November 2018: Inventory Amounts: "Too Much Or Too Little?"

As mentioned in my intro, picture if you will that you are an investor and you are interested in purchasing an existing automotive dealership. In the "buy sell" agreement, you notice that the selling dealer currently has a parts inventory amount of $249,387.00 on the latest dealer financial.

Next, you research a little further and find out the selling dealer's D.M.S., (Dealer Management System) "controlled" parts inventory amount shows a different parts inventory amount of $211,459.00, leaving a variance, or "discrepancy" amount of $37,928.00 between the controlled inventory and the dealer financial inventory.

Of course, this is an obvious concern to you as a potential buyer as this "discrepancy" has to be accounted for and adjusted to actual physical inventory count records. As a potential buyer, this would probably be primary concern when researching the parts inventory asset in the "buy sell" agreement.

This above situation is not uncommon for buyers and sellers of automotive dealerships when researching and considering the actual net worth of the selling dealers parts inventory.

The sad thing is that this above situation doesn't even hold a candle to what disasters may lie underneath when considering the actual net worth of this huge dealer asset.

In my opinion, when we consider these two varying amounts, I wouldn't be as concerned about the discrepancy as much as these amounts can be reconciled to the agreement of both parties, even though one of the two parties may feel they got the better of the deal.

Here's what would concern me more than anything...

As a potential buyer, wouldn't it be great to know how "liquid" this parts inventory is? Wouldn't it also be great to know how current, or obsolete this parts inventory is? Lastly, are these parts inventory amounts "too much or too little" to satisfy my customer base?

The biggest question even beyond the three mentioned above is...

What is the proper amount that I should have invested in my parts inventory?

This to me IS the question that we should consider as a buyer and most importantly when we are looking forward to the parts departments return on investment, (ROI). After all, if I'm the buyer, I could be looking at a parts inventory that could either "too much or too little" based on the previous dealer's monthly sales averages.

So, just how do we determine what I call the "desired" inventory amount that will satisfy my customer base? What will be my basic inventory value guideline going forward for my parts manager to manage and maintain?

The answer to these two questions will lead us to the correct and "desired" inventory level as well as potential answer to what may be causing these "too much or too little" inventory amounts. Lastly, the answer will give us a game plan to fix and manage either situation, whether "too much or too little".

The answer lies in a couple simple parts guideline set by NADA starting with recommended days supply of parts inventory amounts. As a matter of fact, these recommended days supply guidelines also apply to new and used vehicles.

We will then bring in the second NADA Guideline that will also play a part in determining our "desired" parts inventory amount. Actually, the "math" of this second NADA guideline will determine NADA's FIRST guideline!

Here are the NADA Guidelines that will determine our "desired" parts inventory amount along with an example;

The first guideline is NADA's recommendation for "days supply" of parts inventory, which is 45 days, or 1.5 months supply. This means, in a dollar sense that if I was unable to buy any more parts today, I would at least have enough "parts supply" in dollars to last the next 45 days, or 1.5 months.

So why 45 days, or 1.5 months?...

This is where guideline number two comes in with NADA's recommendation of parts inventory "Gross Turns" comes in. The parts inventory "Gross Turn" represents the number of times annually that the total parts inventory value sells, or "turns" and that guideline, or recommendation is 8 times annually.

So, if we do the math, twelve months a year, (annually) divided by eight recommended parts gross turns equals 1.5 months supply, or 45 days supply, whether we are talking parts, or new & used vehicles.

Next, in order to determine our existing parts gross turn number, we have to look at history and bring parts "cost of sales" into the picture. The formula for calculating gross turns is;

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

Now, we have all the ingredients to determine our overall "desired" parts inventory amount. That being said, all I have to do now is bring in my "cost of sales" amounts and my guideline for gross turns into the picture to finally determine my "desired" parts inventory amount.

Here's the example utilizing an average monthly parts "cost of sales" amount for the last twelve months of $100,000.00;

$100,000.00 X 12 Months - Divided By - 8 Annual Gross Turns = $150,000.00 

As you can see based on the example, without even having to actually do the math, we can simply take our average monthly sales at cost and multiply the amount by 1.5 and we can determine exactly what our parts inventory amount should be.

"Now that we know the amount, what do we do if the amounts are "too much or too little?"

Having a parts inventory amount that is "too much or too little" can have ramifications both ways. Much like in new and used vehicle inventories, there are no real benefits to either situations, only undesirable results from either one.

First, let's take a look at what could happen if our parts inventory amounts are "too little"....

The biggest risks of having "too little", or a low days supply of inventory is the potential for lost sales and lower service productivity as "stock out" situations will happen more frequently.

Turning the inventory amounts at a higher rate does give a higher and more frequent return on investment, but what's "unknown" is the unrealized and lost sales.

Overall customer satisfaction and retention is also at risk as too many return visits or even extended service visits due to not stocking enough parts, or the right parts may have a substantial impact. Not having enough parts, or the right parts can also impact overall service sales and employee wages.

Next and lastly, let's take a look at the negative impacts and risks of having "too much"...

Having "too much" in the way of inventory amounts carry far more risks and dangers than having "too little". In this situation though, we have to not only determine how much is "too much", we also have to know where we have "too much".

For example, if our "desired" inventory amount is like our above example of $150,000.00, and we are carrying $200,000.00 in inventory, where is the overage coming from? This is where we have to do a little more research in determining where we go next to get it back to a "desired" inventory amount.

There are only two areas that can cause the situation where we have "too much" in area of parts inventory amounts. Those two areas are parts obsolescence and overstocked parts inventory within the current, active parts inventory and each can be determined quite easily.

If we use the above example again with a "desired" parts inventory amount at $150,000.00 and an actual inventory amount of $200,000.00, we are "overvalued" by $50,000.00 in obsolescence and "overstocked" inventory.

If my obsolete inventory is $30,000.00, (parts with no sales over 12 months), the remainder would be "overstocked" parts that may be active, but carry more parts days supply than necessary. Both can be managed by the "Smart Parts" Manager.

In the area of obsolescence, we not only have to come up with a game plan to eliminate the amount, more importantly we have to "stop the bleeding" so obsolescence doesn't return year after year. Solving the problem is one thing, managing it from coming back is another.

As far as the overstocked amounts, those can be managed by proper Source Ranking, Low and High Days Supply, or Best Reorder Points, (BRP) and Best Stocking Levels, (BSL) until these "overstocked" parts reach their proper stocking levels.

In my opinion, the biggest danger and/or risk if our parts inventory amounts are "too much" is the fact that some of the same risks that apply in "too little" inventory amount category can apply in the "too much" category as well.

Excessive obsolescence and excessive overstock amounts can actually overshadow the "desired" inventory amounts. It is quite possible, once I do the math, that I could have "too much" and "too little" at the same time.

For example, if my "desired" inventory amount is $150,000.00 and my actual inventory amount is $200,000.00, but with $100,000.00 of that amount considered obsolete, my net "active" inventory amount would be $100,000.00.

This would leave me with $100,000.00 in active inventory...$50,000.00 less than the "desired" amount.

Having the right parts and the right inventory amounts go hand in hand. The right combination of the two can only lead to gross and true turns at or above guide, expected return on investment and a high level of customer service.

Are Your Parts Inventory Amounts "Just Right?"....Or, Are You "Too Much, To Little, Too Late?"

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

October 2018: Comparing Management Styles

In my opinion, one of the toughest things that we all have to go through at some point in our lives is our own personal "self evaluation". As Parts Managers, or any dealer manager for that matter, our own "style" of management brings us to where we are.

Before we even get started, I do not profess to be a psychological analyst by any means, but after being in this business for over 40 years, I have seen so many management styles that I have admired and many that I thought were not so admirable.

In my opinion, the Parts Manager's "Management Style" includes many variables as the parts department is the only department within the dealership that operates in a "wait and see what happens" atmosphere.

In most other departments such as Service and Sales, there is a plan for the day, whether it be a certain number of appointments, a planned sales event or calling customers back for follow up, there always seems to be a basic plan.

In the Parts Department though, we have to "wait and see what happens" for the most part, as in most cases, the other departments are the ones that will eventually dictate how our day will go. Much of what happens is directly and indirectly out of the control of the Parts Manager.

Even though we can be proactive in some respects by looking at how many Service Appointments there are, how many recall customers are coming in, etc., in general, the Parts Department operates in a "reactive" manner. Much of the duties and responsibilities of the Parts Department is to provide and to serve.

To me, the Parts Department reminds me of the movie "Groundhog Day", starring Bill Murray, where every day repeats itself to a point of frustration and with the same outcome. Over and over, the routine stays the same including the same results.

So how does this all play out when we refer to the Parts Manager's "Management Style"?

First of all, we have to go back to the beginning where the Parts Manager has to possess the right skills, abilities and knowledge just to be in the Parts Manager position in the first place. The duties and responsibilities of the Parts Manager has to come in first and foremost.

After that, the Parts Manager's "Management Style" takes over as to how far and how successful they become. Even though most successful Parts Managers, including myself, seem to have a similar personality profile which would include an analytical, logical mindset and an intrinsic, or introverted behavior pattern.

Much like the dealer's Office Manager, the Parts Manager deals with numbers, specifics and a high level of transactions each day which requires a "deep thinking, calculating" mind just to keep up with daily parts operations. Much different than a Service Manager or Sales Manager where "thinking on the fly" is a normal attribute.

In my opinion, the Parts Manager's "Management Style" not only has to be consistent, it has to be goal oriented with the leadership capabilities, even through this "Groundhog Day" affect. Each day can be so repetitive in nature as the same movie plays over and over. 

It is not unusual to see everyone in the Parts Department fall into a "Comfort Zone" that can impair the overall vision and eventual goals of the Parts Department. Keeping everyone in the department focused and chasing the same goal can be quite a challenge.

Think about it for a minute, in many Parts Departments, we see the same technicians each day, we may answer phones from the same customers from the same body shops and service garages over and over. Other than a few customers showing up at our retail counters, or calling in to get a price on a part, every day replicates itself.

Not only that, each day has its own specific time to perform specific duties such as placing stock orders by the proper cut off times, special orders, checking in and receipting orders, stocking shelves, managing core returns, etc....the list goes on and on.

This is why to me, the Parts Manager has the most difficult job in staying on track with the right "Management Style" that will keep their staff motivated and striving to achieve the objectives and goals set before them.

Let's look at a few "pros and cons" that may affect the Parts Manager's "Management Style"...

PROS:

One of the benefits of the "Groundhog Day" effect is that through repetition, the Parts Manager can expect consistent performance from the Parts Department Staff. Each staff member has specific duties and responsibilities that can easily be managed.

Whether through performance expectations in the counter staff, or by observation of drivers, inventory clerks, shipper/receivers, etc., it's pretty much an everyday expectation for a Parts Manager to maintain.

Another "pro" is that most Parts Departments are profitable so dealer expectations are often met or exceeded, thus reducing pressure on the Parts Manager. It's less likely that the Parts Manager is the topic of "heated discussions or meetings" with the owner and other dealership managers.

The expected "consistency" of the parts operation is expected to be just that...consistent and profitable. This is also why, in my opinion, the Parts Department is pretty much excluded and often times forgotten when it comes to the importance in their role in overall Service Absorption.

Lastly, one other "pro" is that the Parts Manager usually has the longest tenure in the dealership as far as their management staff. The trust that dealership owners ranks almost as high as the Office Manager as the dealer has to trust their Parts Manager with their second highest asset next to the Used Vehicle Inventory.

Sadly though, most Parts Managers rank at the bottom as far as dealers investing in their overall training budget, whether it be in Inventory Management Systems, (I.M.S.) Training, Dealer Management Systems, (D.M.S.) Training, or most importantly, training in basic Dealership Accounting. 

CONS:

Based on the previous, this is where the "cons" of the Parts Manager's "Management Style" can take a turn for the worse. Without the proper training and leadership capabilities, the Parts Manager may not possess the right skills, abilities and knowledge necessary to be successful.

Many Parts Managers that I have met tell me that they got the job as Parts Manager just because they were the "next in line", or maybe through tenure they "inherited" the position. This to me is crazy, when you think about that this person in this position is controlling my number two asset and can sink my business.

Without the proper training, and throwing in the "Groundhog Day" affect, parts setups and controls don't get managed properly, low "First Time Off Shelf Fill Rates" appear and obsolescence starts freezing up valuable assets.

Service Productivity also takes a dive due to low "First Time Off Shelf Fill Rates" as things just start to "trickle down" and missed opportunities rise. I've even seen technicians leave for other dealerships because they lose so much waiting for parts each day.

If I were to pole a number of Parts Managers with these few questions, I would believe the results would be staggering in a negative way.....

1.) "When was the last time you looked at, or modified your Phase-In/Phase-Out Criteria?"

2.) "When was the last time you looked at, or adjusted your Low Days and High Days Supply, (Best Reorder Point, BRP and Best Stocking Levels, BSL)

3.) "When was the last time you looked at, or adjusted your Parts Escalation Matrix?"

4.) "Does your Parts Obsolescence, (over 12 months, no sales) represent at least 20% of your parts inventory?"

5.) "Are you reporting at least 5% - 10%, (Cost of Sales) as Lost Sales, or what I refer to as Potential Missed Opportunities?"

6.) "Last, and most important....do you know HOW to manage or modify all the above?"

Unfortunately, in many dealerships, Parts Managers are pretty sharp individuals, but their dealer has never given them the chance to even learn the basics of what I call "Parts 101". It's not their fault and when I do get a chance to train Parts Managers on the basics, I choose to refer to this training as the "sharing of information"

We can't know what we don't know and the beginning to a successful Parts Manager "Management Style" begins with leadership capabilities, skills and knowledge along with the proper training and the "sharing of information".

They also need to be able to motivate their staff to expected goals while managing the "Groundhog Day" affect each day. Comfort Zones are comforting, but in the long run....comfort is short lived as change is inevitable.

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

September 2018: Building Service Menus: "What's The Parts Manager's Role?"

For over 30 years I have trained and coached in well over 200 dealerships throughout the U.S. and Canada and I have to admit that one of my most "dreaded" visits into dealerships was "Service Menu Week". I knew I was in for a brainstorming week with both the Parts and Service Managers.

I also knew that this "Service Menu Week" would require lots of research including manufacturers' service and maintenance recommendations, local area recommendations and the dealer's sales and gross profit needs.

Most importantly though, bringing the Parts and Service Managers together and agreeing on "one size fits all" Service Menu.

Building the "right" Service Menu requires many elements including; recommended service intervals, maintenance recommendations, service labor times, proper effective labor rates and yes....parts!

We not only have to choose what parts to include at what intervals, we also have to determine the right price for so many different part numbers.

Before we get started building our Service Menus, I want to mention that as we move through this exercise, those of you who have the benefit of V.I.N. Specific Service Menus already have much of the research, or "homework" taken care of up front by the vendor.

Vendors who provide these V.I.N. Specific Service Menus "dial into" each vehicle manufacturers' specific year, make and model to labor time guides as well as part numbers for each interval menu service. The only items left to be installed are labor times, effective labor rates and the parts selling prices.

For most dealers though, these V.I.N. Specific Service Menus can be quite expensive which means creating and developing these Service Menus falls upon the Parts and Service Managers to do all the leg work. Often times, this is where we may be called in to assist the managers in creating their Service Menus.

We will go through each step of the Service Menu Development Process from start to finish which will of course include the Parts Manager's role. In my opinion, both the Parts Manager and Service Manager need to keep it simple when developing Service Menus.

Without a doubt, they can be quite cumbersome, complicated and could end up getting way out of hand.

Let's Get Started!... 

Step One: Competitive Market Survey

One thing that we have to consider is what our overall "out the door" pricing should be. Comparing other dealers Service Menu Pricing is extremely important as we don't want to price ourselves out of the market even though we don't necessarily want to be the cheapest.

The focus should be on value and providing the interval service that replicates the manufacturer and local area recommendations.

Choosing the right combination of the manufacturers' and local area recommendations could be the difference in overall menu penetration. Too little can be too little and too much can be too much when it comes down the final pricing decisions.

In comparing prices in the market, we have to make sure we are comparing "apples to apples" and not "apples to oranges."

Step Two: The Right Combination At The Right Interval 

When we talk about the right combination, we are referring to the right combination of manufacturer and local area recommendations at the proper intervals. In my opinion, this is one of the most important decisions that both the Parts and Service Managers have to make.

This decision will determine the overall menu penetration and proper sales and gross expectations.

Service Menu Packages should first include the manufacturers' recommendation, whether in severe or non-severe climates. Additional recommended services such as power steering fluid, brake fluid, fuel induction, transmission fluid, coolant and wheel alignments are often added to the manufacturers' recommendations.

Although, it's great to see many manufacturers now recommending, (once again!) brake fluid replacement, transmission fluid and coolant back in the rotation. For a while there, we were told by these manufacturers that some transmission fluid and coolant were considered "lifetime" fluids.

Many owners manuals maintenance recommendations leave much up to chance with phrases like "inspect and replace as needed or required".

This phrase leaves the door wide open to varied menu package prices from dealer to dealer. Proper verbiage on service menu packages is crucial in NOT misleading customers on their service maintenance needs.

Most manufacturers Owner's Manual Maintenance Recommendations only suggest the very basic maintenance operations such as oil changes, tire rotations and maybe engine and cabin air filters. They leave the area recommendations up to the dealer and local climate conditions.

This in itself is very important in explaining to customers the difference between what their Owner's Manual states versus what the dealer may be recommending. Quite simply and for example, I'm sure that more air filters are replaced in Arizona versus Alaska.

Due to these variances in the Owner's Manual and local climate recommendations, educating the customer along with Service Advisor Service Menu Presentation Training on the Features and Benefits is extremely important.

Step Three: Parts Pricing

Here we go "Smart Parts" Managers!...

First and foremost, all Service Menu Parts Prices need to be "flat priced", unless a V.I.N. Specific Service Menu is being used. Service can't be changing their labor fee amounts around different parts prices on cabin filters for example. Weighted Price Averaging is the way to overcome all the different parts prices on the same type of part.

Weighted Price Averaging simply works by combining five or more of the most popular part numbers of the same type of part and combining all of the piece sales collectively. Once the collective piece sales of all five part numbers are tabulated, then we would divide the total piece sales by the total cost to get an average piece sale cost.

Example: Cabin Filters

 Part #                 Unit Cost          Annual Piece Sales          Total Cost       
123456                  $4.56                       512                          $2,334.72
654321                  $7.88                       345                          $2,718.60
123123                  $10.65                     112                          $1,192.80
321321                  $12.35                       54                             $666.90 
987987                  $14.12                       21                             $296.52

                               Total Piece Sales:  1,044   Total Cost:    $7,209.54

                               Average Piece Sale Cost:                              $6.91
         
                               Mark Up % (40% Retained Gross)                  1.67

                               Cabin Filter "Flat Price":                           $11.54

Even though there is a negative gross profit on the two least popular and most expensive cabin filters, the most popular cabin filter has a retained gross profit of over 60%, far exceeding the negative gross, with almost ten times the overall sales of the bottom two.

Most often times, the part that sells the most is usually less expensive.

The biggest "gross killer" for Service Menu Labor is the inconsistent parts pricing on Service Menu Labor Operations. Even though the Menu Labor Fee could have had a "backed in" Desired Effective Labor Rate, labor overrides due to part pricing inconsistencies tends to drive the Service Menu Labor Effective Rates down.

Oil and Fluid prices that may have varied quart or litre quantities utilized can also cause a problem for "out the door" Service Menu Pricing. The best way to overcome fluid quantity pricing is to go to the top right out of the gate. 

In other words, if quart or litre quantities range from four to six, allow for six in the Service Menu Pricing. Customers don't mind if their Service Menu Package was a little less than quoted as opposed to being more than quoted. 

Another way to overcome varied application usage is to provide the right comments, or disclaimers such as "includes up to 5 quarts of oil, add for additional". Either way, keeping it simple is always the best way to go and makes it much easier for Service Advisor Presentations.

Step Four: Service Menu Labor Pricing

Coming up with the right Service Menu Labor Pricing can now be added to the overall "out the door" package price. Now that the parts "flat prices" have been established, it's time to look up, or establish the proper technician times to each menu package and "a la carte" Labor Operations.

Combining each individual Labor Operation within each Service Menu Package is required to achieve one combined labor time for each package.

Once the labor time is established, the Service Manager needs to determine the right Customer Pay Effective Rate that will retain the proper gross margins while maintaining an overall competitive "out the door" Service Menu Price.

It is not uncommon to make compromises on Customer Pay Effective Labor Rates and Parts Markup Percentages in order to remain competitive in the marketplace. Most important is to eliminate overrides and advertise professional service and value.

Step Five: "Lock 'Em In"!!!

The last step in Building Service Menus is to lock everything in as far as Operation Codes, Flat Parts Package Amounts, Labor Fees and Technician Labor Times. If possible, depending on which D.M.S. is used, these labor operation codes should be password protected, thus eliminating any chance for overrides.

Overrides should only be allowed by the Parts and Service Managers Once overrides are allowed, that's when gross profit and menu penetration percentages start to go downhill. If "accepted" overrides are becoming more frequent, then maybe we need to modify the Service Menu Package, or "a la carte" service maintenance operation.

The Parts Manager's role in the Service Menu Building Process is crucial and plays an overall major role in the success of any Service Menu. The success of any Service Menu Program can only be determined by how well the Menu Presentation and Penetration Percentages are tracked and maintained.

I've often been asked by Service Managers....

"How do you like our Service Menus?"

My answer is always a question and quite simple...

"That depends, what's your overall Menu Penetration and Retained Gross Percentage?"

"The Service Menu is only as good as how well it was built in the first place, performing to the levels expected with at least a 35% Menu Penetration with 100% Customer Presentation. Lastly, if priced correctly with the right "backed in" gross amounts, the answer to this Service Manager question would be obvious."

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

August 2018: "What Are The Costs Or Benefits To Loyalty?"

Purchasing parts from the manufacturer today is quite a bit different than it was years ago. Back in the day, we just had parts order options such as stock orders, supplemental stock orders, emergency orders and perhaps critical orders that we placed and received overnight.

Each order carried its own cost or benefit whether it was receiving the best discounts and most return reserve accrual from placing a stock order to higher costs from placing emergency or critical orders to receive the parts as fast as possible.

Today, we see these basic parts order functions expanded into programs where many manufacturers are controlling the dealers parts purchases through Vendor Managed Inventories, (V.M.I.'s) and in some cases, tying in the Service and Sales Departments for overall dealer incentives and program qualifications.

To me, many of these parts programs being offered by the manufacturer are beginning to emulate many of the dealers up front vehicle sales incentive programs that may even include "cash back" to the dealer if compliant to their respective programs.

Discounts, allowances and return reserve accruals are also available to the dealer, once again, if compliant to achieve maximum program benefits. Sounds great if all this comes together for the dealer, but in many cases, the reality of higher costs outweighs the benefits.

Let me explain.....

The first key word that we need to pay attention to is "compliance".....

Let's look at the definition of "compliance" as stated by dictionary.com;

"The act of conforming, acquiescing, or yielding, a tendency to yield readily to others, especially in a weak and subservient way, conformity and accordance..."

So, to me, when it comes to being "compliant" to these programs, the first question I have to ask is... 

"Who's In Control Here?"...

I would have probably thought that these programs would lean more towards program "qualifications", or perhaps even program "enrollment", instead of "compliance".

 It also leads me to believe that we don't have a choice, but to comply. It also seems to imply that if we don't comply, there will be costs and consequences.

As I mentioned in the beginning, it was much simpler back in the day as the Parts Manager had control of the dealers "purchase power" and the discounts, allowances, return reserves and any added costs were controlled by the Parts Manager.

Today, with many manufacturers offering V.M.I.'s, the Parts Manager has lost much of this control, or chooses to give up their control, thus leading to the dealers "purchasing power" being forfeited over to the manufacturers.

The end result in many dealers parts departments that I have worked with is an over inflated inventory with obsolescence in excess 25% or more.

Recently, I was interviewed by Fixed Ops Business on an article that is due out in November of this year and the subject matter focuses on "problem K.P.I's", (Key Performance Indicators) in dealership Parts Departments today.

Not to give too much away on the upcoming article, but I believe that parts obsolescence is one of the biggest "problem K.P.I's" that many Parts Managers deal with today.

One of the biggest contributors to parts obsolescence, in my opinion, is the fact that many Parts Managers "overextend" themselves into many of these programs offered by manufacturers just to be compliant.

So, who really benefits from these programs and who really gets impacted by the negative effects from these programs?

First of all, before we answer these questions, the news isn't all bad as there are significant benefits to being "loyal". Keep in mind that the following is just a sampling of my own research from dealers I have personally worked as well as a sampling of dealer 20 groups that I have also worked with.

Who Benefits?

For the most part, high volume dealers that have parts purchases in excess of $3,000,000.00 annually receive the biggest benefits from these "loyalty' programs offered by the manufacturer. Higher parts demands enables these dealers to achieve the biggest volume discounts by reaching higher discount percentage "tier levels"

Along with the higher demands, also enables these dealers to have a "broader inventory" with more part numbers that qualify for program benefits. Their inventory also tends to have higher gross and true turns annually so inventory is usually protected and obsolescence less likely to occur. 

Plus, with the strong "purchase power", accruing parts return reserves are much higher, thus allowing these dealer Parts Managers to keep up and return parts that may slip in that "over 12 months, no sales" category before the become obsolete.

These high volume dealers also tend to have strong wholesale sales which also allows the Parts Manager to keep their "loyalty" percentages strong as most of these wholesale parts are purchased from the manufacturer as opposed to purchasing parts from aftermarket vendors.

In the end, these high volume dealer Parts Managers can pretty much capitalize on all the benefits from these programs achieving the most in discounts, allowances, return reserves and overall dealer "cash back" from the manufacturer.

They are also a big player in the overall dealer programs that may tie in the Service and Sales Departments. So now we have "compliance" playing a role in all of the dealers operations and in all departments.

Who Does It Cost?

Well, I guess the opposite would be correct with dealers that have less than $3,000,000.00 in annual parts purchases. Especially, even those smaller dealers who don't  achieve that amount in annual parts purchases. Outside purchases are much more common from other dealers and aftermarket vendors as emergency purchases are much more frequent.

With so many part numbers out there in order to even qualify for some of these programs, it's becomes that much tougher to meet program requirements for "compliance". Because of this pressure to meet qualifications, oftentimes Parts Managers will purchase "qualified" parts just to meet compliance levels, even if these parts have little or no sales history.

These smaller dealer Parts Managers also tend to "walk away" from their own Dealer Management Systems, (D.M.S.) when it comes to creating their own stock orders, relying solely on the manufacturers' Vendor Managed Inventories, (V.M.I.). When this happens, the risks of overstocking the parts inventory and inflating obsolescence goes much higher.

In some cases that I have personally witnessed, Parts Managers are and have been pressured by their manufacturer to purchase more parts just to reach compliance levels just to gain a small discount. I have seen one case in particular where the Parts Manager would have to purchase $10,000.00 more in parts just to gain an additional discount of $2,500.00.

Sad thing is, these parts had very little or no sales history in this store, so you can imagine many of these parts will end up becoming obsolete and hopefully protected. The other sad truth of this example is that the discount isn't "real money" as discounts aren't realized until the parts sell, even though it is reflected on the financial as 100% gross profit.

On the brighter side of all this, there are manufacturer programs out there that benefit ALL dealers as some Vendor Managed Inventory, (V.M.I.) companies are better than some others. Some even encourage and credit the dealer for NOT overstocking or carrying obsolete parts inventory as well as shorter terms of months before parts can be returned to the manufacturer at no cost to the dealer.

I guess what it all comes down to is managing the parts inventory and the dealers' second highest asset without getting caught up in all the hype that the manufacturers' try to sell the dealer.

Getting the best return on the dollar is always most important without all the added expense and risks that overstocking and obsolescence can bring. In the end, I believe these programs should benefit the dealer and not be a second parts warehouse for the manufacturer.

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

July 2018: Obsolescence: "How Does It Happen In The First Place?"

Talking about parts obsolescence is nothing new of course, and to take it a step further, we should be sick and tired of this topic still being a topic of concern. The unfortunate reality of it all is this topic may never go away if we don't eliminate the root causes of parts obsolescence.

I am definitely not one who just accepts things as they are merely because "that's the way it's always been", especially when it comes to this topic. If any Parts Manager has this frame of mind, then maybe it's time to not only think outside of the box, it's time to "get out of the box" altogether.

One added note before we begin, I have some great business associates and partners out there that actually work with, and help dealers "buy down" their obsolescence and it's their business to do so. But, as a Parts Manager for many years, my goal was to prevent obsolescence from happening in the first place.

Before we get into the contributing factors that create the obsolescence mess in the first place, I think we need to look into the benefits of an "obsolescence free" parts inventory. Imagine if you will, just for a moment, what it would be like if the "Smart Parts" Manager was "obsolescence free".

Picture this if you will...

The "Monkey On The Back" has been lifted and now the dealers' second highest asset is experiencing gross and true turns at, or above the NADA Guidelines. Parts profits rise as now we can experience the highest margins and earn the highest discounts and allowances possible.

Without the obsolescence, my sales activity is much higher, to the point that sales activity in the 0-3 month category meets, or exceeds 75% of the total activity and in the 4-6 month category, sales activity meets, or exceeds 23%, both NADA Guidelines in each category.

This would mean that 98% of the inventory is active in the 0-6 month category! In addition to that, if we maintain a Level Of Service 90%-95% and a Stock Order Performance Level at 85% - 90%, our "First Time Off Shelf Fill Rate" HAS to be 85% -90% as well!

That being said and in addition, the Service Shop Productivity can be maximized, from a Parts Support standpoint, thus increasing overall parts and labor sales and profits. Parts purchase power is at its peak and achieving top levels of manufacturer parts compliance and loyalty are also maximized to gain the highest discounts available.

Even though the topic is obsolescence, I think anyone of us can imagine all the above scenarios, IF we didn't have to deal with obsolescence in the first place. We also have to keep in mind the cost savings from outside purchases, inventory acquisition and holding costs, physical inventory costs, etc.

So now that we have had a moment to dream of an "obsolescence free" parts inventory, let's take a look at what causes parts obsolescence in the first place. We will look at each factor individually and explain how each of them impact this obsolescence "end result".

First and foremost, Parts Manager Training is the Number One contributing factor to parts obsolescence. As you will see in each of the following contributing factors, if we don't know what these factors are, their terminologies, definitions, or even how to manage them, we will have parts obsolescence.

If we can't read or understand the D.M.S., (Dealer Management System) Parts Monthly Management Report, or even understand what the results represent, we can not manage the parts inventory, especially in the area of parts obsolescence.

The second "contributing factor" is Non-Stock Parts as parts that haven't even met phase-in criteria are almost a sure bet to end up in the obsolete category. Parts that are manually ordered, special order parts that are not sold, some V.M.I., (Vendor Managed Inventory) parts that have not met the recommended overall demand are all examples Non-Stock Parts.

Outside of Parts Manager Training, Non-Stock Parts in inventory is the biggest obsolescence contributor. NADA Guide on Non-Stock parts in inventory should be 10% or less, but in many parts departments, especially those I have been affiliated with, the percentage of Non-Stock parts in inventory exceeds 50% and even more.

In my opinion, this huge rise in Non-Stock parts in inventory over recent years is definitely due to Parts Managers diving too deep into their manufacturers Vendor Managed Inventory, (V.M.I.) Stock Replenishment Programs, which we will review further as we continue through our obsolescence "contributing factors".

Speaking of which, our third "contributing factor" are the Parts Phase-In Parameters. If we don't have the proper Phase-In Parameters, we could be actually "phasing in" an obsolete part right from the beginning. I have personally witnessed many dealers' Parts Phase-In Parameters that will phase-in a part after only one or two demands in a twelve month period.

The Phase-In Parameters need to be consistent over a shorter period of time with more demand over a shorter period of time, far less than twelve months, and if possible, measuring both total demand and demand within a given month.

Some D.M.S. (Dealer Management Systems) software systems can actually measure phase-in demand over a period of days, instead of months and can be "weighed" over the a shorter, more recent time period.

Our fourth "contributing factor" to obsolescence is Parts Days Supply criteria. Once a part has met phase-in criteria, the Days Supply criteria takes over the parts life cycle, stocking levels and best reorder points.

During the part's life cycle, the stocking levels can vary extensively and if not managed properly, high quantities of a part can remain, long after a part has phased-out, ultimately becoming obsolete.

Calculating the proper Days Supply is a simple math equation that unfortunately, many Parts Managers don't even know how to figure out.

Many Parts Managers confuse Days Supply with parts quantity. A single Days Supply of a given part could be a quantity of one or a hundred, both equate to a given part's Days Supply.

Calculating Days Supply is simply math as I just mentioned. For example; if a part sells twelve times a year, or annually, this means the part sells on average, once every thirty days. The "Low Days" Supply, or "Best Reorder Point", (BRP) would then be thirty days.

Calculating the "High Days" Supply, or "Best Stocking Level", (BSL) is simply multiplying the "Low Days" Supply by 50% - 150%, pending demand according to the Mike Nicoles Group.

The more a part sells, the lower the "Days Supply", or "Best Reorder Point", (BRP) number. The "Low Days" Supply, or "Best Reorder Point", (BRP) is as follows;

Total Annual Parts Piece Sales Divided By 365 Days A Year 

Number five on our list are the Parts Phase-Out Parameters, which often go unnoticed as Parts Phase-In Parameters are usually the primary concern for Parts Managers. Although, the Parts Phase-Out Parameters are just as important.

Once again, I have witnessed many dealers' Parts Phase-Out Parameters set to far out. It is not unusual for me to see these parameters set at twelve months or even higher.

With today's parts life cycle far shorter than they were as little as twenty years ago, these Parts Phase-Out Parameters should be set at nine months or even less. Parts reaching phase-out status at nine months or less can send a trigger to the Parts Manager and will have less of a chance of hitting the "over 12 Month" category as the three month "buffer" allows the Parts Manager to act quicker to make sure those parts are not reordered for stock replenishment.

Up to number six on our list of obsolescence "contributing factors" with Lost Sales Reporting. Now, one might ask why we would have Lost Sales Reporting on our list and of course, there is a valid reason. If we are not posting Lost Sales, we are missing out on all the "true demand" available to us.

Parts demand is defined as the combined total of Sales and Lost Sales and if we miss those demands from Lost Sales Reporting, we risk the chances of more outside purchases, manual orders, special orders and Yes...more risk of building obsolescence. Total demand helps the "Smart Parts" Manager in stocking only "qualified" parts at phase-in.

Number seven on our list of "contributing factors" to obsolescence is our Parts Special Order Policies, as this one should be obvious to most Parts Managers. If we don't have a Parts Special Order Policy, it is a sure recipe to accumulating parts obsolescence.

Special Order Policies should include deposits and/or prepayments for all Special Orders Parts that fall into the "customer pay" category. Special Order Parts that fall into the "warranty" category should only be ordered if the vehicle is in the shop or has a "future appointment" set by the Service Department BEFORE the customer leaves.

All Parts Special Orders should be approved and signed to maintain accountability and follow up. They should also be accompanied with consequences, cost and a time limit to complete the sale of the Parts Special Orders. Parts returned to the manufacturer must carry a return fee to either the customer, or department responsible for returning Parts Special Orders.

Also, as weird as it sounds, technicians DO NOT ORDER parts!...they REQUEST parts, as the Service Advisor and Manager authorizes the Parts Special Order. They are also responsible for getting the authorization and parts order priority from the customer. The Service Manager and Advisors are also responsible and held accountable the completion of the repairs.

Our last obsolescence "contributing factor" probably impacts our obsolescence today more than any of our other "contributing factors", even though all the previous are ranked above this one. Our number eight obsolescence "contributing factor" is the manufacturers' Vendor Managed Inventory Programs, (V.M.I.).

Ever since the manufacturer got into the game, parts obsolescence has exploded in many dealerships that have a manufacturers' V.M.I. Stock Replenishment Programs. Even though there are benefits to all V.M.I. Programs, there are many risks and high potential for excessive obsolescence and even overstocked inventory amounts of active parts.

Many Parts Managers are not even creating their own stock orders utilizing their own D.M.S. and relying on the manufacturer to determine what their stock replenishment needs are. These V.M.I. Programs can determine what a "select group" of dealer parts demands are, but not all the "individual" dealers parts demands, and what qualifies as a V.M.I. controlled part.

So what ends up happening very often is the Parts Manager may be stocking V.M.I. "qualified" parts that don't even sell, or even meet their own individual stocking requirements and phase-in parameters. Even though they may be protected, often times they still end up in the obsolescence category.

These parts that are so called "protected" still costs the dealer in acquisition and holding costs along with return fees. The other "unseen" cost of holding parts inventory is the lost revenue and gross by these parts occupying shelf space of parts that may turn several times annually.

On the other side of that, many parts that have met their own individual store's stocking requirements and phase-in parameters are not stocked or replenished on a normal basis because they haven't met the overall V.M.I. Program qualification standards in the group as a collective. 

The "art" of managing a parts inventory seems to be slowly slipping away from many Parts Managers as they don't even utilize their own D.M.S. as intended. Creating a D.M.S. Stock Order is still as crucial as it's always been to determine individual store's stock replenishment needs. There is more out there than just the manufacturer's V.M.I. Program.

One thing I have always maintained and believed is that I have never been one to stock inventory to "protect" and to be the manufacturer's second warehouse. I have always purchased and stocked parts to sell, not to hold and protect. That's a definite recipe for accrued obsolescence and overstocked inventories that will repeat itself year after year....

"Are you carrying too much obsolescence?....just remember, you have to stop the bleeding first, then you have to know the factors that cause obsolescence in order to eliminate it completely."

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

June 2018: Issue 100: "The Best Of The Best"

For over eight years and counting, ACG "Smart Parts" is and has been a monthly blog post dedicated and devoted to today's "Smart Parts" Manager. Our mission in the beginning and still today is to provide the latest information, ideas, insight and training tips for the Automotive Dealer Parts Manager.

We have also provided many Parts Managers our FREE "TakeAways" over the years. These "TakeAways" consisted of what I call "tools of the trade", Excel Report Calculators designed to help Parts Managers sharpen their skills in many various areas of inventory, financial and personnel management.

As we hit this month's 100th issue of ACG "Smart Parts", we wanted to take a look back at some of our most popular, or as they say in the blogger world, most "clicked on" blog articles by our "Smart Parts" Managers. We will briefly revisit these blog posts in descending order from the most recent, all the way back to the beginning.

Each of our monthly blogs dating all the way back to the beginning are still readily available today, just in case you may have missed them, or perhaps you just starting following us at;

http://smartpartstraining.blogspot.com

Many Parts Managers today still tell me that they will often times go back over the years to revisit previous issues that provided them vital information and training from Dealer Management Systems, (D.M.S.) issues, Definition of Terms, Parts Goals and Guidelines, Industry Updates, Leadership and Management Training, etc.

So, "Smart Parts" Readers, let's take a look back to some of our most popular "Smart Parts" blogs and let's see if any may be some of your favorites! You never know....we may rediscover some information that may be useful today as we take a "descending" look back over the years!

March 2018: The Top 5 "Unseen Costs" Of Managing The Parts Inventory

This popular blog illustrated some of the costs of managing the parts inventory that most, or at least many Parts Managers never even considered because for the most part...they go "unseen". We answered questions such as;

• How much does  "overstocked" inventory really cost?
• What are "false profits" in the area of Discounts and Allowances?
• What are, and how do I calculate Inventory Acquisition & Holding Costs?
• How much do low "First Time Off Shelf Fill Rates" cost in Lost Service Productivity?
• What is the actual cost of Obsolescence versus Active Parts with Higher Turn Rates?

For most of us, we never review these "unseen costs" because they don't stick out on any reports, other than maybe obsolescence, but we hardly ever think about what it REALLY costs if we carry too much obsolescence.

February 2018: Vendor Managed Inventories: "Compliance Or Obedience?"

This "Smart Parts" blog realy drew some attention as we looked at various manufacturers Vendor Managed Inventory Programs, (V.M.I.). We looked at how many Parts Managers today are TOTALLY relying on the manufacturer to replenish their stocking inventory and the dangers that may lie within when relying solely on the manufacturer.

My first question to Parts Managers who rely solely on the manufacturer has always been;

"What did you do before there was a V.M.I. Program offered by the manufacturer and how did you replenish your stocking inventory?"

It just seems that more and more Parts Managers today are being more "obedient" to the manufacturer, but calling it "compliance". Whatever happened to creating your OWN stock order on your OWN D.M.S.?

The end result in most of these situations is that the manufacturer is happy, but the individual dealers' "First Time Off Shelf Fill Rate" suffers. Have you ever asked yourself one or both of these questions;

• "Why is the manufacturer telling me that I should stock this part when I've only sold one in the last year and a half?"
• "Why isn't this part number qualified on my V.M.I. Program?....I sell a ton of them!"

Inventory Protection and Automated Stock Orders are the two top "selling points" by these manufacturers, along with more earned discounts, allowances and return accruals following right behind. Even though these are great benefits, we need to use the V.M.I in addition to our own D.M.S.

As a Parts Manager, my goal in buying parts was to "sell them", not "hold and protect them" over a period of time. At least, that's what we did "back in the day" well before these V.M.I. Programs were introduced.

October 2017: "It's Time To Do The Math Ourselves!"

Another popular issue really addressed a simple topic, but one that also seems to go unnoticed today. When was, or have you ever calculated your individual store's Gross or True Turn Rate? Believe it or not, there are still many Parts Managers that don't even know how to calculate Gross Retention Percentage.

With the on-going advancements in Dealer Management Systems, (D.M.S.), Computers and Software in general, it seems that we have gotten away from the basics. Knowing and doing the math is less popular today because we don't have to!

The problem is with all these calculations and math being done for us is that we end up not even knowing if the numbers, percentages and results are even accurate in the first place because no one knows how to recheck them for accuracy. This month's issue is definitely a "reread", unless you missed it!

June 2017: An ACG "Smart Parts" Perspective: "The Future Of Parts Profits"

This article was also very popular because it touched on a topic that many Parts Managers are concerned about today. With the quality of new vehicles getting better and better each year, where is our parts profits going to come from?

Back in the day, maintenance intervals were every three months and/or 3,000 miles and today, we are lucky to see our customers coming back into our dealerships at least twice a year as maintenance intervals get longer and longer.

On the other hand, in this article, we provided lots of research and information on the "Recall Boom" in the country with air bags leading the charge to our newly expanded parts profit area. Recall parts sales and profits were hitting an all time high and in many dealerships, the number one single parts profit area.

This one was back in June of 2017....Where will our future of parts profits take us in 2018 and beyond?...keep reading and we will address that one in the future!

April 2016: "Is Wholesale Really Worth It?"

In this article back in April of 2016, we touched on this age old question that still haunts many Parts Managers today. The only thing different with this article was that we actually provided a "FREE TakeAway" which was an Excel Calculator that would answer this question for each individual automotive dealership today.

This Excel Calculator brought in all the indicators, factors, costs and benefits to all the areas that affect the overall net, net profit of the parts wholesale business. In many cases, there are a LOT of dealers out there that are actually losing money in wholesale after everything is factored into the equation and they don't even know it.

Even though many Parts Managers and Dealers like the benefits of all the discounts, allowances, return accruals and "cash flow that is generated by the extreme volume, many "unseen" costs go far beyond the benefits that are "seen".

August 2014 - October 2014: A Three Part Series: "The Ultimate Parts Manager" 

This three part series on what I referred to as "The Ultimate Parts Manager" covered all the ingredients of what it takes to be the "Best Of The Best". We took a detailed look at each individual ingredient listed as follows;

• Education and Personal Background
• The Right "Belief System"
• The Right Personality and Personality Profile
• Leadership Skills
• Goal Orientation
• Having The Proper Business "Ethics"
• Salesmanship
• Having The Right People
• Having The Right Process

Having the right ingredients is the key to being "The Ultimate Parts Manager"

April 2014: "Are You Hiding From Your Customers?"

Now, this one caused a little stir back in April of 2014 for sure! For many years, the Parts Manager is pretty much in the background, especially when it comes down to customer service in the Service Department.

I've witnessed and seen many disputes over the years between Service Advisors, Service Managers with the Parts Department in general, with the Parts Manager when there are issues over pricing, parts not in stock, or special order parts that didn't arrive in time for a scheduled customer appointment.

The communication between the Parts and Service Departments is crucial in my opinion and the Parts Manager should be a key player in customer satisfaction. Many Parts Managers that I have met over the years do not even engage the Service Customer.

In my opinion, it's time that Parts Managers take an active role, right along side of the Service Manager when it comes down to pricing policies, CSI, and selling skills, much like the Service Advisors and should be trained to be a "partner" in all Fixed Operation capacities.

It's time for Parts Managers to "get out of the closet" and experience what the customer experiences, along with helping the Service Department work on it's number one goal and that is Customer Retention.

After all, in most dealerships today, 65% - 70% of the Parts Department Gross Profit is generated in the Service Department. Another great "reread" and reality check for sure!

February 2013 - December 2014: "The Parts Department's Top 10 Indicators"

This ten part series, in my opinion, really boosted ACG "Smart Parts" back in 2013 as we devoted almost a whole year in training new Parts Managers and perhaps, re-educating Parts Managers on Parts Manager basics, which I call "Parts 101"...

Each month, we focused on one top ten indicator which we counted down from number ten, all the way to number one. In order, we took, in my opinion,, the most important indicators, or "topics" that a Parts Manager really needs to be educated on and know the terms, definitions and most importantly, how to manage these top ten indicators.

Without taking anything for granted, we defined and detailed each indicator without exception and to educate and inform Parts Managers the importance in understanding each indicator. Believe it or not, we had a lot of positive comments from Parts Managers out there, with the top comment being;

"I never knew this stuff before...I've been a Parts Manager for years, but no one has ever explained any of this stuff to me before now....Thanks!"

Here are the top ten indicators from number ten down to number one in my opinion;

10.) Parts Department Net Profit

  9.) Parts Gross Profit & Parts Gros To Sales

  8.) Expense Management

  7.) Inventory Gross & True Turns

  6.) Sales Activity 0 - 3 Months

  5.) Controlling Obsolescence & Managing Special Order Parts

  4.) Lost Sales & Emergency Purchases Reporting

  3.) Sales & Gross Per Employee

  2.) Level Of Service, (Overall Off Shelf Fill Rates)

  1.) "First Time Off Shelf Fill Rates"

Number One is number one for a reason because it covers all aspects of the other nine "Top Ten Indicators." If we are selling parts, "The First Time" at a rate that is 80% or higher, we are then maximizing our sales and profits, maximizing the dealers' investment and providing the best customer service that keeps the customer coming back.

These are just a few of the "Best Of The Best" as we had many more that date back to the beginning in April of 2010. We are just getting started here at ACG "Smart Parts" with many more months of information, insight, opinion and training tips as we move on to the next 100 issues!

As mentioned earlier, all of our monthly ACG "Smart Parts" blogs are readily available and this "library" of parts blogs are timeless and may come in handy as your reference source for many years to come!

As my Service Partner, Guy Salkeld always says;

"Training is the Key to Knowledge and Skill, but Desire is the Key to Success!" 

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

May 2018: Getting Rid Of Obsolescence Forever: "Is It Possible?

If anyone were to ask me what has changed in our parts industry over my last 38+ years, particularly in automotive dealerships, I would have so many to list that I could spend one whole blog on the changes. But, there is one topic that would never make this list and that is parts obsolescence.

One might think with all the technology, innovations and manufacturer assistance with Vendor Managed Inventories, that we would have this "Monkey On Our Back" issue called parts obsolescence issue put to bed by now.

Even though we hear new terms like inventory protection and idle inventory management along with all these new fancy Dealer Management Systems, (D.M.S.), obsolescence is still a major concern for many dealer owners and parts managers. In my opinion, it has actually gotten worse over the last several years.

There are many logical reasons for these increases in obsolescence, such as increased part numbers per manufacturer due to the increase of vehicle models, increased vehicle components, and shorter part coverage lifespan just to name a few.

All that being said, we are basically talking about part numbers that have to follow the same guidelines and parameters today as they did years ago.

Parts still have to be tracked by demand, phased-in to the D.M.S, carry the proper, mathematical days supply, and phase-out when demand diminishes, then they are returned to the manufacturer or scrapped.

So, why are we still dealing with this "Monkey On Our Backs" called Obsolescence? 

In order to come up with the right solution(s) to any problem,  we need to begin by identifying how the problem got there in the first place. In the area of parts obsolescence, as we mentioned, there are many reasons, or causes that can lead to unacceptable obsolescence amounts.

To me, we have to define what obsolescence is in the first place, and not to be confused with the term "idle inventory".

Quite simply, all parts are idle until they sell and in my opinion, we should be more concerned with what has not sold over a period of time, which, for the most part has been set at 12 months no sale.

In order to get rid of obsolescence forever, we will need to have an action plan, which consists of four basic steps;

1.) Identify The Obsolescence: "How Did It Get There?"

2.) Make The Appropriate Adjustments: "Stop The Bleeding!"

3.) Make A Decision: "Get Rid Of It!"

4.) Maintain Control: "No More Obsolescence!"

We will walk through each one of these steps individually, in detail in order to accomplish the mission of getting rid of this "Monkey On Our Back" forever. We will also provide the proper sources and resources needed to staying obsolescence free.

Let's get started...

1.) Identify The Obsolescence: "How Did It Get There?"

Believe it or not, identifying obsolescence can't go understated even though one would think that this should be obvious to most parts managers. I mentioned earlier that obsolescence is sometimes referred to as "idle inventory" and that alone can be confusing.

I have always followed my mentor's guidelines as Mike Nicoles has always defined obsolescence with these simple truths about parts with no sales over the course of a year and beyond;

• Parts With No Sales After 6 Months = 49% Chance Of No Future Sales
• Parts With No Sales After 9 Months = 67% Chance Of No Future Sales
• Parts With No Sales After 12 Months = 98% Chance Of No Future Sales

These numbers and percentages have held true for years and to me, should be where we set the bar on what is truly obsolete in our inventory. The chance of selling parts over twelve months is minimized to just 2% and with those odds, I would consider all parts over twelve months obsolete and should be dealt with.

As far as how these parts got to this point of being obsolete in the first place, in my opinion, is more of a problem today than it was years ago.

Many parts managers today have "given up the reigns" of controlling their parts inventories to the manufacturers, and some, unfortunately have never learned, or forgotten how to make the appropriate adjustments in their Dealer Management Systems, (D.M.S.)

Phasing parts into the D.M.S. is one thing, but if the Phase-Out parameters are set beyond 10 months, obsolescence can be pretty much guaranteed. The idea should be to stay ahead of obsolescence game by keeping these parts OUT of the 12 months no sales category.

Another added "obsolescence contributor", if you are a parts manager that utilizes a manufacturers Vendor Managed Inventory, (V.M.I.), are these parts that we comply, or "obey" to stock, even if they may have not met phase-in criteria in your dealership.

The most often asked question that I receive is..."How do I get rid of my obsolescence?" and I always have to respond with..."I can help you with that, but...we have to Stop The Bleeding first"...

Let's move on to Number Two....

2.) Make The Appropriate Adjustments: "Stop The Bleeding!"

"Stopping The Bleeding" is probably the most important step in becoming obsolescence free forever. Believe it or not, obsolescence starts even before any part hits the shelf. There are several questions that we need to ask ourselves before we even "shelf" any part that could become a high obsolescence risk....

• Should we even be stocking this part in the first place?
• Have these parts met my own phase-in and stocking criteria?
• Are my phase-out parameters aggressive enough?
• Are we being "compliant" or are we being "obedient" to my Manufacturer's V.M.I.?
• Are we more concerned about inventory protection than actual parts sales?
• Are we relying on the manufacturers' stocking recommendations more than what our own Dealer Management System, (D.M.S.) recommends?

In order to "Stop The Bleeding", we need to have the right answers to all of the above questions and more. We  also need to have strong policies and procedures to stop the build up of obsolescence coming from improperly ordered parts and special order parts not picked up, etc.

In addition to having the right phase-in and phase-out parameters, we also need to have the proper days supply in all annual piece sales ranges to minimize overstocking, which could eventually increase obsolete amounts once these overstocked parts hit the 12 months no sales category.

3.) Make A Decision: "Get Rid Of It!"

Once we have "Stopped The Bleeding", we can now move on a make some decisions on just how we get rid of these obsolete parts that are in the 12 months no sales category. There are many options that are available to us, including some new options that some "Smart Parts" Managers may not be aware of.

With several options available to us, I feel we should list these options in the order of priority as well as which of these options will give the dealer the best return on investment on the obsolescence while minimizing the losses.

a.) Utilize all manufacturer return allowances and return policies available. Even though there are very few dealers that can accrue enough return allowances to match their obsolescence, maximizing the "dollar-for-dollar" return is 100%, or perhaps even more with price increases over time.

b.) My second choice for ridding the obsolescence would be networking the inventory through various websites such as OEConnect, Cash Discovery Programs, Cobalt, Parts Voice and Ebay to name a few. 

One of the latest and most successful programs out there is the "North American Dealer Parts Exchange", (nadpe.com). As their website explains, this program works much like match.com, where your inventory is matched up with dealers that would purchase your obsolescence in exchange for purchasing fast moving parts that may be considered obsolete in someone else's inventory.

Here's a clip and some quotes from their website;

"WHAT WE DO FOR PARTS MANAGERS"

"NADPE is a Dealer-To-Dealer cloud-based marketplace that allows you as the Parts Manager to trade away your Slow-Moving, Idle, and Obsolete parts inventory, for Fast-Moving, Active parts inventory you sell everyday.  The trades are done between dealers of the same brand within your region, using the massive data we collect from each dealership.  We effectively present bulk matches for your Slow-Moving Parts to be reallocated, and redistributed to the right dealers – but not without your review and approval first.  Imagine if you only knew what you could move between other dealers in volume, and without the work of collecting the data to find out."

"HOW IT WORKS"

"We take all the dealers within our network, and cross-match your Slow-Moving inventory with the Fast-Moving inventory data of every dealer in our database – finding bulks matches.  We are similar to Match.com – but for Parts Inventory."

"All the parts you wish you could return to the manufacturer, and can’t, with the lack of Parts Return Allowance, NADPE supplements your ability to move just as much with other dealers in your region.  Many dealers use NADPE to essentially double their return dollars, and use NADPE in tandem with their Manufacturer’s return program."

"Unlike any other option available to Parts Manager’s in the industry, NADPE allows you to exchange those Idle Parts for dealer cost, without losing a single penny."

c.) My third choice would be selling off the obsolescence for "pennies on the dollar" with either other dealers that have accrued more return dollars than they need as they may be very big into wholesale and can afford to buy up other dealers' inventories.

There are also companies out there such as Dealermine that will evaluate and buyout dealers' parts obsolescence for approximately half the actual value, thus providing "dealer cash" that can be turned into fast moving inventory which will eventually yield higher return on investment for the dealer at several inventory annual turns.

d.) Lastly, if the dealers' parts inventory has a lot of "blue sky", meaning that the "controlled inventory" reported on the Dealer Management System, (D.M.S.) is at a higher value than what is reported on the front page of the financial, then the obsolescence can simply be "written off" and scrapped up to the "blue sky" amount.

4.) Maintain Control: "No More Obsolescence!"

After we have identified our obsolescence and how it got there in the first place, "stopped the bleeding" and finally gotten rid of our obsolescence with the best return on investment, it's now time to keep it from ever happening again.

I do believe that we will always have parts that slide down into the 12 months no sales category, whether it's parts that are non-returnable when we purchase them, low cost parts below manufacturer return limits, accessories, etc.

With that said, we will need to implement a program and set up what I call a "Scrapping Account" each month where we can set aside funds that will be there to scrap those parts once they hit that fateful 12th month.

This "Scrapping Account" can be set up quite easily in Accounting in the "Parts Inventory Adjustment" account. Each month, a set percentage of the parts total cost of sales is credited to the parts inventory adjustment account and charged back to the parts department monthly gross.

To offset this reduction in gross profit, we will adjust and increase our parts "cost plus" escalation matrix on "captive parts" in the $10.00 - $30.00 parts cost range by 10%.

The realized net profit from the increase of 10% will result in an approximate 3% net to gross number. Approximately 80% of our total parts sales comes from this $10.00 - $30.00 cost range.

For example, if I wanted to get rid of $30,000.00 in obsolescence and I've exhausted all my options in Step 3., I can could set up and utilize my scrapping account. The breakdown on how this all works is as follows;

Average Month's Parts Cost Of Sales: $100,000.00

Inventory Adjustment Amount Credit: $3,000.00 (3%)

Additional Gross Profit From 10% Escalation Matrix Adjustment: 3%

Gross Profit Debit Amount: $3,000.00

Total Amount Of Obsolescence: $30,000.00

Months To Eliminate and Scrap Obsolescence: 10

In my opinion, parts obsolescence should be a "thing of the past" and never be allowed to happen if we utilize all of our options and a "mind set" that it can be done.

We will even provide our ACG "Smart Parts" Excel Scrapping Calculator to help those "Smart Parts" Managers calculate the right percentage to use in your "Parts Inventory Adjustment" account based on your individual obsolescence amounts. 

Email Us Today To Request and Receive Our FREE "Smart Parts" Take Away!

ACG "Smart Parts" Excel Scrapping Calculator

dave@smartpartstraining.com

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com