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! 

 

 

December 2020: "The Top Five Dealer Parts Concerns For 2020"

The Covid-19 Pandemic has definitely impacted, and still impacting each one of us as we have noted over and over throughout this year. In every dealership, changes have been made to adjust and adapt to the way we do business and the dealership Parts Department has definitely had it's share of these changes.

The results of these changes and adaptations in the Parts Department seems to have peaked the dealers interest in taking a closer look at how their number two asset is performing. Not only the performance of the investment has suffered as profitability has also been impacted heavily.

In this issue of ACG "Smart Parts", we will look at the concerns and issues that dealers have in their Parts Departments. We have compiled data from our dealers and our industry in general as well as our own data collected here at ACG "Smart Parts".

Many Dealer 20 Groups have also put the Parts Department to the forefront as dealers look to increase their overall profitability and the Parts Department is one area that has overwhelming opportunity. Not only are we missing opportunities in the Parts Department, we are going in the wrong direction in many areas.

The reasons for these concerns have been caused and still being caused by the effects of the Covid-19 Pandemic. Normal daily routines interrupted by the pandemic in the Parts Department have caused a lasting impact in the Parts Department investment, while increasing operating costs and lowering profits.

In the past, for the most part, Parts Departments have always been profitable for many dealers. Unfortunately, they have also "fallen under the radar" when it comes down to areas of concern. For many dealers, the qualifications for being a Parts Manager has been the either the next one in line, or perhaps a counter person that has had the most tenure in the parts department.

Now, with what we have learned and experienced during this pandemic, all of a sudden, many areas concerning the Parts Department have come to the surface. Cash flow is now a top priority and "frozen assets" have become a resource to dealership sustainability. 

Here in lies the question that, in my opinion, should have been a question far before this pandemic...

"Why Does It Take A Pandemic To Bring These Issues In The Parts Department To The Forefront?"

With that said, and in order from number five to number one...Let's take a look at "The Top Five Dealer Parts Concerns For 2020"

 

Number Five: Parts Obsolescence

If there ever was a result area that would indicate that we have a problem is obsolescence. Not that we haven't had obsolescence in the past, it's actually the "growing" obsolescence this year that's new, even more than years past.

With more focus this year than perhaps previous years due to the pandemic, "cash flow" is suddenly a means of survival for many dealers. In prior years, cash flow was a constant as money was always flowing from so many areas from new and used vehicle sales, service and parts sales, etc.

Due to the pandemic and for many dealers, this cash flow train came to an abrupt halt and all of a sudden, dealers are looking for cash to remain in business and retain employees. Shut downs and reduced traffic took us to a new low in many dealerships.

Obsolescence of course is a means for cash flow as these "frozen assets", even though they can be sold for less than we purchased are suddenly becoming a dealer revenue source. To make matters worse, due to manufacturer shutdowns and decreased customer traffic during this pandemic, obsolescence has actually increased in many dealerships.

With lower than normal parts sales activity, more parts are moving into the obsolescence category as parts age no matter what the situation as parts movement happens, regardless if there is a pandemic or any other market collapse.

This overall increase in obsolescence has opened the eyes of many dealers as the more obsolescence increases, the higher their acquisition and holding costs become. Combined with tying up cash flow and increasing the "frozen assets", this is our Number Five Dealer Parts Concern for 2020.

Number Four: Parts Stocking Levels

Another area of our dealers concerns is that even though sales have diminished, our parts inventories are rising. Not only are we experiencing more obsolescence as previously mentioned, the "fear" of not getting parts due to the pandemic has caused many Parts Managers to overstock their Normal Stocking Parts.

Not only that, many manufacturers that offer a Vendor Managed Inventory Program, (V.M.I.) have also gotten into that act by recommending Higher Days Supply, or Best Stocking Levels. This catches the dealers eye as they see their parts inventories rising when sales are not supporting the excess inventory.

The other reason for increases in Stocking Levels is that most Dealer Management Systems, (D.M.S.) manage Stocking Levels by Annual Piece Sales. If ABC Source Ranking is not set up, or set up properly with the proper algorithms, (if D.M.S. equipped), previous Stocking Level set ups will take over, even though sales have been negatively impacted by the pandemic.

This will lead to overstocking of what we don't need and under stocking what we do need and if the Parts Manager is not trained, or simply doesn't know, (how do we know what we don't know?), then Stock Orders and V.M.I. Suggested Stock Orders will not be accurate, or make sense.

On another note, many Parts Managers do not trust their own D.M.S. generated Stock Order because of improper Set Ups & Controls. What has always bugged me is if they know this...why don't they want to get it fixed so the system can do the work for them instead of the other way around?

Trusting the manufacturer's Vendor Managed Inventory recommendations on Normal Stocking Parts and Stocking Levels alone, and not utilizing our own D.M.S. for recommended Stocking Levels is just a recipe for not stocking what we do need, and overstocking what we don't need.

The pandemic has definitely impacted the dealer parts Stocking Levels and the dealers are taking notice that their total inventory values are far exceeding, in many dealers as much as twice the recommended guideline of 45 Days Supply, (1.5 months). Would we allow this same scenario with our New & Used Vehicle Inventory Days Supply?....this is why Stocking Levels has hit our top five at Number Four.

Number Three: Parts Inventory Reconciliation

Our Number Three Top Dealer Parts Concern could have easily been one of our top two concerns from dealers based on the overwhelming number of calls we have been receiving here at ACG "Smart Parts". This "Covid-19" year has seen more dealers with Parts Reconciliation variances than we have ever experienced in the past.

Based on our data compiled from dealers, industry analysts and our own data, parts discrepancies in the wrong direction have been on the rise. Normally, dealers experience an end of year "uplift" in their parts inventories resulting in additional profits when reconciling the parts Controlled Inventory on the D.M.S. and the Accounting Ledger Balance Parts Inventory.

There are many reasons for this shift in these balances this "pandemic" year as opposed to previous years including; improper receipting and accounting of parts purchases, parts billed without being receipted properly, parts cost not adjusted properly on outside purchases, lack of control, pilferage, lack of training, etc.

Parts Reconciliation is probably the biggest area that has experienced this "out of the routine" result from this pandemic and has led to this overall lack of control and accountability. Parts Managers in general do not have the experience in Accounting even though it should be part of all basic Parts Manager Training.

In my opinion, this concern should have always been there, but because most dealers have been  experiencing that end of year parts profit "uplift" just isn't there now. Now  the blame comes down to the Parts Manager when it goes the other way. The causes are many, but the pandemic has definitely made Parts Reconciliation our Number Three Dealer Parts Concern.

Number Two: Parts Manager Training

Let me start off with our Number Two Dealer Parts Concern with the following statement that I've heard from many dealers....

"I'm not going to spend any money on Parts Manager Training, or any Parts Training...Anyone can hand out a part over the counter!"...

This is where it all starts, although I'm not saying all dealers feel this same way, but by far, this seems to be the general thought, but we will spend all kinds of money training other dealership managers and technicians, but when it comes down to parts, training is not a priority.

The problem is that many dealers don't understand is that in many dealerships today, out of all their managers, there are only two that can put the dealer out of business and that is the Used Car Manager and the Parts Manager.

Parts Managers today need to be one of the most trained managers in the dealership, not only on Inventory Management, but also Dealership Accounting. Also, the Parts Manager needs to be trained on the D.M.S. Set Ups & Controls as these Set Ups & Controls are not usually set up properly from the D.M.S. Vendor and how to manage them moving forward.

Maintaining the parts inventory investment is much more complicated than it was years ago as the parts "life cycle" is much shorter while demand for the right part at the right time is much higher. Turning the dealers investment, while limiting obsolescence is an art form today.

Other departments depend on the Parts Department, especially the Service and Collision Departments when we start to measure "cycle times" and productivity as time is a perishable inventory that we can never get back. In many dealerships today, these two departments may lose up to 20% of their overall productivity due to low "First Time Off Shelf Fill Rates".

Many dealers confuse "Overall Off Shelf Fill Rates" with "First Time Off Shelf Fill Rates" as the overall number just means we filled the order minus Lost Sales Reporting, whether I filled the order today, tomorrow, next week, or next year.

If I don't report Lost Sales, my number looks even higher, or better, but don't be fooled...the real fill rate to be concerned with is the "First Time Off Shelf Fill Rate". The percentage of time that we fill the order on the first visit which will increase overall shop productivity.

Parts Manager and Parts Training in general has finally moved up to where it should have been all along and is our Number Two Dealer Parts Concern. Installing the Proper Set Ups & Controls is one thing, but "managing" them going forward is another as parts has always been a "moving target".

Number One: Profitability

As it should be, profitability is our Number One Dealer Parts Concern. You may have noticed that our Number One says "Profitability" and not "Parts Profitability" and that's for a specific reason as most Parts Departments in dealerships ARE profitable.

This is also the reason many dealers do not invest in Parts Manager, or Parts Training in general because they can count on them to be profitable. What many dealers do not realize is that the Parts Department, by percentage is the most profitable department in many dealerships.

What many dealers also don't realize is just how much the Parts Department impacts the profitability in all the Fixed Operations and to some extent, the Front End Sales Departments. Much like in the Sales Department, we are likely to sell more vehicles that we have on the lot versus ordering or locating vehicles for customers at a much lower profit.

Whether managing the Parts Inventory, or the New & Used Vehicle Inventories, it still requires the proper training and skill set in order to get the best Return On Investment. Higher profits can always be achieved by having the right vehicles on the lot and having the right parts on the shelf.

In my opinion, maximizing on our Number One can only be achieved if we drill down all of our Top Five Dealer Parts Concerns and making the right decisions. Moving the Parts Department up in the priority category is essential to the overall profitability of the dealership. 

The Covid-19 Pandemic has definitely made us more aware and focused on all of our dealership resources for maximizing overall dealership profitability. The Parts Department is one, in my opinion, that needs to get an "uplift" in the dealers priority list if it hasn't already.

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...

 

 

 

 

 

November 2020 - Automotive Industry Update: "Looking Beyond Covid-19"

Each year, in the month of November, ACG "Smart Parts" focuses on providing our readers an automotive industry update with an analysis of what we have seen thus far in the current year along with a perspective of what we can expect going forward into, in this case, 2021.

We will provide our readers with data, opinions, perspectives and opinions from respected industry analysts as well as our own experiences here at ACG "Smart Parts"  with our dealers over this past year. We will break down our update in three different sections as follows.

Our first section of the update will be an overall update on the automotive industry in general based on new and used vehicle sales data and predictions from NADA's Market Beat Report from September 2020. This data from NADA will give us information from the automotive production side as well as unit sales thus far in 2020 and predictions going forward.

Our second section will focus on the parts industry specifically, including the automotive dealership level and the aftermarket parts levels provided by the McKinsey Global Institute, including data and predictions for the automotive parts industry as it stands now and looking ahead.

Lastly, our third section will provide our readers our own data and experiences from an ACG "Smart Parts" perspective with our own dealers here in the U.S. and around the globe. 

This unique perspective will give our readers a "hands on" view of what's really happening out "in the field". We will review what our dealers and their employees are experiencing from many different market areas and the actual affects this pandemic has had on them.

The Covid-19 Pandemic has definitely impacted our industry and most important, it has impacted our lives in all aspects. It is not our intention to tell you what you already know, rather, we want to give our readers "information" that will shed light on just what has happened from an industry standpoint and to  help us to prepare going forward.

Our goal is to try and answer the following question...

"Where Are We Now And Where Are We Going?" 

Many of you may already have an opinion or answer to those questions, but the information we will be looking at may help in our thought process going forward. Even though we have already gone through a lot during this pandemic, the automotive industry still remains strong and resilient.

 Here We Go!

Section One: NADA's Market Beat Automotive Industry Update

First of all, I would like to recognize NADA for providing the following data and information concerning new & used vehicle sales through September of this year as well as their predictions going forward. The following information is readily available and in more detail at their website, (www.NADA.org)

The Covid-19 Pandemic has obviously impacted new & used vehicle sales, but the good news is that sales have been steadily climbing this year with sales of 16.3 million units in September, the highest since February, finally topping the 16.0 million mark. Even though overall, sales are down 4.3% from September 2019, with overall decline this year at 31.9%, the trend is looking positive.

The good news is that the decline percentages continue to shrink with predictions of increases in sales to climb even higher on into 2021. The biggest reason, believe it or not for the sales declines were not due to customer demand, as plant closures due to Covid-19 limited production and dealers not receiving or re-stocking their inventories.

In addition, model year changeovers also put pressures on overall inventory levels, but as of the end of September, inventory on dealer lots totaled 2.66 million units, which was up 3.6% over August 2020, but down overall by 26.7% from September 2019. We still have a ways to go, but the signs are that we are on the comeback trail in a consistent fashion.

Along with this continued increase in production, it is supported by increasing consumer confidence and lower interest rates, thus promoting dealer sales and after sales with more trade ins supporting the used vehicle inventories. Much of the year thus far has seen dealers desperately seeking used vehicles to offset the lack of new inventory and trade ins.

Market share increases were also seen for GM, Ford, Hyundai-Kia and Subaru, while Honda and Volkswagen remaining the same with their market share numbers. Toyota, FCA and Nissan suffered the biggest declines in their market share numbers. 

Light Duty Truck Sales continue to dominate the light vehicle market as the only category to show a year to year overall increase, even through the Covid-19 Pandemic.

Section Two: Dealer & Aftermarket Parts Industry Update

Once again, we would like to recognize our resource, McKinsey & Associates, (www.mckinsey.com) for their data, research and predictions for our industry update on the dealer and aftermarket parts industry update. We all know that our first section on the overall new & used vehicle industry update has a huge impact to our automotive parts industry.

First of all, we have all experienced the direct effect of the manufacturer plant closures, parts shortages and vendor shut downs that Covid-19 has caused. With that said, we can now look at we may not know about the parts industry in general and what we can possibly expect going forward.

In the past, the automotive parts industry has been pretty resilient during any crisis, even when we consider the financial crisis we all experienced back in 2007-2009. Back in that particular crisis, people delayed major purchases such as homes and new or used vehicles. This actually put emphasis on repairs to existing vehicles resulting in higher parts and service sales.

In that last recession of 2007-2009, we realized GDP declines all over the world, resulting in substantial declines in new and used vehicle sales. But in retrospect, some are actually predicting that this Covid-19 Pandemic could cause a more substantial negative effect to our automotive parts industry. 

According to McKinsey & Associates, there are some new factors that have not been evident in any past crisis. People are driving less, as much as 50% less in certain areas. This reduction in miles driven results in fewer collisions, lower traffic numbers, lower public transportation and even higher use of e-commerce platforms.

These numbers and analogies don't just apply here in the U.S., they also apply around the globe as the Covid-19 Pandemic has impacted everyone. Many analysts also predict that many of these impacts will result in changes that may never go away and become the "new norm" going forward.

On the other hand, some of these changes in our habits such as social distancing along with a general new awareness could cause a spike in sales. With public transportation being reduced due to this new awareness, new and used vehicle sales may actually rise. Even though less miles may be driven, the overall individual vehicle purchases may increase with less people using public transportation.

Also, with the reduction of overall new vehicle sales, even though they are on the comeback as mentioned in Section One, the increase in used vehicle sales could promote more parts sales as older vehicles requiring more repairs will result in higher parts sales. 

We've already seen a spike in aftermarket service contracts, as manufacturers warranties would decrease due to lower new vehicle sales. All pointing to higher dealer and aftermarket parts sales, including accessory parts sales.

Another big factor to consider would be our trade agreements with other nations that could impact overall parts distribution and sales worldwide. Just the introduction of the USMCA versus NAFTA could have a huge impact on parts distribution, pricing and overall sales here in the U.S.

McKinsey & Associates also notes that Automation will play a much bigger role in our parts industry going forward. With the disruptions in the labor force, and more attention paid to social distancing and reduced infection risk, manufacturing, distribution centers and warehousing may become more automated.

Bottom line is that in order to survive and climb out of any crisis, we all have to adapt and change to whatever the environment is and whatever the market bears. As competition increases, so will the landscape and the players. Downsizing and consolidation may be front and center in order to remain efficient and profitable.

Section Three: An ACG "Smart Parts" Industry Update & Perspective

This year has definitely been one for the ages ond one that we will never forget for many reasons. In this, our final section, we will provide a perspective that all "Smart Parts" Readers can relate to as I refer to this section as the "Real World Section".

Working with our Owners, Dealer Principle, Parts Managers, Service Managers,  Collision Center Managers, Service Advisors, Parts Counter Staff, Office Managers & Staff, Sales Managers, Cashiers, Drivers, Porters, Body & Service Technicians, etc. directly has given me a unique perspective in all areas of the dealership and not just Parts.

First and foremost, Dealer Owners have not only had to survive, (and still surviving) the Covid-19 Pandemic, they've had to survive in general. Decisions had to be made in order to stay in business while trying to protect and secure their employees.

After the initial impacts of the Covid-19 Pandemic were felt in the first few months, we noticed that dealerships were starting to emerge as sales started to increase. The amazing thing was not only were sales increasing, they were increasing to higher levels from the previous year numbers in the same months once we hit the mid-year point.

Parts Departments were doing their best to find parts during factory shutdowns wherever they could to provide the best customer service, even at higher costs. Parts inventories became leaner and dealer owners were taking more interest in their Parts Department's performance and overall investment.

As mentioned in our last month's issue of ACG "Smart Parts", parts inventory reconciliation between the Account Ledger Balance Inventory and the D.M.S. Controlled Inventory seems to have become center stage as the dealers investment discrepancies went in the wrong direction.

Due to the disruption of normal parts receipting and accounting integration practices, discrepancies were on the rise during this pandemic. The number of parts vendors also rose due to "get the part by any means" became a normal phrase in our Service and Collision Center departments. All leading to a "Pandora's Box" during the pandemic.

Even though all of our dealers and all their employees had to endure, and still enduring this pandemic, overall...sales are coming back to normal expectations. Even though, many of our dealers are operating in understaffed conditions.

It's always been tough to find qualified staff, especially technicians, it's even more so during these times. That being said and going forward, there can never be a more appropriate time than now to focus in training at every level and promoting from within if applicable.

Lastly, and most important, I've never seen a time where our dealers and their employees working harder than ever before to be the best they can be, no matter what the circumstance. 

Doing more with less is definitely evident in all of our dealerships that we partner up with and their results are proof that no matter what we face in our industry, the Industry Updates will always positive!

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...

 

 

 

 

 

 

October 2020: Parts Monthly Inventory Reconciliation - "Now More Than Ever!"

This year has definitely been different from any other year we have experienced due to the Covid-19 Pandemic, which has impacted everyone of us in all aspects of our lives. It has also impacted our industry, like many other industries in so many ways.

Back in February of 2016, our ACG "Smart Parts" feature article was titled, "Reconciling The Parts Inventory". That feature focused on the benefits of performing a Parts Monthly Inventory Reconciliation versus just one Annual Parts Inventory Reconciliation.

We are bringing this topic back for another "go around", but with a different focus on the same topic. This year, more than ever, we have been overwhelmed with dealers contacting us for help with their Parts Inventory Reconciliation. 

General Ledger amounts are soaring at a much higher rate than ever compared to the Controlled Inventory amounts revealed on our D.M.S. Reports, or even after physical inventories are taken. This 180 degree swing in these two inventory amounts is sending many dealers into panic mode.

In retrospect, could you imagine if our New & Used Vehicle Inventories experienced the same scenario? In other words, you may have 250 New & Used Vehicles sitting on the lot, but the Financial shows that there are 300 New & Used Vehicles in Inventory. 

This comparison is exactly what many dealers are experiencing with their parts inventory.

For years, many dealers have experienced a parts inventory "pick up" at the end of year, after the physical inventory was performed. This is the reason, most dealers do not want to perform a monthly parts reconciliation because they like that 100% net profit bonus at the end of the year.

What they don't realize is, even though they like that bonus, how do they know if that bonus should be even greater? In other words, let's say that their end of year "pick up" bonus is $35,000.00 after the physical inventory is completed. What if that bonus could have been $50,000.00 or greater by performing a monthly parts reconciliation?

Maybe it could be greater, and just maybe I could write down more of my obsolescence and take a "pick up" at the end of the year, thus reducing my inventory acquisition & holding costs. These are areas that, in my opinion, should be the concerns for the dealer.

Waiting until the end of the fiscal year allows for a whole year of variances to occur. If the Parts Manager knows that they are building up this little "kitty" during the year, it allows for a little "buffer zone" to adjust the parts inventory throughout the year.

Without making any accusations, it just leaves too much out there to the realm of possibility, or to question. How would I know if parts are going out the back door?...how would I know that my "pick up" is accurate?...could it be more or less?...should I scrap some obsolete parts. etc.?" 

By managing the parts inventory monthly as opposed to annually, the parts inventory discrepancies can be seen and adjusted monthly. It's also much easier to find these potential discrepancies over the last thirty days as opposed to trying to track them down at the end of the year which will include the last twelve months.

This is exactly why Office Managers, Dealers and Accountants prefer to make that one entry at the end of the year and hopefully, it's a positive adjustment in the dealer's favor. If not?....then this is when everyone comes unglued and this is the reason this year is so much different.

"So, What Has Caused This 180 Degree Shift And Panic Among Many Dealers This Year During the Covid-19 Pandemic?"

The one thing that I believe we can all agree on is that the Covid-19 Pandemic has definitely taken us all out of our Comfort Zones. This cannot be more evident and true than for the Parts Manager. First of all, most Parts Managers are regimented to doing the same things, the same way, over and over again throughout each day.

As opposed to Service Managers and Sales Managers, each day is different as customer concerns and sales needs in both departments are different and unique. In the Parts Department however, each day brings on the same processes and procedures, even though some days may be busier than others.

The results of what we have experienced and are still experiencing from the Covid-19 Pandemic are the shifts and changes from what we are normally used to in the Parts Department. Some, or perhaps many of these shifts and changes to every day operations has left a huge, negative impact on our parts inventory reconciliation.

Let's take a look at how some of these shifts and changes in our normal operations have impacted the parts inventory....

Receipting Practices:

This category is first and foremost as one of the causes and affects that Covid-19 has had directly on the variances in the Ledger Balance Inventory Value versus the Controlled Inventory Value in the Dealer Management System.

Parts delays, back orders, parts coming in from different vendors at a different cost, parts not even being receipted, but sold on repair orders, cost adjustments not being accounted for, Manufacturers Parts & Accessories Statement not matching what was receipted into the D.M.S. are just a few of causes in this category alone.

In the last three months, over 16 dealers that I have been working with have had discrepancies from what was receipted into the D.M.S. versus Manufacturer's P & A Parts Statement that the Accounting Department will pay for and add to the Parts Accounting Ledger Balance.

Even though we normally experience parts purchases that may be carried over from month to month, these amounts that I'm seeing are staggering. Some manufacturers are worse than others, but dealers are actually paying for parts they haven't even received yet.

With some plants being closed throughout the shut down, parts managers have had to do anything they could to service their customers whether stock replenishment, or special orders. Using different vendors, or even other dealers for a source, this has led to many accounting nightmares and unfortunately, most have gone unnoticed or accounted for properly.

Negative On Hand & Outstanding Orders:

This is another category that has led to an extreme amount of variances between the Parts Ledger Balance Amounts versus the Parts Controlled Inventory Balance in the D.M.S. during this pandemic. I have seen "Negative On Hand" amounts in the D.M.S. skyrocket in many dealerships which means a couple things. 

Number One, parts were being sold and not even receipted, thus reducing the D.M.S. Controlled Inventory Balance, even though the Ledger Balance Amount will go up. Number Two, in most Dealer Management Systems, Negative On Hand Balances, left uncorrected, can impact Normal Stocking Levels in a negative way.

Outstanding Orders are also a heavy player in these inventory variances as many of these Outstanding Orders are false and most likely were received, put not properly receipted and/or relieved from the original Outstanding Order(s). Once again, reducing D.M.S. Controlled Inventory Value Amounts.

Left unrelieved properly, the D.M.S. and the manufacturers Vendor Managed Inventory Suggested Stock Orders will not be accurate as those parts left "outstanding" will not be included. This alone will result in Parts Manager's chasing even more parts to fill the shelves at a higher, unaccounted for price, not reported, recorded or adjusted in the Parts Ledger Balance Inventory.

Parts Receipted Into The Wrong Inventory:

This category is another key player into these variances that we are experiencing between Accounting Ledger Balance Inventories and the Parts D.M.S. Controlled Inventories. The parts main inventory, tire inventory and the gas, oil & grease inventory have often been confused, even before Covid-19. It just got worse with Covid-19 than ever before.

With most manufacturers, tires, gas, oil & grease purchases can be receipted into the wrong inventories, and actually be sold into different inventories. An example of this is an invoice for tires can be receipted, in Accounting into the parts main inventory, but sold from the tire inventory, or vice versa.

This will cause a discrepancy in both inventories and if only reconciled at the end of the year, these discrepancy amounts can add up in all three inventories throughout the course of a year. Monthly Parts Reconciliation can trap these discrepancies much easier each month.

In the gas, oil & grease inventory alone, there should be a monthly, and/or annual "pick up" as oil is normally sold at a higher cost per quart than the actual "true" cost paid per quart. If reported monthly, the additional profit should be recorded as "Discounts & Allowances", resulting in more monthly parts gross profit as opposed to just reducing, or "buying down" the Parts Ledger Balance Inventory.

Manufacturer's P & A Statement/Outstanding Credits:

I mentioned earlier that I have witnessed many dealer parts statements from the manufacturer did not reflect what was actually receipted into the D.M.S. and that there may be some month to month rollovers, but I have witnessed much more.

Parts return credits, core returns and delays from the ability to send back parts to the manufacturer during the Covid-19 Pandemic have all really created a mess when it comes to Parts Inventory Reconciliation. Most often times these "relieved", Outstanding Credits are going unreported.

Even though parts and/or dirty cores are being returned and deleted from the D.M.S. Controlled Inventory, the "Outstanding Credits" are not being accounted for in the Parts Inventory Ledger Balance, even though the Parts Manager has taken them out of the D.M.S. Controlled Inventory.

Here's the worst one that I have witnessed...the manufacturer's P & A Purchase Statement may also include "promo" material such as Sales and/or Service Advertising Banners, Brochures, Accessory Displays, Gift Items, etc. that were being posted into the Parts Ledger Balance Amount.

If we are not looking at our Parts Purchase Statement from the manufacturer each month and waiting to reconcile at the end of the fiscal year, there in itself can be a huge problem. The Parts Manager should also be "matching up" every parts invoice from the manufacturer to every packing slip from the manufacturer to insure that we are only paying for what we receive.

At the end of the day, month or year...it all comes down to "balancing" the books and the Parts Accounting Ledger Balance Inventory as this is what we need to reconcile to. No matter if we reconcile monthly or annually, the adjustments have to be made to match that Parts Ledger Balance.

It would only make sense to do this process at the end of each month in order to protect ourselves from these end of year surprises, especially when we are expecting all this "blue sky", only to discover that it ends up in the other direction. 

At that point, it's just too late and we will just have to pass down the blame to guess who?...That's Right!...the Parts Manager when all the while, so many others may be involved in the discrepancy. This is why we need to do the process as intended and save everyone from all that end of year aggravation with our Accountants.

Covid-19 has definitely been a wake up call for all of us and as we always do...we learn from these experiences and the lesson here is undeniable and if we don't act on it, then I guess history just may repeat itself in the future...

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...

 

 

 

 

 

September 2020: The Future Of The Parts Department In A Virtual World

When we reached the new millennium back in the year 2000, would anyone have even thought that we would have self-driving, autonomous, or even "robotic" vehicles that could sense it's environment and move safely with little or no human input? Absolutely not!...and I for one would have never believed it possible in my lifetime anyway.

Even though we already have remotely operated subways, trains and even "drones", the idea that an autonomous vehicle can sense it's environment and adapt to that environment as opposed to trains and subways that are on a designated track, which is it's predetermined environment.

Drones on the other hand are controlled remotely by the operator and they have a much bigger environment in the air. The drones also cannot adjust to it's environment as once in the air, the drone operator controls it's every move, but if the drone operator runs the drone into a tree, it will hit the tree and not self adapt to avoid it.

Driver-less vehicles is a perfect example of where we are headed in a world that is becoming more virtual with less human interaction. We can now also imagine drone technology expanding into commercial travel, (which I would be totally against!) where pilots would no longer be required to fly commercial passenger airplanes.

Today, new vehicle manufacturing has significantly moved into this virtual world as robotics are replacing, or reducing the need for factory assembly line workers. People will always be needed to operate and run these new robotics, but there is a huge difference in producing automobiles today versus the day when Henry Ford started the assembly line over 100 years ago.

New vehicle design has also changed from drafting boards and clay models, (although still used) to other technology such as ECAD 3-D technology that can take many new vehicle designs "virtually" from inception to reality much faster and more efficiently, leading to new designs never thought possible.

Even the television and movie industries have gone "virtual" over the last twenty plus years as Pixar's RenderMan has been their #1 "rendering" technology to meet their ever-changing challenges in 3-D animation technology. So advanced is this technology that even animation can look almost perfectly and virtually real. 

That industry as also come a long way, "virtually" from the days when Walt Disney drafted his first images of Mickey Mouse with a pencil on a piece of paper. Much like the movie industry from a series of photographs to 8mm movie cameras to I-MAX Theaters to even video technology that all of us have on our Smart Phones.

"So, How Does All This Affect The Future Of The Parts Department In A Virtual World? 

During this Covid-19 pandemic, we have all had to move in many new directions in order to provide customer service in a more "virtual" way with less human interaction, including myself, having to provide fixed operations training exclusively through virtual means via the internet.

Zoom, GoToMeeting, MicroSoft Teams, FaceTime and many other internet face-to-face, live social media interaction venues have taken the place of live, one-on-one, on-site interactions with not only client and customer, but also a primary means of communication for media in general.

Our Service Departments have had to step up their "pick up and delivery" services, with more online communications through texting and website services for customer follow up and even "waiter" appointment slots being reduced, and "drop off" appointments increased.

In the Parts Department, we have also had to adapt and offer more "virtual" services, delivering more parts directly to our retail customers and not just to our wholesale customers, using alternate delivery options such as UPS, U.S. Mail and even in some cases, Uber services if needed.

On the more virtual side, we are seeing more and more websites and companies such as Rock Auto and other aftermarket companies allowing the customers to look up their own parts and ordering them without even talking to another human being.

We now have parts "scanners" that allow us to receipt parts much more efficiently, requiring less personnel, or people to perform those duties. Once again, the more technology expands, the less need for people to do the same job, and of course, more cost efficient in many cases.

The advancement of new, electronic parts bin systems have also allowed the advancement of robotics to more efficiently stock more parts in less space. All we have to do is push a button and the part(s) come to us. 

Once again, less human interaction and less need for people. Streamlining the stocking of many smaller parts allows for more efficient managing of the parts inventory.

On the the biggest areas, in my opinion, that is not far in the distant future is the use of Parts Kiosks. Even though kiosks are not new, we are seeing the use of these kiosks more and more than ever before and the parts department is no exception in my opinion.

It wouldn't surprise me in the not too distant future, where we can go to the dealership parts department "area", or my local aftermarket parts store, look up my own parts by VIN number and buy the parts I need through a kiosk or vending machine, pay by credit or debit card and the part is brought or sent to me in the vending machine, or by a delivery driver, perhaps even by a driver-less vehicle!

If you think about it, and please don't take this the wrong way, with parts cataloging systems are now so electrically advanced where 99% of the time, all we need is the VIN number of the vehicle, and anyone could research and look up their own parts.

We already see this today as most Collision Centers submit their parts orders to the parts department and the part numbers are already on the estimate, as opposed to years ago where we had to look all those crash parts up ourselves. 

Once again, most of the work and "interaction" is taken out of the equation, with exception to those parts that require more information due to model options, special equipment, etc. where a seasoned "parts pro" needs to do the job.

We have already seen the introduction of this kiosk and vending machine technology with the car vending machine, introduced by "Carvana". 

Now, we don't even have to deal with a New or Used Car Salesperson as we can conduct the sales transaction online and then just pick our New or Used Vehicle up at the car vending machine satellite site.

In Japan, there is actually a dealership, (Autobahn Motors) where they have all their vehicles in vending machines and from the outside, their building looks like one giant vending machine. Even their showroom is car vending machines. Definitely worth taking a look at their website to see this amazing look into our "virtual" future.

The success of this new "virtual" way of buying a New or Used Vehicle is still yet to be determined in my opinion as I still think there is nothing that can replace that experience of buying a New or Used Vehicle and "making the deal" face-to-face.

As for the parts department, we will be seeing more and more come down the pipe as after all, we do sell a retail product, which is a commodity that can be moved physically, or electronically through robotics or other "virtual" means, and it's just a fact like any other physical, tangible product.

Overall, I believe there is no replacement for the human element and the interaction between the dealer and the customer...period! Technology and innovation will always be growing and expanding, including the direction into this "virtual" world, but good old fashioned customer service will never be replaced.

We all want it and we all need it and that's what separates the competition and makes us always try to be the best of the best. Most importantly, that's what makes better products and better services as competition is not like a machine, a robot, or any new technology. The one single thing that cannot be replaced, reinvented, or re innovated is our human spirit and the will to succeed.

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...

 

 

 

 

August 2020: Covid - 19 Update: "What Have We Learned?"

In our May issue of ACG "Smart Parts", we focused on preparing our Parts Departments for and beyond Covid-19. Now, after months into this health crisis, it's time to see what we have learned and what the effects and results have been for "Smart Parts" Managers and more importantly, the effects on the parts department.

Also in our May issue, we highlighted our "Top 10 Action Items" that parts managers should prioritize in preparation for Covid-19 and beyond. These action items have already played a key role in what we are seeing now, just three months later, since our May issue.

In general, the effects this virus has had on our industry is quite staggering, from the manufacturers, automotive vendors and of course, each one of us in all aspects of our lives. Some of these effects will be temporary, although, some may change our industry and our lives for many years to come.

In my opinion, even though these effects and results from Covid-19 have obviously been negative, there has been some positive effects and results as well. In some ways, this pandemic has forced us back to our roots on managing the basics in all departments.

In this issue of ACG "Smart Parts", we will look at what we have learned these last three months since we prepared ourselves back in our May issue. Believe it or not, there has been more damage done to our parts inventory than you might expect.

Manufacturers limited availability, supply chain issues, delivery issues, factories and warehouses closing, etc, have all contributed, (and still contributing) to the overall "trickle down" effect of reducing our abilities to be profitable while still trying to provide the products and services our customers expect.

We've all heard the term..."One thing leads to another"...and in the area of the parts department, that term is more evident than one might think as we "drill down" the "trickle down". In this process of measuring the effects, and/or results from Covid-19, we should all ask ourselves this one question....

"What have we learned and what are we doing about it?"

Let's look at some of the effects and results over these past several months. These results are from my own experiences over the last three months, working, training and coaching many dealers through this pandemic. Keep in mind as we walk through this "drill down" that time moves on no matter what happens and parts age, no matter what happens.

Believe it or not, in just three months, which is one "parts cycle", ALL of our parts inventories have increased obsolescence, no matter how well we were managing obsolescence prior to this health crisis. Sales movement has been shifted automatically one level lower.

First, let's look at the industry guidelines for Sales Movement:

Sales Movement 0 - 3 Months: Industry Guideline - 75%

Sales Movement 4 - 6 Months: Industry Guideline: - 23%

Sales Movement 7 - 12 Months: Industry Guideline: - 2%

Sales Movement Over 12 Months: Industry Guideline: - 0%

The one thing that we all have to agree on is that managing parts is all logic..."black & white", it's all math, algorithms and most important, there are no opinions, it is what it is. We can look at these above guidelines and know for a fact, lower sales during this crisis will impact our Sales Movement over time.

After evaluating many dealership parts departments since this all started, the last six months, (two "parts cycles") EVERY dealership parts department has had a "downshift" in all four sales activity categories. Especially in the last two categories, seven months and beyond.

So, what does this all mean?

Basically, it means we have a problem as if we didn't have enough obsolescence before this crisis, we have now increased it by 10% - 15% in these dealerships that I have evaluated. Even though individual dealerships numbers all over this country may vary, this evaluation sampling has revealed some interesting results.

This is where the "trickle down" effect starts as not only did our sales suffer since the beginning of this crisis where we couldn't generate the expected sales and gross numbers, we now have increased our cost of doing business and freezing up more assets.

 

On top of that, many dealership parts managers couldn't even get many parts they did need from their manufacturers due to plant closures and had to buy from other sources at a higher cost, just to fill their customer needs, all of which resulted in a negative, "trickle down" effect.

Now, as I mentioned earlier, there were some positives from these effects as some dealers were actually able to "rid" themselves from some of their overstock quantities and obsolescence due to this crisis. Parts that were not selling with slower sales activity were now moving again.

Plant closures and parts source reductions forced parts managers to use many parts locator systems to find their parts at other dealers, whether for their customers, or even to replenish depleted stocking quantities. Even if they had to pay more, they still had to provide for their customers and in many cases, added fees were passed down to the consumer.

Another area that has been impacted heavily from this pandemic during these dealer evaluations is our Dealer Management System's, (D.M.S.) posting & receipting practices. The impacts have "trickled down" to even our basic Accounting Practices.

Stock Order receipting became Emergency Purchases receipting, adjustments for additional costs of parts purchases were not being accounted for, Lost Sales not being reported, Outstanding Orders not being cancelled or deleted impacting future suggested orders, lack of proper management on back ordered parts...the list goes on and on.

Let's take a look at some of these areas of normal, regular, daily routines that have been impacted and disrupted our lives as parts managers. Keep in mind, changing our normal daily routines as parts managers will have an impact going forward if we don't fix it now.

Ordering & Receipting Practices

The simple procedure of ordering parts and receipting parts during this pandemic has simply been disrupted and changed. Parts that we would normally order for stock replenishment, whether through the manufacturers Vendor Managed Inventory, (V.M.I.), or even through our own D.M.S. has been disrupted.

Many parts managers are trying to reorder parts to replenish stock and when they receive the back order, or cross ship answer back with no scheduled delivery date, they are forced to seek other sources. Problem is, many parts managers who order from other resources, tend to receipt these normal stock order parts as Emergency Purchases, or perhaps Other Purchases.

This in itself will disrupt the D.M.S. and send false signals on Stock Order Performance, First Time Off Shelf Fill Rates and Parts True Turn. No matter where we buy our parts to replenish stock, they always need to be receipted as Normal Stocking Parts.

The source of where we buy our parts to replenish stocking levels does not determine an Emergency Purchase. This is crucial and perhaps a little difficult to understand, but in normal circumstances, Emergency Purchases should only be recorded on parts we run out of and have to chase down for a customer.

The key thing to remember here is if I'm chasing down a Normal Stocking Part that I ran out of for a customer, which is an Emergency Purchase...OR!...if I'm chasing down a Normal Stocking Part to replenish stock because I can't get it from the manufacturer...it's still a Stock Order Receipt. Just because the vendor changed, the reason didn't, therefore it's still a Stock Order Receipt.

Lost Sales Posting  

Since this pandemic began, many of the dealership parts departments have pretty much stopped posting Lost Sales. In one sense, I can understand with all the confusion and the prime focus becoming..."Just get me the part no matter where you have to go!"...normal process and procedure seems to go by the wayside.

In all actuality though, this is one area that we really need to hold firm and stick to our guns. After all we are not talking about those parts that we already stock and ran out of because of restocking issues, Lost Sales Reporting is key on those parts we never had and we need to record that demand.

We also have to remember that people, pandemics, customer affordability, time of year or any other objection does not determine a Lost Sale....the vehicle does. If the vehicle needs it, whether it gets done or not, that's a demand and requires the posting of a Lost Sale, if not sold.

Lastly, let's keep it simple...there are only two reasons why we don't have the part...either we never stocked it because it hasn't met Parts Phase-In Criteria, (Post Lost Sale), or...we ran out of a Normal Stocking Part that has met Phase-In Criteria, (Emergency Purchase). Both are crucial and need to be recorded appropriately and accurately.

Recording each Lost Sale and Emergency Purchase accurately will allow "Smart Parts" Managers to reduce "run out" situations while posting more demands from Lost Sales to bring in those new parts that our customers need at the right time.

Outstanding Orders

In my opinion, this category alone has had the most overall impact and perhaps still continues and many parts managers don't even know it. Outstanding Orders in my recent evaluations has skyrocketed since this whole thing started and for good reason.

Obviously, with plant shut downs, "forever" back orders, cross ship parts, delivery issues, vendor issues...the list goes on and on resulting in higher than usual Outstanding Order numbers on our D.M.S. Management Reports.

Here's the problem and why I say this category has had the most impact....

If we do not "relieve" those Outstanding Orders with proper receipting practices, meaning if I manually receipt parts that arrive without "relieving" that particular order control number, it will still remain "outstanding" on the D.M.S. even though that part was technically receipted.

The reason this is more evident now is because many parts are arriving weeks and perhaps months after they were ordered so many of these parts get receipted "manually" with the original order or control number omitted.

Another reason for Outstanding Orders rising is because we haven't received the part that we originally ordered and eventually had to find another source to acquire the part, which is fine, but we need to "cancel" the original order for those parts.

Bottom line as to why this is huge...

The D.M.S. will not reorder, or suggest reorder of a part that it sees with Outstanding Order quantities pending, When you think about it, that makes sense as the system is basically telling us..."Why should I order more of the same part that you already have on order?"

In my opinion, we should clear out all Outstanding Orders over 30 days so we can allow our D.M.S. to do it's job when we run our D.M.S. Stock Orders, which I hope all "Smart Parts" Managers do. Don't just rely on your manufacturer to do your job for you. Even if a part does arrive from over 30 days, I can still track it down and receipt it manually.

Accounting Practices/Adjustments

This is also a category that has gone wild since the pandemic started and is still one of the hottest topics that I receive questions on today. With all the additional sources that parts managers have had to purchase parts, whether from other dealers or vendors, there is almost always a cost adjustment that has to be accounted for.

Problem is, many of these cost adjustments are not being properly accounted for all the way to the Accounting Department. Cost is cost when it comes down to billing out a part and if we do not make the adjustment on the repair order or counter ticket, then we have just started a Parts Reconciliation Nightmare with the Accounting Department.

Sad thing is in many dealerships today, they won't be aware of this issue until end of year when most parts departments perform their Annual Physical Inventory. Performing a "Monthly Parts Reconciliation" between the Controlled Inventory, (D.M.S.) and the Accounting Inventory, (Financial) is crucial and should be a normal, monthly practice.

If your dealership does not perform a Parts Monthly Reconciliation as opposed to one Annual Parts Reconciliation, I would strongly recommend to do a "trial run" through July because I can pretty much guaranty that this year especially will bring nightmares if you wait until the end of the year to try and reconcile the parts inventory.

Lastly, it's great to see in all of these evaluations that we are definitely on the upswing, climbing out of an event that none of us would ever expect, but we still go on, as we always do...we adapt and we move on in this industry that is ever changing and ever growing stronger each day, month and year.

So!...What Have You Learned "Smart Parts" Managers!...More Importantly...What Are You Doing About It?".....Stay Strong!

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...

July 2020 - Parts Escalation Matrix: "Developing The Perfect Recipe"

In my opinion, one of the most debated and discussed topics in managing the Parts Department is the Parts Escalation Matrix, second only to managing Lost Sales. When it comes down to developing Pricing Strategies, which includes most often the utilization of a Parts Escalation Matrix, there are many variables that come into play.

Some of these variables may include market area, basic pricing strategies, piece sales & cost sales ranking, Dealer Management Systems, (D.M.S.) capabilities, parts training, etc. which all lead to variations from dealer to dealer when it comes down to what Parts Escalation Matrix to use, or when it should be applied.

Developing the "right" Parts Escalation Matrix goes well beyond "just having one", or "just using one" as there are many key ingredients in the development process that "should not" lead to the exact same matrix in any given dealership, unless, of course a parts manager does a "copy and paste" version from another dealer's matrix.

The reason that the Parts Escalation Matrix needs to be different is because of the variables previously mentioned, even if several dealerships are owned by the same company, these variables are still in play. One of the biggest variables fore mentioned is piece sales & cost sales ranking. Not all the same parts sell from dealer to dealer as markets and customers are different.

The utilization of a Parts Escalation Matrix is nothing new to any of us, but it is not a "one fits all" fix for achieving the proper parts gross profit numbers and percentages that we all expect. Much like any other process we have to manage, the Parts Escalation Matrix needs to be measured constantly for effectiveness.

Not only that, but the Parts Escalation Matrix needs to be designed to impact the proper price "cost ranges" with the right mark up percentages that will impact expected gross profit percentages without sacrificing or losing sales due to overpricing.

In this issue of ACG "Smart Parts", we are going to reveal our Top 10 Ingredients in "Developing The Perfect Recipe" when developing the Parts Escalation Matrix. Even though no matrix should be exactly alike, there are some basic guidelines, or "ingredients" that need to be applied to every Parts Escalation Matrix.

So!...before we get started with our Top 10 Ingredients in "Developing The Perfect Recipe" for our Parts Escalation Matrix, I have to ask all "Smart Parts" Managers this simple question....

"If so many Parts Managers have and utilize a Parts Escalation Matrix, then why are so many Parts Departments not achieving expected Customer Pay Gross Profit Margins & Percentages?"

The answer is...."Maybe we have the wrong ingredients in our recipe?"

Here's our Top 10....

As I mentioned earlier, there are Parts Escalation Matrix guidelines that, in my opinion, should be considered before we develop any parts matrix. The following Top 10 Ingredients to the perfect recipe will be listed in order of importance so that we can achieve our expected customer pay gross profit margins and percentages.

Number 1: Price Escalation Levels

I have seen so many Parts Escalation Matrices over the years and I have been amazed at the lack of, or improper cost ranges in many of them. Whether the matrix is a "cost plus" or a "list plus" matrix, there are so many "gaps" between these ranges. I have seen gaps from the $50.00 range all the way up to $250.00 with varying percentages above cost or list.

For example, I've seen cost ranges that from $5.00 to $50.00 with the same percentage increase which will result in under costing and over costing on certain parts with that much of a "gap" in the cost range. The end result is parts staff  "overriding" that matrix to a price closer the M.S.R.P., or perhaps even less, depending what they "think" the price should be.

Each Parts Escalation Matrix should have at least 12 - 15 pricing levels, whether cost plus, or list plus, (I prefer cost plus, which I will explain in our Number 3 Ingredient). Each level, escalating upwards, should only have a $1.00 gap up to $5.00, then a $5.00 gap from starting at $5.01 up to the $25.00 range.

The gaps can be increased by $10.00 or $15.00, starting at the $25.01 range up to $100.00 and then increasing by $50.00 or more before finally "capping out" around $250.00 with M.S.R.P. taking over from that point. As price increases, customers are more aware and may "price shop" at that point.

In my opinion, if a customer will pay $37.52 for a non-competitive part, they will also pay $39.87 for that same part as it remains in that "zone" where they are less susceptible to shop elsewhere. On the other hand, they may not buy a part that we may "matrix up" to $344.17, where M.S.R.P. is around $287.12

Setting up the appropriate levels is Number 1...percentages above cost or list may have to be modified from time to time to get the right "fit", but the ranges need to be consistent and a "constant". Not having the proper amount of ranges will only lead to more price "overrides" by the parts staff.

Number 2: Application - Where To Apply The Matrix

This is one question I get a lot...."Where should I apply the matrix?"...

There are some specific times that I may not choose to apply the matrix such as Competitive Parts as I mentioned earlier as those parts should be "flat priced" in the D.M.S., whether manually or automatically. Keep in mind that all parts should be priced the same "over the counter" and in the Service Department, whether matrix, or "flat priced".

Another area where "Application" comes into play is Pricing Policies & Strategies between certain customers and situations where promotions, discounts and certain parts like accessories may be involved. Training the parts staff is key to insuring consistency and proper gross margins and percentages are maintained.

Pricing strategies within the dealership could also affect whether we use the matrix or not is within our own internal organization like the Used Vehicle Department and Collision Centers. Once again, consistent and proper training by management is essential.

Lastly, we may have multiple Parts Escalation Matrices for Fleet Customers, Wholesale Accounts, Senior Citizens and Military, etc. that may require different matrices for certain situations as we are not limited to just one matrix, or "catch all" matrix within all parts sources, or parts stocking groups.

Number 3: Percentage Ranges

After we have set up a consistent and constant Pricing Range, it's now time to "experiment" with the proper matrix escalation percentages. Depending on which cost range, some parts may get "out of whack" and be way too far from M.S.R.P., and other parts may well be within the right percentage range.

Most important thing to remember here is that we have to separate by Parts Source, or Stocking Group which parts we want to matrix in the first place. In other words, I may have a set of brake pads that fall into the same price range as a sensor. The matrix price on the sensor may be okay, but I may be charging too much for the brake pads as they are more "competitive" and not "captive".

All competitive parts should be "flat priced" and excluded from the matrix by either Parts Source or Stocking Group and not updated to the matrix price. Most Dealer Management Systems, (D.M.S.) can be set up to override the matrix on "flat priced" parts.

The most important thing to remember about our Number 3 is that these percentages need to be experimented with, adjusted, modified, measured on a consistent basis and there are always a "moving target" and require on-going maintenance.

Number 4: Cost Plus Matrix vs. List Plus Matrix

Our Number 4 is also extremely important as I still see Parts Managers utilizing a "list plus" matrix and I believe that a "cost plus" matrix works best. For one thing, list price is also a moving target as list price varies on many parts and becomes very difficult to control retained gross profit.

Some M.S.R.P. prices may be set too low, especially with Accessories, and on the other hand, some M.S.R.P. prices have a "backed in" huge list price with lots of retained gross profit already. This may lead to either "under pricing" or "over pricing" on certain parts. Which, once again, leads to more price overriding by parts staff.

One thing to remember is that cost is always a "constant" and never changes as the price we pay is the price we pay. So, if I "mark up" from cost at 1.75% on a part that costs $10.00, I will always retain a 42.8% gross profit percentage, ($7.50), not matter what the list price may be.

The only way that we can control gross profit margins and percentages is to control our "cost plus" margins and percentages. It also allows us to make changes and modifications in specific percentage ranges in our matrix. In addition, it will always calculate, even if the manufacturer does not show a list price in their pricing guides.

Number 5: Captive Parts

I mentioned earlier that I don't believe that we should apply a matrix to Competitive Parts, which should be "flat priced", so that leaves us to those parts that are "captive" and less likely to be price shopped if the matrix is applied properly.

These "captive" parts also allow us to make up for the difference on competitive, "flat priced" parts to achieve our overall goal and targets on overall parts gross retention. Much like the Labor Grids we use in the Service Department, we need those "captive" repairs to make up for our competitive and maintenance service parts.

These parts can also be separated by utilizing the D.M.S. options with Source Stocking by Piece Sales, or other Algorithms that will determine which parts are considered "competitive" versus "captive". Once these ranges are determined, they can be separated by source, or stocking group with the proper pricing strategies applied.

The most important thing to remember when utilizing a parts matrix on "captive" parts is what cost ranges we need to focus on the most in order to retain our best margins and percentages, which leads us to our Number 6 Ingredient....

Number 6: Cost Ranges

Another key factor in developing the perfect recipe for the Parts Escalation Matrix is which cost ranges that need to be focused on. In most cases, 80% of our part sales at cost fall into the $10.00 to $35.00 cost range. These ranges can be easily determined by performing a D.M.S. Parts Ranking Report. This report can be run by parts sales at cost, and/or piece sales.

This report can also be usually run in an ascending, or descending option which will determine what parts are selling in what range by percentage. As mentioned, approximately 80% of most parts that sell at cost is between $10.00 and $35.00. The remaining 20% is split between the $.01 - $9.99 cost range and $35.01 and up cost ranges.

That being said, it's pretty obvious that when developing a Parts Escalation Matrix, we should be focused on the majority range on "captive parts". It also means that this is the range that requires the most work, modifying, experimenting, measuring and managing it constantly to insure proper gross profit margins & percentages.

A "tweak" here and there in this $10.00 to $35.00 cost range can make a huge difference in overall gross profit margins and percentages just from a volume standpoint. A simple 10% increase swing can mean a total difference of 1% - 2% in overall customer pay gross profit retention.

Number 7: Capping The Grid

Our Number 7 Ingredient is here for a reason as I've seen so many Parts Escalation Matrices that have little or no cap in the escalation percentages, thus resulting in lost sales and customer retention. In my opinion, any part that sells over the $250.00 cost range should default back to cost plus 67%, which will result in a 40% parts gross retention percentage on customer pay parts, which is industry standard.

In my opinion, many customers would be more inclined to price shop on repairs and/or parts that are higher in price, especially on high ticket parts such as engines, transmission, axles, air conditioning parts, or for any other major service repair part.

It's much better to gain a little most of the time instead of gaining a lot just a few times. Let alone what that would do to the dealer in general on future vehicle sales and overall customer retention. Capping the grid is also easier to remain consistent with less overrides as from the parts staff.

Number 8: Discounts & Overrides

The biggest "gross killer" when it comes down to maximizing the Parts Escalation Matrix is Discounts & Overrides. Not having controls in this category leads to inconsistent pricing from department to department, and dealer to dealer. Common sense should tell us that no matter who is selling the part, the price needs to make sense.

If the Parts Escalation Matrix does not have the right ingredients, the number one way we can tell is by the number of discounts & overrides were done by parts staff. Creating a "Parts Exception Report" in the D.M.S. by counter person weekly, if not daily is a must, especially if Discounts & Overrides occur frequently.

Once again, we have to look at these Discounts & Overrides in a common sense fashion and ask ourselves..."Why are they overriding the matrix?" If so, we need to look at our recipe from the beginning and check the ingredients. The "Perfect" Escalation Matrix won't have overrides and only  "authorized" discounts.

Lastly, on our Number 8 Ingredient, I've had MANY dealers call me and tell me that the matrix we installed isn't working. They suggest we have to adjust it higher, or, it's working on Counter Retail, but not on Service Customer Repair Orders which can't make sense, especially if it's the same matrix.

The last thing we should  to do is to play around and increase the Escalation Matrix due to poor retention when the real culprit is discounts & overrides, instead, we should be looking at adjusting, modifying or "tweaking" the matrix, training our people and holding them accountable.

We should also, (if possible) implement a "password protect" feature in our D.M.S. with password authorizations as to who can discount and/or override our pricing strategies in general and not just with the Parts Escalation Matrix.

Number 9: Measuring & Managing Results

Like anything else we do as managers, we have to measure and manage our results so we can "fix it" if need be. A Parts Escalation Matrix is not a "set it and forget" implementation and process. It requires constant monitoring and measuring just for the fact of promotions, seasonal changes, customer preferences, sales and gross numbers, etc.

Managing & measuring results may also lead to additional Escalation Matrices and where they be applied. Percentage modifications, marketing, sales and gross goals and a host of other reasons may lead us to having additional matrices. If we have and utilize a Parts Escalation Matrix, all the previous eight ingredients must be followed consistently and monitored constantly, no matter how many we have.

Lastly, the actions we take when measuring and managing the Parts Escalation Matrix requires staff accountability, training and coaching. Positive reinforcement is always recommended and encouraging feedback from our parts staff and will always help us achieve our goal of developing the perfect recipe.

Number 10: It's a Moving Target

Much like our sales and gross goals, the Parts Escalation Matrix is a constant, moving target as it should be. Sales and gross dollars always follow trends and the Parts Escalation Matrix is no exception. The Parts Escalation Matrix is also just a piece of the overall parts pricing strategies & policies that is different from dealer to dealer.

Developing any market strategy has to include how we sell and move products and/or services, so if we are not keeping our eyes on the never ending "moving target", we will never achieve our overall goals and expectations.

So, if we are not achieving our overall parts gross margins and retention percentages, then we don't have the perfect recipe in developing our Parts Escalation Matrix. If the results aren't there, it's time to get back to basics and change the recipe.

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...