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

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

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

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

So, what does this mean?...

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

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

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

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

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

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

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

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

Here is a sampling, or list of terminologies out there given to us by various Dealer Management Systems, (DMS), industry analysts, consultants, parts managers, etc.

• Off Shelf Fill Rate, (OSF)
• Sales to Stock Ratio
• Sales to Cost Ratio
• Purchase to Sales Ratio
• Stock Order Performance
• Demand Fill Analysis
• Same Day Fill Rate, (SDF)
• Level of Service
• Purchase to Fill Ratio
• Fill Rate Analysis

Who wouldn't be confused?....which one of these is my "First Time" Off Shelf Fill Rate?

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

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

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

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

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

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

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

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

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

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

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

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

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

Overall Off Shelf Fill Rate:

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

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

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

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

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

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

The obvious answer is "No"....

Same Day Fill Rate:

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

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

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

Lastly...

"First Time" Off Shelf Fill Rate:

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

August 2019: "Show Me How To Fix It!" - Part Three: Managing Stocking Levels

As we move on to part three in our five part series titled, "Show Me How To Fix It!", managing Stocking Levels, in my opinion requires constant maintenance, unless your are fortunate enough to have a Dealer Management System, (DMS) that automatically adjusts and manages Stocking Levels through predetermined algorithms.

These predetermined algorithms measure Dynamic Days Supply, (DDS) and Weighted Daily Demand, (WDD) instead of most Dealer Management Systems, (DMS) that utilize "ABC Source Ranking" by Annual Piece Sales. The DDS and WDD are constantly working in the system to ensure proper Stocking Levels.

ABC Source Ranking requires the Parts Manager or the System Administrator to create separate sources with annual piece sales ranges along with the proper Low and High Days Supply for each annual piece sale range.

To my knowledge, there are only a couple Dealer Management Systems, (DMS) out there that provide this option that measures DDS and WDD automatically. For most other systems though, we, as Parts Managers have to set up our own Stocking Levels for each one of our Parts Sources in the DMS via ABC Source Ranking.

Unfortunately, many Parts Managers out there do not even know how to "properly" set up their Parts Sources with the appropriate Best Reorder Points, (BRP, or "Low Days Supply") and Best Stocking Levels, (BSL, or High Days Supply). 

As I've mentioned many times in previous articles, most Parts Managers that I have met are very intelligent and very qualified to manage their Parts Departments. But when it comes down to these five Key Performance Indicators, (KPI's) that we are focusing on, many Parts Managers haven't had the opportunity to "learn" them.

As a matter of fact, many dealership Parts Departments that I have visited and still visiting today have the same set ups on Phase-In/Phase-Out Criteria and Stocking Levels that they had years ago. Some even had the same initial setups that they had when their DMS was initially installed well over twenty years ago!

Not only that, if you throw in the Manufacturer's Vendor Managed Inventory, (VMS) setups, (if offered), now you have the perfect recipe for disaster. The most "imperfect" scenario of running out of the parts you need the most and overstocking of parts you don't need has just been born.

So, how do we get this ship turned around and going in the right direction? 

First of all, and before we get down to "fixing" the problem, we have to know how these Stocking Levels work in the first place. We have to also know that one of the biggest, if not the biggest factor in all this is how many times a part sells over the course of a year, also known as "annual piece sales".

In addition to factoring in our "annual piece sales", we also have to fine tune it even further by knowing the "peaks and valleys" of "annual piece sales". Once we categorize, or group these parts together within the same "annual piece sales" range, we can then set the appropriate BRP's and BSL's, or Low and High Days Supply.

One of the ways that I simplify what I'm referring to, especially when I have the Dealer Principle in the room, is by the following scenario...

I would start off by asking the dealer what is their highest selling new vehicle on the lot was as well as their lowest selling new vehicle on the lot. After I received the answer on both the high and the low, my next question would be...

"Would you have the same number, or inventory of those two vehicles on the lot at the same time?" 

Of course, the answer would be "No", and once again I would ask "Why not?...

The final answer was obvious as they would run out of the new vehicles that they sold the most as well as having too many of the new vehicles that sold the least, resulting in overstocked, or "over-aged" units that they would have to get rid of.

The worst part of that scenario is that they would have to chase down, or "dealer swap" the new vehicle that they ran out of, resulting in lower gross profits, or even potentially losing the sale in the first place as the customer would shop elsewhere.

The similarities between selling vehicles and selling parts is really no different except for the number of parts versus the number of vehicles. The irony is that dealers would definitely "fix" the new vehicle inventory, but many don't put the same priority on their Parts Department.

Okay!....Let's Get Down To Fixing It!

Fixing any problem always starts with identifying the problem and the root causes that lead us to undesirable results. If the Parts Department is experiencing too many "stock out" situations and experiencing never ending obsolescence, you can be assured that we have a situation much like the above new vehicle scenario.

The first step in "fixing" Stocking Levels is to separate the parts inventory into separate sources or "groups" that have similar "annual piece sales" ranges, referred to as "ABC Source Ranking". Each piece sale range requires different setups for Best Reorder Points, (BRP or Low Days Supply) and Best Stocking Levels, (BSL or High Days Supply).

For example, if a part sells only 12 times a year sells on average once a month, or .03 times per day, (WDD). A month contains 30 days on average, so the Best Reorder Point, or Low Days Supply on that part would be 30. That's the math portion which is irrefutable, but it's the Best Stocking Level, or High Days Supply setting that is most important.

According to Mike Nicoles, (who I agree with), the Best Stocking Level, or High Days Supply should be set at 50% to 150% of the Best Reorder Point, or Low Days Supply. That being said and with the above example, my Best Reorder Point, or Low Days Supply would be 30, and my Best Stocking Level or High Days Supply would be 45, 60 or 75.

The "constant" number in all this is the Best Reorder Point or Low Days Supply as that is basic math. If I had a part that sold 100 times a year, that would mean my Best Reorder Point, or Low Days Supply would be 4, (100 divided by 365 days a year = 3.65, rounded up to 4). 

Faster moving parts always carry a Lower Reorder Point or Days Supply, which confuses many, but we have to remember that "Low Days Supply" or "Reorder Point" doesn't mean quantity as quantities vary in a given "Low Days Supply" or "Reorder Point" of any part number. 

A Four Days Supply of a part that sells 100 times a year just means when I get down to 4 Days Supply, I am down to a quantity of 4 parts left, I need to reorder back up to my Best Stocking Level, which would be reordering back up to 6, 8 or 10, (50% - 150% of Low Days Supply, BRP).

Let's use a different annual piece sale range....let's say that I have a part that sells 865 times a year,  meaning that I sell on average, 2.37 of that part per day, (WDD of 2.37 rounded up to 3). When I get down to a Four Days Supply, 3 X 4 = 12, (our BRP), I then need to order back up to my BSL, which would be 18, 24 or 32, which would be 50% - 150% of my BRP, or Low Days Supply.

The trick is managing which Best Stocking Level, (BSL) or High Days Supply to use...50%, 100%, or 150% and at what time of year. I could sell a part 12 times a year, but what if it was an Air Conditioning part that sold 12 times a year, but all sales were in three months out of the whole year?

This is why Managing Stocking Levels carries a high maintenance factor as we have to "manage" the parts annual activity during the "peaks and valleys" of the part's life cycle. We have to know when to increase and decrease the BSL, or High Days Supply.

Lead Time is also a factor in calculating Best Reorder Points, or Low Days Supply. Usually the lowest or minimum amount of "Lead Time" is 3, or perhaps even 4. One day to place the order, one day to receive the order and one day to post and "shelf" the order. This is why the lowest BRP, or Low Days Supply should never be less than 3 or 4, which I prefer 4.

We've looked at fast moving parts and how our BSL's, BRP, Low and High Days Supply should be set, but what about slow moving parts? After all, we don't want to get stuck with them after they phase out, so how do we prevent those situations?

As you might have guessed, if fast moving parts carry a Lower Days Supply, (BRP), then slower moving parts need to carry a Higher Days Supply, or BRP. Sounds kind of opposite, but it's true and remember what I wrote earlier...."Low Days Supply, or Reorder Points Don't Mean Quantity as Quantities Vary!"

In other words, if I have a part that only sells 3 times a year...a part that just barely meets phase-in requirements, sells only on average every 120 days approximately. So, my BRP, or Low Days Supply, or Best Reorder Point, BRP would be set at 120 Days. My Best Stocking Level, or High Days Supply would be set at 50% of the Low Days Supply, or Reorder Point which would be 180.

Even though my options of choosing my High Days Supply can be 50% - 150% of my Low Days Supply, I prefer the lower percentage as this part has low movement. If movement increases, then my Low Days Supply, or BRP would get lower and I would increase the percentage for better safety stock on my High Days Supply, or BSL.

So!...with all this happening all around us, how do we "manage" all these part numbers that are constantly changing from "peaks and valleys" to various "annual piece sales" ranges to different Best Reorder Points or Low Days Supply and various percentages on what should be my Best Stocking Level, or High Days Supply?....Enough Already!

The good news in all of this is that most, if not all Dealer Management Systems can automatically move these parts all around to different sources that carry the correct Stocking Levels for those parts with different "annual piece sales" ranges.

As parts sales increase and decrease throughout their life cycle, the DMS will automatically place them in the right source with the right Stocking Levels, both Low and High Days, or the right BRP and BSL. Keep in mind, even though the system will move these parts automatically, we still may have to adjust and modify from time to time for seasonal and "captured" piece sale ranges.

The trick, if any is to have the right amount of part sources, based on "annual piece sales" that connect to the system's "Default Source". The DMS "Default Source" is the main source that the system identifies with on all new parts that enter the system, whether they phase-in or not.

Once a part enters the system via way of the "Default Source", and once phased-in, it will then "feed down" to the proper "sub-source" that contains the appropriate Low and High Days Supply, (BRP/BSL) based on "annual piece sales". The system will move them back and forth, through ABC Source Ranking if necessary based on current averages at the end of each month.

Lastly and most importantly, doing the proper math on Low and High Days Supply, (BRP/BSL)  within these annual piece sales ranges is critical. Also, having the right number of sources for each annual piece sales range is equally important and I usually recommend at least eight for ABC Source Ranking by Piece Sales.

No matter what D.M.S. you may have, managing Stocking Levels is the most important Key Performance Indicator, (K.P.I.) out our Top Five, after the part phases into the system, that will insure that we have "the right part at the right time".

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

"Show Me How To Fix It!" - Part Two: Parts Phase-In/Phase-Out

It's still amazing to me that even today, many Parts Managers have not been exposed to the basics of Parts Inventory Management, which I refer to "Parts 101". The basics of "Parts 101" means those Parts Managers that have never had the opportunity to learn and "manage" industry guidelines, or how they came about in the first place. In their minds, they are just there.

Many may have had the opportunity to attend some Parts Manager Training offered by the manufacturer, or perhaps even from the various 20 Groups across the country, but many Parts Managers still don't know the basics. More importantly, how to "fix it" when it's broken. 

Even though we may receive an award or "certification of attendance", the only information provided by these various sources are guidelines and numbers on where we should be. In other words, they can tell you where you rank compared to industry guidelines, or what you're doing wrong, but there aren't many that can "Show Me How To Fix It!"

This actually reminds me of a commercial by a major corporation about the Dental Monitor Person who confirms the patient has a huge cavity and when asked by the patient..."Well, aren't you going to fix it Doc?"...the answer, of course was..."Oh no, I'm just the Dental Monitor and that is a huge cavity!"...or even about the one with the Bank Security Monitor declaring that there is a bank robbery.

Lastly, in this opening monologue and before we move on to Part Two of "Show Me How To Fix It" on Parts Phase-In/Phase-Out, I just want to say that many, if not all Parts Managers that I have met and worked with are very intelligent and talented. 

The only thing missing, in my opinion is information. No one has ever "shared" the right information to Parts Managers that I have been so fortunate to receive over the years. In addition to not receiving this valuable information, many of these "basics" have gone "under the radar" and even controlled to some degree by various manufacturers.

This is especially true with Parts Phase-In & Phase-Out Parameters. How a part enters in to the inventory and eventually phases out of our inventory is controlled primarily on these parameters, no matter who is controlling them, or even if they are correct or not.

Either way, the Parts Manager MUST know how these parameters work and how they may need to be modified from time to time. They are not set ups that we "set and forget" as I will expand further as to why these, or any other parts set ups need to be modified from time to time.

Onward and Forward to Part Two!....Parts Phase-In/Phase-Out Parameters!

The first thing that we need to establish and not assume is the actual definition of Parts "Phase-In" and Parts "Phase-Out". Even though it may seem like common sense to most "Smart Parts" Readers, there are still Parts Managers out there that just don't know as I mentioned earlier. One of my favorite sayings is..."How do I know what I don't know?"...

Let's start out with Parts Phase-In:

"Demand or total number of demands, (sales and lost sales) reported in a period, (days or months) over a desired total number of periods, (days/months)"

In other words, if I wanted my "phase-in" period to be so many demands, or demand within a month of any kind, (sale or lost sale) over a course of a certain number of months, this would give me sufficient "evidence" to if I want to consider those parts that meet the criteria and to be considered "Normal Stocking Parts", or "Active Parts".

That be said, and with many different options out there as to how much demand, or demands within a number of days, or months over a course of time is where "Parts 101" comes in. We have to know the differences on how much, how often and how long we need to measure this information.

Most importantly, we need know how aggressive, or how moderate we want these parameters to be in the first place. We also have to remember that even though a part phases in, not matter what these parameters are, these parts do not simply "jump on the shelf". 

Although they may appear on a  Parts Phase-In Report, or on a D.M.S. Suggested Stock Order, the Parts Manager is the one who will ultimately make the choice on whether to stock the part(s) or not. The key thing to remember here is that we cannot manage what we cannot see and having this information in front of us is most important.

We also have to remember that the key word in Parts Phase-In and Phase-Out for that matter is "demand". The are only two types of "demand" or "hits" out there and that is the posting of Sales and Lost Sales. So now we see the importance of posting Lost Sales which we fixed in Part One of this series. 

If we don't post Lost Sales, we are missing a ton of demands and opportunities for potential future "Normal Stocking" or "Active Parts", which increases our "First Time Off Shelf Fill Rate". Actually, the proper posting of Lost Sales or lack of posting Lost Sales plays a key role in our initial Phase-In Parameters.

If our Lost Sales reporting is less than the required guideline of 5%-10% of total sales at cost, we would then set the parameters with a "lower" total demands required for phase-in. If my Lost Sales Reporting is at or above the 5%-10% of total sales at cost, we would then require "higher" total demands for phase-in as there would be more overall demands reported on Total Sales and Lost Sales.

Here are a few samples of "Phase-In" Parameters...

Aggressive Phase-In Parameters:

Parts with demand in 2 "separate" months out of the last 3 months with a "total" demand of 3.

Moderate Phase-In Parameters:

Parts with demand in 3 "separate" months out of the last 7 months with a "total" demand of 4.

Average Phase-In Parameters: (* Non-Aggressive)

Parts with demand in 2 "separate" months out of the last 6 months with a "total" demand of 3.

* Phase-In Parameters most often used by the manufacturer on their Vendor Managed Inventories, (V.M.I.), if offered.

Phase-In Parameters NOT to use:

Parts with demand in 3 "separate" months out of the last 12 months with a "total" demand of 4.

The danger with this last one is that you could possibly "phase-in" a "phase-out" part right out of the gate! One example is a part that may have demand in January and February, then another demand in December of the same year. 

The problem with this example is the other 9 straight months, the part has NO demand and in many cases, "Phase-Out" Parameters usually start anywhere from 7 months with no demand or more. Especially with the average parts life span of Normal Stocking Parts today is less than one year.

Believe it or not and unfortunately, these Phase-In Parameters are still widely used in many Parts Department today. Sadly, many of these Parts Managers don't even know it, and/or don't even know the ramifications to these parameters in the long term.

Lastly, and perhaps most important, if we are only using the manufacturer's guidelines on Parts Phase-In on their Vendor Managed Inventories, (V.M.I.) parameters AND don't even run our own D.M.S. Suggested Stock Orders, we are turning over total control on what we should be stocking.

Now onto Parts Phase-Out Parameters:

"Parts with no demand, (sales or lost sales reported) over a specific period, (days/months)."

Even though Parts Phase-Out Parameters are much simpler, they are extremely important. Knowing when we should be "alerted" on a part that hasn't had any demand over a certain period of time, (days/months) is as important as to when we should be "alerted" when we should possibly phasing-in a part.

The trick is...when should that "alert" time be and when should we consider actually return these parts to the manufacturer, or perhaps even scrap these parts that meet the Phase-Out period? I know what we DON'T want and that is the "alert" time period to be at 12 months.

If we wait until one year with no demands, it's too late. The chances of no future parts sales on these parts rises to an astonishing 98% chance according to Mike Nicoles, who is the most respected and revered Parts "Guru" for many years.

Quite simply, we should set our "alert" period, or Phase-Out Parameters anywhere from 7 to 10 months, pending the return policies from individual manufacturers. Even if the particular manufacturer requires a specific stocking period before return eligibility,  "Smart Parts" Managers still need to be "alerted" when parts hit the desired Phase-Out period.

"Fixing" our Parts Phase-In and Phase-Out Parameters can only happen if we know what these parameters represent in the overall picture of what parts we need to stock. Once these parts meet phase-in stocking requirements, the next step is "how much" and "how many" we should have on the shelf.

Speaking of "Stocking Levels", that will the subject in our August issue of ACG "Smart Parts". In Part Three, we will be "fixing" our Parts Stocking Levels. Fixing our Parts Phase-In and Phase-Out Parameters is just the beginning to having the Proper Set Ups & Controls in our Dealer Managements Systems, (D.M.S.).

If you haven't looked at these Set Ups & Controls in a while and/or you don't know where or how to manage them...you might want to ask yourself this one question....

"Who's Managing YOUR Parts Inventory?"... 

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 2019: "Show Me How To Fix It!" - Part One: Lost Sales

In my opinion, finding a problem and fixing a problem are two different things. Anyone can tell you that you have a problem, but I'm more interested in ways to fixing the problem. In this computerized age that we live in, we have tons of reports available to us, but it's what we DO with all this information that is most important.

Over the next five months, starting with this issue of ACG "Smart Parts", we will concentrate on five Key Performance Indicators, (KPI's) in Parts Inventory Management that shape just how well our parts inventory is performing compared to industry guidelines.

We will start with Lost Sales, followed in consecutive months with Phase-In/Phase-Out Criteria, Stocking Levels, Gross & True Turns and lastly, and most important...First Time Off Shelf Fill Rates. Each of which, we will lay out a business plan to fix these KPI's and get them to industry guidelines.

A couple of years ago, I was invited to attend a conference with other parts industry analysts to have a "round table" meeting to discuss the "state of our industry" concerning parts in general as it pertains to today's automotive dealership.

One of the first topics of discussion was the reporting of parts "Lost Sales" and its overall effect in the daily operations and stocking levels of the parts department. We first discussed the true meaning of Lost Sales, and of course, the actual definition of a "Lost Sale".

With approximately fifteen to twenty attending this conference, just how many definitions do you think we had from those attending?....Exactly!....about fifteen to twenty! This was a great start to the conference and the debates began!

That being said, therein lies the first problem to less than desired results in many dealership parts departments today achieving industry guidelines of approximately 5% - 10% reported Lost Sales at cost compared to total parts sales at cost.

So, if all of us that attended have a difference of opinion, how do we expect our dealers' parts managers to achieve these industry guidelines?...What is the true definition of a Lost Sale?...and perhaps most important...Why is it important to report Lost Sales to begin with?...

So many questions, but now....Let's Fix It!....

Much like any problem or situation, before we can fix anything, we have to identify the root cause and develop a plan with an end goal in mind, along with a timeline to completion, or expected result. This is especially true when it comes down to Lost Sales Reporting and its definition.

When I was asked what my definition of a Lost Sale at this conference, my answer was much like any answer I give as a consultant as I tend to answer a question with another question. My answer to the question, (in the form of another question) was...

"What is the industry guideline"?

The answer given to me was 5% - 10% of total sales at cost, meaning that if my total cost of sales was $100,000.00 on any given month, then I should be reporting at least $5000.00 to $10,000.00 in Lost Sales at cost. 

At this time, I did answer the question as to my definition of a Lost Sale with...

"I guess then if you are a parts manager reporting Lost Sales at 5% - 10%, you have the right definition, if you are not...then you don't have the right definition"...

That being said...let's lay out our "Three Step" plan to "fixing" Lost Sales Reporting...

Step One: Belief System

In my opinion, fixing Lost Sales Reporting starts with the parts manager "believing" in what reporting Lost Sales can do for them. First of all, a Lost Sale is considered a "parts demand" or "hit" in the Dealer Management System, (D.M.S.). Demands to the D.M.S. are only recorded with either a Sale, or a Lost Sale.

Reporting "parts demand" into the D.M.S. is the only way parts are phased-in to the system and to eventually be considered a stocking item or part. Once the parts are phased-in, then the Stocking Level Parameters take over until the parts phase-out from inactivity or a given period of time.

It is in this first step where most don't even achieve industry guidelines on Lost Sales Reporting because they don't truly believe how important it is. This is why I don't like the term "Lost Sale" as I would replace the term with "Potential Missed Opportunity".

That interpretation alone, in my opinion, is a game changer. The term Lost Sale to me just seems to have a negative tone to a practice that is a positive one. Posting Lost Sales is not a bad thing, it's a good thing.

Do I want to take a chance by missing a potential "part demand" in my system"? Even if I record a Lost Sale up front when the customer or technician inquires about a non-stocked part, should I report a Lost Sale?

What if that customer or technician eventually orders the part and we sell it, aren't we now getting two demands on the same part? One from the Lost Sale and one from the actual sale of the part...will that not give me a "false" demand of two instead of one?

Let me respond with my own "What If?"....What if we don't post a Lost Sale up front because the customer or technician is ordering the part?....What if the customer never comes back, or the part is never installed?

Now I have a part that I ordered sitting on the shelf with NO demands posted even though there was a "need" or "demand" for that part. But, if I did post a Lost Sale and I sell that part to someone else, I would now have two demands on that part. One more demand that could lead to stocking that part in the future.

Here's the key.....It Doesn't Matter!

Step Two: YOUR Definition as a Parts Manager

If our "Belief System" has been resolved, we can now take the next step in "fixing" Lost Sales Reporting. Keep in mind that if we don't "believe" in what we do, then don't expect anyone else to believe it, especially our parts employees.

This "state of mind" has help 95% of all my clients achieve industry guidelines on Lost Sales Reporting within one to three months. Each of which were well below industry guidelines, or didn't even report Lost Sales at all in the beginning. 

Choosing the right definition as a parts manager, in my opinion is basically "simplifying" the definition in the first place. Too many parts managers that I have met that have less than desired results in this category have way too many restrictions on Lost Sales Reporting.

In most Dealer Management Systems, (D.M.S.), Lost Sales Reporting is recorded by demand within a given month, even though you can set limits on total demands. So, in other words, it doesn't matter if I record one Lost Sale, or ten Lost Sales on a given part number, the system is only calculating the demand that month.

If the part has demand within a given month along with demand in a two or three other given months out of let's say six or seven months, then the part will phase-in to the system. Even if the part does phase-in, it's not going to "jump on the shelf". The parts manager still has to decide if he or she wants to accept these parts as stocking parts.

The most important thing to remember is that we can't manage what we can't see in front of us and I don't know of any parts manager can manage thousands of part numbers in our system without seeing it right in front of us.

So, when it comes down to simplifying the definition for your parts employees is...when in doubt?...post the Lost Sale. DO NOT restrict your employees from posting, or making them decide if they should post a Lost Sale on this ball joint for a 1986 Ford F150. Chances are, there won't be any more demands on that part ever again.

And...if we ever did post a Lost Sale on that ball joint AND we posted a sale on the same part, as a parts manager, I'm not going to accept it as a stocking item when I look at my phase-in report. I've actually accepted many "weird" parts and let them phase-in and realized many future sales on those parts and let them phase-out after their life cycle was completed.

Step Three: Resources For Lost Sales Reporting

"So, where do I find these "Potential Missed Opportunities?"...are there more out there that we could be reporting? Are we only reporting Lost Sales when we simply check a part number and we don't have it? Can we have a Lost Sale AND an Emergency Purchase at the same time?..."

Many Lost Sales go "unreported" because we simply don't look for all the areas of "Potential Missed Opportunities". Here are just a few areas where we can enter Lost Sales to build our system "demands" for potential future stocking parts...

• Aftermarket parts that we purchase that are within our carline. The part may be billed out as the aftermarket part number, but we should post a Lost Sale on the manufacturers part number.
• Parts on service estimates that go "unsold", or the customer declines to have the work performed at a later date. Let's say a customer has an estimate that involves ten different repairs or services, but only chooses to have five of the repairs or services performed. If the other five that the customer declines involves parts that are not stocked, Lost Sales should be posted on the non selected items. After all, there was a "need" or "demand" for those parts even though the customer declined them. 
• Emergency Purchases are also another "resource" for posting Lost Sales. You actually can have an Emergency Purchase and a Lost Sale on the same transaction. Here's why...what happens to all those parts we chase that end up just sitting on the floor and not installed, only to be sent back to the vendor or dealer where it was originally purchased.

We have to be careful though because I'm not insinuating that we post Lost Sales and/or Emergency Purchases on all parts that we Special Order. I'm only recommending we post Lost Sales and an Emergency Purchases on parts we have to chase, excluding Collision Parts unless you are a dealer that is actively pursuing wholesale sales.

Common sense is the best way to simplify the posting of Lost Sales to industry guidelines. If a category of a part is a normal stocking part, then I should post Lost Sales on those types of parts. If I stock ball joints for certain vehicles, then I should be posting Lost Sales on ball joints that I don't stock.

Here's another note, if you are a dealer that utilizes a Vendor Managed Inventory Program from the manufacturer, (V.M.I.), posting Lost Sales in your own D.M.S. is the only way to increase your demand in YOUR inventory. 

Relying on the manufacturer that tabulates demand on groups of dealers will only give you group information that may not meet your own demand. It can also lead to overstocking of parts that you don't sell and understocking of parts that you do sell.

If 95% of the parts managers that I have worked with, (39 of 41) can get their Lost Sales Reporting at, or above guide, then there is no reason, or excuse for not reporting Lost Sales. After all, it is an industry standard and not just an option.

"The benefits from posting Lost Sales far outweigh the efforts of changing habits within our department...we just have to believe it".

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 2019: Low Parts Gross %?: "Don't Blame Your Parts Escalation Matrix!"

Have you ever heard the term that refers to gross profit as just a "State Of Mind"? This statement or term is probably most evident in our business when we talk about pricing our Used Vehicles in the Sales Department once the Used Vehicle has gone through reconditioning.

Usually, Used Vehicle prices are determined from "cost up" once backed in costs are added to the vehicle such as mechanical/body repairs and vehicle reconditioning. Once "true cost" is determined, the sale price is added from "cost up" in order to retain the desired gross profit margins and percentages.

In theory, the same thought should be applied when determining our "desired" retained gross profit percentage in the Parts Department, but unfortunately, there are many more variables to deal with in parts. There are also many more transactions in the Parts Department that can impact the overall parts retained gross profit percentage.

If it were that easy, we could just double our cost on all parts, (except for competitive parts), and we would realize a 50% retained parts gross profit. As a matter of fact, I have actually met Dealers and Parts Managers that have suggested that for a solution and they still didn't realize their "desired" retained parts gross percentage.

Once again, it's just not that easy as there are far too many variables in the Parts Department that eventually lead to less than desired retained parts gross percentages. Simply doubling the parts cost, or increasing the parts escalation matrix could actually lead to more problems.

These two simple solutions, (doubling parts cost & increasing the matrix), can lead to "overpricing" parts on certain parts invoices and repair orders that could eventually lead to losing customers and lower customer satisfaction and retention.

Even though I am a true believer that overall gross profit "dollars" are what we can really spend, as we can't spend a "percentage", but I also believe that both gross profit "dollars" and retained gross profit "percentages" should and can be achieved in the Parts Department.

The prime reason for my belief in achieving both overall gross profit "dollars" and retained gross profit "percentages" is that parts cost is a "constant" and very rarely changes as opposed to Service Labor and Used Vehicle costs that are always fluctuating due to various Technician Rates and Used Vehicle Reconditioning Costs.

So, what's the solution?...

Much like any situation, or problem that requires a solution, we first have to identify the areas where the situation, or problem exists in the first place. Simply applying solutions, or "band aids" to a situation or problem without "drilling it down", only leads to undesirable results.

After countless situations that I have experienced over the years in many dealerships on this topic, I have decided to focus this month's "Smart Parts" edition on my list of "Top 10" causes for Low Parts Retained Gross Profit Percentages. 

We will start at Number Ten and work our way up to our Number One cause for Low Parts Retain Gross Profit Percentages.

Here We Go!!!

Number 10: Mistakes

We know that everyone makes mistakes, but there are actually more chances for this to happen in the Parts Department because there are more transactions in the Parts Department in a single day than there are in the whole dealership in a single month.

Mistakes are made in the areas of "fat fingering" parts quantities, receipting parts, billing parts to the wrong repair order at the wrong price, or line number on the repair order, and more importantly, pricing errors. Pricing errors often occur because we tend to "assume" far too often.

Pricing Levels and Pricing Strategies also tend to cause many errors in billing parts as mistakes are made in the basic assignment of these Pricing Levels, or Pricing Strategies. Parts counter staff can often make mistakes in applying the right Pricing Level, or Pricing Strategy to the right customer.

Finally, the most common mistake made in the Parts Department is billing the right price on an invoice, or repair order from outside purchases. Parts may be billed out at factory cost without any adjustments made on the actual "true" cost that was paid for the part, especially on warranty repair orders.

Number 9: Proper Sales Training

That's right!...who would ever think that we would ever consider sales training in the Parts Department. In many Parts Departments, other than "over the counter" sales, parts counter staff are rarely exposed to the vast number of customers that flow through our dealerships each day.

Having the confidence and knowledge in selling is a skill that requires the proper training in any retail environment. Lack of training, skill, knowledge and especially confidence not only impact overall parts sales, it can also impact potential profits at the desired retail retained parts gross percentage.

The biggest impact from the lack of sales training is counter staff  "assuming" a part costs too much in their mind, thus giving the customer a discount up front, even before the customer objects to the original sale price of a given part or accessory.

Number 8: Sales Mix

Believe it or not, the "Sales Mix" of our parts sales can highly impact our Parts Retained Gross Profit Percentage. Depending on location, demographics, customer and area median income, etc., the Sales Mix between Competitive, Maintenance and Repair Parts & Labor Sales can vary.

For example, if my Service Department's repair order sales and repair order count leans more heavily towards Competitive and Maintenance Repairs and/or Services, my Parts Retained Gross Profit is going to be lower than expected industry guidelines.

On the other hand, many Fleet Service Dealers tend to realize even higher Retained Gross Profit Percentages because their Parts and Service Sales tend to be more "Captive" Repairs that usually outweigh Competitive and Maintenance Repairs and/or Services.

Even if an Escalation Matrix is installed, when we are considering the Competitive and Maintenance Categories, the Escalation Matrix is often substituted by parts "Flat Pricing" which is locked into fixed parts sales price with a fixed gross profit in order to remain competitive in the marketplace.

Number 7: Flat Pricing

Speaking of "Flat Pricing", that is Number 7 on our list of causes on Lower Parts Retained Gross Profit Percentages. The problem or concern that I have with "Flat Pricing", even though I'm a big fan in the concept is that many Parts Managers just throw out a "Flat Price" on a part such as an air filter without doing the proper math.

Even though these "Flat Priced" parts are usually competitive in nature and are usually considered Menu Items, it doesn't necessarily mean that we have to assume an expected Lower Parts Retained Gross Profit Percentage. If we do our homework and apply "Weighted Parts Price Averaging", we can get the best of both worlds.

By utilizing "Weighted Parts Price Averaging", we can actually research our annual piece sales of, let's say our "Top 10" air filter part numbers, combine the total annual piece sales of these "Top 10" air filters, then divide the total annual piece sales of all ten part numbers by the total cost for all ten air filters annually and come up with one average cost for all air filters.

Once the average cost is determined for all these air filters, we can then apply our markup percentage to achieve our desired Retained Gross Profit Percentage. For example, if my average cost for all these air filters is $11.87, then we can "markup" from cost by 1.67 to achieve my desired Parts Retained Gross Profit Percentage of 40%. So, in this case, all the air filters would sell at a sales price of $19.82.

The theory, (which actually works!) is that the air filters that we sell the most, usually cost less and the air filters we sell less, usually cost more. Once the weighted average kicks in, we may make less on the air filters that we sell the least, but...we make a much a higher Retained Gross Profit Percentage and more often on the air filters that we sell the most, thus retaining an overall "average" gross profit percentage of 40%.

Number 6: Emergency Purchases

I believe it's pretty obvious that Emergency Purchases has made our "Top 10" List, even though some may question it's position at Number 6. Quite simply, and much like in the Sales Department, if we have to chase it, we lose gross profit, both in dollars and retained gross percentage. 

This problem is even more magnified if the Parts Department has a low "First Time Off Shelf Fill Rate". I guess opinions may vary on where Emergency Purchases falls in to our countdown as it would depend on how low a particular Parts Department's number is, or what their percentage is on their "First Time Off Shelf Fill Rate". 

Emergency Purchases would actually rank a little higher on our countdown for some if "First Time Off Shelf Fill Rates" percentages are drastically low, resulting in more Emergency Purchases. More Emergency Purchases means lower gross dollars and percentages.

Low "First Time Off Shelf Fill Rates" that result in Emergency Purchases not only impacts the Parts Retained Gross Profit Percentage, it actually impacts the Service Department with lower shop productivity, efficiency and ultimately, lower labor sales and profitability.

Number 5: Service Estimating

As we reach our top five, we will see a higher impact, or potential higher impact on not only Retained Parts Gross Retention, but also missed gross profit opportunities in dollars which is a "double whammy". Ironically, in many dealership Service Departments, there is no real Service Estimating Program.

Whether there is a Dealer Management System, (D.M.S.) integrated Estimating Program, or one that operates electronically and separate from the D.M.S., chances are less likely for lost gross profit dollars and percentages in both parts and in service labor.

The sad truth is that many dealers' Service Departments still operate on a manual Service Estimating Process where estimates are written on the back of a repair order. Parts and Labor quotes are scratched on the back of the ticket and communication between parts and service is poor at best.

Poor communication in the areas of E.T.A., (estimated time of arrival) on parts, omitted parts, added costs to obtain parts, addition errors, etc. are just a few parts "gross killers" out there that can and does happen more often than we would expect, or even see.

Number 4: Pay Plans

Now we are getting to the "real meat" as we get even closer to our Number 1 reason for Lower Parts Retained Gross Profit Percentages. If you don't know it already, most of our employees "work their pay plan" as most of us want to maximize the areas that will end up in our back pockets.

Let me give you an example....

Let's say that I'm a Service Advisor and my pay plan is steered more towards selling labor than it is parts. I will even go one further and say that my pay plan is also steered more towards selling customer labor as opposed to warranty and internal labor.

That being said, which jobs are going to have the higher priority? Of course, warranty and internal parts and labor will take a back seat as customer pay labor is my number one priority. So, whether it's incentives, or the clock, (if I'm paid by the hour), that's how I am going to work my pay plan.

Here'[s another one...let's say that I have a transmission job in the shop that requires either  a transmission replacement or a transmission overhaul. Which one do you think I would want to push, or sell to the customer? Of course it would be overhauling the transmission as that we pay me more with the customer pay labor.

Also, wouldn't it behoove me to "pad" my labor utilizing labor grids more than the actual parts needed for the repair and at the parts escalated price?

Even though both the grid and matrix should be applied, the tendency to discount, or reduce my estimate may be what it takes to make the sale. If I did have to make cuts somewhere, it would definitely be on the parts side.

On top of that, and in my opinion when it comes down to ethics, replacing the transmission with a
re-manufactured unit with a better warranty would be a better value to the customer in many cases. Unfortunately, ethics isn't always the case when pay plans come into play.

Pay plans also impact Retained Gross Profit Percentages for Parts Managers and their counter staff. If my parts pay plan leans heavily towards "total sales", or even "total gross profit", then percentages really don't mean anything to me.

I would tend to lean towards making the sale and applying discounts just to drive the numbers instead of making sure I retain the right gross percentage.

Number 3: Overrides

Some may think that "Overrides" is the same as "Discounts", but they are quite different as overrides are directly linked to overriding stated Escalation Matrix Sale Price, or maybe even the Manufacturers Suggested Retail Price. Overrides may also be legitimate when we look at our Pricing Strategies, or Pricing Levels to certain customers.

So, it doesn't really matter what the Escalation Matrix is, or how strong it is, if I'm going to override it anyways, the actual sale will be determined by how much the override is and not how good the Escalation Matrix may appear.

Even though overrides may be legitimate in many cases, the real factor in overrides that can contribute to Low Parts Retained Gross Percentages is that there is usually very little "policing" by Parts Managers. Once a parts counter person has the ability to override once, they may just do it again and again, even if the customer does not qualify in a particular Pricing Strategy, or Pricing Level.

The ability to change a selling price of any part, or overriding the selling price, should always be accompanied with the accountability that comes along with it. In my opinion, giving the ability, or access to parts overrides should be treated like giving someone your personal bank account number.

Unfortunately, in many Parts Departments, pretty much every parts counter person has the ability to override parts selling prices. That's why I always recommend that Parts Managers run their D.M.S. Exception Reports at least once a week which will reveal any unauthorized parts price overrides.

Number 2: Discounts

Even though they may seem similar, parts "Discounts" are different than parts "Overrides" because discounting parts has many more people involved and reasons for applying parts discounts. Coupon Specials, Service and Parts Promotions, Customer Rewards Programs, Competitive Pricing, etc. are just a few areas where we normally see parts discounting.

When we talk about the "people" side of parts discounting we see far more people involved compared to parts "Overrides". Parts overrides are usually centered around parts counter people and management, where parts "Discounting" has far more people involved.

Parts discounting can involve not only parts counter people and management as Dealer Principle, Parts & Service Managers, Service Advisors, Cashiers, Sales People, Advertising Managers, Internet Sales People and even the Ad Companies themselves may ALL have their "hands in the till" on parts discounting.

The danger in all this is not only the number of people involved, it's actually how all these parts discounts go "under the radar" until end of month numbers are revealed and the lost revenue and opportunities are discovered. That's usually when the "finger pointing" starts because with so many people involved, it's rather easy to escape personal responsibility.

Parts discounting also crosses into some of our previous "Top 10" causes listed as parts discounts can also be taken advantage of when we look at our pay plan category, or even Number 5 on our list with Service Estimating.

In my opinion, the one thing that separates "Discounting" from all the rest is the actual impact of discounting when it comes down to lost gross profit dollars and percentage. It is by far the top individual reason or "gross killer" in our "Top 10". Number 1 in actual dollars lost, but not our Number 1 "reason" for "Low Parts Retained Gross Profit Percentage".

And Now!...Drum Roll Please!...

Number 1: Belief System

In my opinion, our personal "Belief Systems" incorporates all the above and is our Number 1 when you think about it. After all, if we are willing to accept lower than desired gross profits and percentages in the first place, we would never have the any of the above reasons to begin with, or they wouldn't even happen in the first place.

Let me give you a few examples of how our "Belief System" could impact gross....

Advisor: "Wow, that part cost way too much, I wouldn't pay that much for that part!"

Parts Counter: "The part sells for $97.89, but I can give you a 10% discount!"

Cashier: "I'm sorry you aren't happy that your car broke down, how about I give you a discount on your bill?" 

Salesperson: "Thanks for your vehicle purchase, here's my business card, just show this card to the parts people and they will give you a discount on parts and accessories!"

I think that most of us can relate to any of these situations where we "freely" give away our hard earned gross profit, just because our "Belief Systems" are not where they should be all around. Also, it's just human nature at times when we feel threatened for any reason, the answer is always to give away money.

When our "Belief Systems" affects our management team, especially in a negative gross profit "state of mind", it will definitely end up being a trickle down throughout each department. Also, if our processes aren't what they should be, that's another reason to give gross away. These are just problems waiting to happen and will always result in lost gross dollars and percentages.

One of my favorite quotes from one of my favorite Motivational Speakers is...

If YOU Don't Believe In What Your Selling....Then, Don't Expect Your Customers To Believe In What You're Selling!"

- Warren Greshes

Your Parts Escalation Matrix can be a great tool in "fine tuning" gross profit retention. But, if we look at it logically, and if we were to just bill out everything at the Manufacturers Suggested Retail Price, with just a moderate Escalation Matrix to support those times where we have to sell at a Competitive Price...we would then, in theory, attain expected Retained Gross Profit Percentages.

"If you are not "hitting the mark" on Retained Gross Profit Percentage...Don't Blame The Parts Escalation Matrix,  you may just find your answer in our "Top 10" List!"

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