn" is 5.

"Total Parts Stock Order Receipts For The Last 12 Months = $600,000.00 - Divided By - Total Sales At Cost For The Last 12 Months = $1,200,000.00 - Divided By - Average Monthly Inventory Investment For The Last 12 Months - $100,000.00 = 6 "Parts Annual True Turns".

In other words, again, in "Layman's Terms", the only thing that changed from the "Gross Turns" calculation is that $50,000.00 of $100,000.00 in the Total Sales at Cost each month on average were from actual parts that were considered "Normal Stocking Parts", and not just "total" Sales at Cost, which as I mentioned, could technically come from outside sources.

So now that we see that the above example resulted in 6 annual "Parts True Turns", once again, we are running out of stocking parts much to quickly as the industry standard, or guideline is 5 "Parts Annual True Turns". Once again, resulting in lost gross and expense from outside purchases and potential Lost Sales.

"So, How Do The Previous Parts Of This Series Play A Part In Parts Gross & True Turns?"

First of all, before we clue you into how the first three parts of the series actually play into the actual "Parts Annual Gross & True Turns", let's first say that parts Sales & Gross Profit determines the success of the Parts Department. After all, we are in business to make a profit, first and foremost.

Beyond that though, it's actual "parts demand" that will determine just what we have on the shelf and most important, what we have on the shelf on a "First Time" basis. Having the "Right Part At The Right Time" determines how efficient the Parts Department will perform.

So Now...Let's Look At Part One In The Series, ("Lost Sales") Plays A Part in "Parts Gross & True Turns"....

We determined earlier that the only way a part enters our DMS is the recording of "parts demands", with the exceptions only given to "manual orders" where the Parts Manager orders parts for stock without measuring "demands" that are provided by posting Sales and Lost Sales. 

Keep in mind that we do not have parts for only two reasons...we either never stocked the part in the first place, or we simply ran out. Parts demands only come from two areas....Sales and Lost Sales, which create the "parts demand". 

Another note, if we are not reporting Lost Sales at industry standards, or guidelines, we are missing lots of opportunity on reported demands into the DMS, which leads us to Part Two's contribution in the series, which is "Parts Phase-In & Phase-Out Criteria".

Now...Let's Look At How Parts "Phase-In & Phase-Out Criteria" Plays Into "Parts Annual Gross & True Turns"...

Tracking "parts demands" is how parts "qualify" to enter our "House Of Inventory" in the first place. Once the "Phase-In Criteria" is met, which means the total number of demands, and/or demands in a month that a part achieves, (Sales & Lost Sales) over a given period of time, allows the part to meet the Parts Manager's Stocking Criteria.

Parts "Phase-In" in itself can be a huge determining factor on what parts need to be considered for "Normal Stocking Status". Choosing the right criteria is most important in determining what parts eventually hit the shelves.

Another thing to keep in mind that even if a part meets "Phase-In" criteria, it doesn't mean that these parts simply "jump on the shelves". The Parts Manager has the ultimate decision whether to stock the part(s) or not. This is why I prefer a more aggressive "Phase-In" criteria which allows me to "see" the parts for potential "Normal Stocking Criteria". After all...I can't manage what I can't see...

Once the Parts Manager decides to allow parts to "Phase-In"...the job of parts "Phase-In" is complete. Now that these parts are allowed to "Phase-In" by the Parts Manager, it's now up to the "Parts Stocking Levels" to take over until parts meet parts "Phase-Out" criteria...

"So, How Do The Parts "Stocking Levels" Play A Part In Parts "Annual Gross & True Turns?"

The combination of these three KPI's...Lost Sales, Parts Phase-In/Phase-Out and Stocking Criteria are key ingredients to "Fixing" our "Parts Annual Gross & True Turns". The "Parts Annual Gross & True Turns" are actually result areas that measures just how well we utilize "Parts Lost Sales Reporting, "Parts Phase-In/Phase-Out Criteria and "Stocking Levels".

The last of which is our parts "Stocking Levels". Choosing the right Best Reorder Points, (BRP, or Low Days Supply) and Best Stocking Levels, (BSL, or High Days Supply) determines the proper amount of parts inventory that we have on the shelf so we don't run out, or have too much.

Doing the math is key into determining these criteria points of the low points and the high points. Quite simply, and as an example, if a part sells 12 times a year, it is due to sell once every 30 days on average. Thus, the Best Reorder Point, (BRP, Low Days Supply) is set at 30 days.

One key thing to remember is that "Days Supply", (BRP & BSL) does not mean quantity. It just determines when to reorder and what the best stocking level should be. Quantity is determined by average annual piece sales, whether "weighted" annually, or measured by percentage over a number of days or months.

Fixing "Parts Annual Gross & True Turns" requires the "Smart Parts" Manager to know, understand, measure, modify and yes...finally "Fix" what it takes to get "Desired Results". 

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...