December 2015: Controlling Parts Obsolescence

One of the most interesting topics in parts that not only never gets old, it never seems to go away and that is parts obsolescence. No matter who try's to come up with the ultimate solution, including myself or how it's done, controlling obsolescence is no easy task.

In my opinion, the first thing that has to happen is that we must have a proper definition of just what is parts obsolescence. Much like "Lost Sales" or even "Emergency Purchases", believe it or not, many Parts Managers have different definitions as to when a part has lost it's ability to sell.

Many industry "experts" may also refer to obsolete inventory as "idle inventory" and to me, that's where it can get confusing. After all, ALL parts are idle until they sell so why complicate things? Call it what it is and then we can start fixing it.

Let's start out with the definition of "obsolete inventory" as stated by investopedia.com....

"Term that refers to inventory that is at it's end of it's product life cycle and has not seen any sales or usage for a set period of time determined by the industry"

Now that we have that out of the way, the next question we have to ask is...who determines that set period of time in our industry? Just when is a part at the end of it's life cycle?

For many years, NADA has pretty much been our guideline for industry standards as have many other similar groups. In the area of parts, these groups as well as myself, have trusted Mike Nicoles for most of our parts industry standards and guidelines.

So let's take a look at what our parts industry guidelines tell us as to just what the timeline or "life cycle" of the majority of automotive parts are and when they have met their ultimate demise. Keep in mind that these following Mike Nicoles stats have been in place for decades.

Chance of no future parts sales with activity after:

Six Months - 49%

Nine Months - 67%

Twelve Months - 98%

Along with that information, here's Mike Nicole's and NADA's Guidelines for parts active inventory movement as a percentage of total parts active inventory movement:

Parts Active Movement 0 - 3 Months   =   75%

Parts Active Movement 4 - 6 Months   =   23%

Parts Active Movement 7 - 12 Months   =   2%

Parts Active Movement Over 12 Months   =   0%

Now that we know what definitions, guidelines and standards we are supposed to live by, we can actively format a plan to identify and control obsolete parts inventory. Not only that, we can now also create a plan to keep it from happening over and over again in the future.

First, what causes these parts to become endangered and obsolete to begin with? How do these parts seem to keep falling down in each of the above categories? Even though some manufacturers offer stock replenishment programs with inventory protection, how come we still have obsolete inventory?

One of the most common contributors to obsolete inventory is Special Order Parts. As vehicles get more complex with more technology, each manufacturer has seen a drastic rise in the number of individual part numbers over the last 30 years.

This rise in part numbers makes it much more difficult for parts managers to keep special order parts at a minimum, even if "First Time Off Shelf Fill Rates" are at 80% or better. There will always be special order parts so we need to make sure we have a process in place with a high standard of accountability.

One area of accountability that I recommend is to charge internal parts handling fees or maybe even the whole cost of the part up to a certain amount.

Even though there is no actual expense incurred to the dealer, it only takes a couple of times before a department, department manager or even an advisor to "take a hit" in pay or department expense for it to stop. 

As I mentioned last month when we talked about controlling parts purchases, we also need to make sure that not just anybody can special order parts, especially technicians and salespeople. We also have to make sure that if these special order parts are not maintained within a 30 day period, there will be consequences.

Having a system in place that includes parts prepayment or deposits for customer pay repair orders and "over-the-counter" sales is a necessity. Even wholesale customers should be kept under watch for the amount of their returns and ability to pay within proper time frames. 

Another huge area of special order parts that contributes heavily to parts obsolescence is warranty parts. It just seems like anybody can order a part for a warranty repair without consequence. The amount of parts that end up on the shelf is staggering as these parts do not require any deposit, prepayment or authorization.

As I mentioned, technicians and salespeople play a big part in the parts obsolescence problem even though they should not be ordering parts in the first place.

Only the Service Advisor, Managers and ultimately the customer should be the ones authorizing special order parts. These parts must also be billed on the repair order or future appointments need to be set before the Parts Manager will authorize the special order.

The biggest contributor to parts obsolescence is hidden right within every Dealer Management System, (D.M.S.) and will continue to breed obsolescence. Many Parts Managers don't even realize their existing  and future obsolescence problems are in their Parts Set Ups and Controls.

Approximately 90% of the over 200 dealerships that I have visited, after reviewing the Parts Managers Monthly Analysis Reports as well as their Set Ups & Controls, I am not surprised that parts obsolescence is an epidemic in these parts departments.

Some of the most common Set Ups & Controls that are either set up incorrectly or go under managed are Phase-In and Phase-Out Parameters and Days Supply.

Believe it or not, many Parts Managers don't even know how to manually calculate Days Supply or True & Gross Turns. After all, isn't that why we have computers?

Problem is, most of these above mentioned Set Ups & Controls are usually set by either an outside source or maybe the Dealer Management System, (D.M.S.) vendor. Unfortunately, many of them are not even close to being qualified or even know what these Set Ups & Controls should be in the first place.

In order to fix the obsolescence problem, we must "stop the bleeding" first, than fix these Set Ups & Controls with updated and "common sense" parameters. A couple of the biggest areas that need to addressed in most stores I visit are Phase-In/Phase-Out parameters and Days Supply that actually make sense.

Phase-In parameters can be debated, but Phase-Out parameters should be set to kick in at the eight to nine month time frame, never at twelve months or higher. Days Supply should also be set with Source Ranking based on annual piece sales.

A part that sells only six times a year only needs a low days supply of 60 days as those parts only sell on average every other month as opposed to parts that sell maybe 24 times a year that would only need a low days supply of only 15 as those parts sell on average twice a month.

When I see Parts Managers that have most or all or of their parts in one or two standard sources, I already know that there is an obsolescence problem before I even look at the Parts Monthly Analysis Report....guaranteed. 

If all or most of the parts are in the same source, then the Days Supply set ups for the source applies for ALL parts, no matter how they move.

If all parts are treated the same as far as how many are stocked,  whether Low Days Supply (Best Reorder Point or BRP) or High Days Supply, (Best Stocking Level or BSL) it can only mean one thing...shortages and overages.

Source Ranking by Piece Sales eliminates both shortages and overages as the Days Supply Set Ups & Controls are set to how a part moves on an annual basis. Each "ranked" source accompanies the proper low and high days supply, (BRP & BSL) that is calculated and matches average annual piece sales.

As movement changes during the part(s) "life cycle", it is adjusted by the D.M.S. to move into the appropriate "ranked" source that matches the proper low and high days supply, (BRP & BSL). Once the part nears the end of the "life cycle", the low and high days are increased, resulting in fewer reorders until final phase out occurs.

Utilizing Source Ranking by Piece Sales definitely helps to eliminate the future obsolescence issues along with the right Phase-In/Phase-Out Parameters. If the D.M.S. is set up properly, the Parts Manager can learn to trust the system to do the right functions.

The last area that contributes to obsolescence, though not as drastic as the prior two is the Parts Manager. Many Parts Managers cause their own obsolescence problem with "forced" Phase-In practices.

Listening to technicians, reacting to peek demand periods by increasing quantities, overriding suggested stock orders and lack of parts special order controls and standards are just a few of the areas.

With all these contributors, it's no wonder why parts obsolescence is an ongoing issue, even with the manufacturers' stock replenishment programs and inventory protection. There is no guarantees or protection for a lack of proper process and accountability.

Lastly, in order to tackle this obsolescence monster, Parts Managers need to be looking at "potential" obsolescence coming down the pipe in the 4 - 6 month sales activity area. It's easy to look and see what is obsolete over 12 months.

Parts Obsolescence can only be stopped at it's core. Especially when we consider all the above mentioned and perhaps others not mentioned. Obsolescence prevention should be the focus, especially after year end parts "write offs" going forward.

Parts Obsolescence is a disease that requires the proper controls to eliminate future obsolescence from happening in the first place. If the problem keeps reoccurring, the problem is not fixed...you have to go to the source to make the problem go away for good.  

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

November 2015: Controlling Parts Purchases

In part two of our three part series, we will focus on one of the most lucrative functions of all Parts Department Controls and that is purchases. The Parts Department not only controls the purchase of automotive parts, it also controls many, if not most of the monthly dealer purchases, excluding vehicle purchases of course.

With that said, it's amazing to me that there really aren't that many controls or restrictions in many dealership Parts Departments concerning these purchases. Just about anyone can write a purchase order, or pick up the phone to buy anything from automotive parts, sublet purchases to paper towels and AAA batteries.

In this month's issue of ACG's "Smart Parts", we will breakdown all of these areas of dealership purchases that are controlled by the Parts Department. We will also look at how not having the proper controls in place can heavily impact the dealers overall net profit.

First of  all, it's not at all surprising that the Parts Department gets this dubious responsibility. The security of the Parts Department makes it an obvious choice by most dealers. Shipping and receiving, the storage of parts, supplies and shop equipment as well as being the central dealership location are also major contributors.

Given these facts, I have to ask a few simple questions.....

• Is there an "automated" purchase order system in place in the dealership?
• Is the approved price included on the purchase order?
• Are purchase orders reconciled each month in Accounting?
• Are all Parts Department authorized to write purchase orders?
• Are parts purchases accounted for properly if there is a price variance?
• Are all purchases accounted for correctly? (asset vs. expense) 
• Are cost analysis studies on office and shop supplies done periodically?

If you've answered "no" to any of these above questions, there just may be some opportunities out there to increase bottom line net profits for your dealer. Purchase control means that we have to have controls in place and these are just a few.

One in particular from the above mentioned questions is automated purchase orders. Most Dealer Management Systems, (D.M.S.) have this option. This allows the Accounting Department to reconcile the purchase order schedule. It still amazes me that many dealers still operate on a "hand written" purchase order system.

Often times, an approved purchase order amount ends up being different from the final amount invoiced from the vendor. This often happens with sublet purchases, especially in the area of new and used vehicle purchases.

Here's an example using the following sublet scenario:

Customer purchases a new vehicle and wants to add a set of aftermarket custom wheels. Salesperson prices out the wheels locally for $800.00 and gets a purchase order from parts and adds in the appropriate price for parts and installation into the deal.

Wheels arrive and the repair order is generated to have the wheels installed in the Service Department. Wheels are billed on the internal repair order and the Service Department installs the new wheels before the vehicle is delivered to the customer.

Salesperson delivers the vehicle without any issues and the customer drives away satisfied with their new vehicle. Everything from start to finish went as planned except for one little problem that no one really expected.

The price quoted to the salesperson for the wheels was $800.00, but the actual price when the wheels arrived was $1000.00 and that's what the Parts Department billed out the repair order. These was no "approved" amount written on the purchase order, so the Parts Department billed the invoice amount of $1000.00.

The salesperson only had $800.00 plus the installation included in the deal so that was the amount added for the customer. The vendor stuck to their price of $1000.00 because the wheels that were sold were actually $200.00 more due to the customer changing their mind as to which wheels they actually wanted.

There were no adjustments made to the deal, so the customer didn't pay the additional $200.00.

End result?...$200.00 backed out of the deal and a loss of that same amount on the bottom line. The purchase order and "we owe" were hand written without an authorized amount so the Parts Department didn't know any different but to bill the amount invoiced on the internal repair order.

Lack of having the proper purchase controls in the Parts Department continues in the area of purchasing office supplies, shop supplies, uniforms, dealer cleaning supplies, equipment or even vending machine supplies. All of which require periodic price comparisons to insure the dealers' money is spent wisely without sacrificing quality or safety.

Price comparisons should be conducted at least once a year, if not more just to keep your preferred vendors "honest" as well. It's not unusual that even your most trusted vendor will increase prices from time to time and often times not intentionally. Sometimes even the vendors gets caught from their manufacturers' and pass the cost down to the dealer.

This is where the "Smart Parts" Manager who is conducting these pricing surveys from time to time will catch these errors and act to correct them. Some of the most common "lack of purchase control" areas that may be impacting the dealers' bottom line may include;

• Increased office supply charges from print overruns from printing companies not requested.
• Additional uniform charges and surcharges from missing or garments or shop rags.
• Unsupervised vendors in the Parts Department writing their own order.
• Unauthorized dealer personnel requesting or writing their own purchase orders.
• Lack of cost or price reconciliation on purchase orders.

The last area of purchase control that we haven't discussed yet is actually the primary function of the Parts Department is the "purchase" and sale of automotive parts. The "lost profit" areas in this category are actually different than sublet or dealer supplies purchase controls.

Lost profits resulting from a "lack of controls" in purchasing parts often times go unnoticed or undetected. When dealing with an asset, as opposed to a direct expense, lost profits get are hidden in inventory accounts, or "asset" accounts. Even though the sublet account is treated like in "asset" account, the parts inventory account has a much bigger and "active" balance.

Parts purchasing can be quite an "art" in addition to having the proper purchase controls in place. If the "Smart Parts" Manager has a clean, active moving parts inventory of 90% or better every six months, purchase control just turned into purchase power.

Controlling parts inventory amounts with controlled obsolescence allows the "Smart Parts" Manager to make wise purchase decisions maximizing earned purchase discounts. Taking advantage of the manufacturers' promotional discounts can make quite an impact on the dealers' bottom line.

In addition to that, if the "Smart Parts" Manager has a "First Time Off Shelf File Rate" of at least 85% or better, there are fewer Emergency Purchases at a higher cost. Another benefit is higher shop productivity with less "down time" waiting for parts.

The added costs from not having a controlled, active inventory and lower "First Time Off Shelf Fill Rates" can be astronomical. Some of these added costs and "profit killers" may include;

• Lost Service Productivity and Labor Profits 
• Added Personnel Costs Chasing Down Parts
• Missed Discounts Opportunities on Parts Purchases from the Manufacturer
• Parts Inventory Variances: Controlled vs. Accounting
• Lost Customer Retention, Poor Customer Satisfaction, (C.S.I.)

As you can see from all of the above examples and scenarios, "Controlling Parts Purchases" or, to put it a little differently, the "Control of Dealer Purchases" in the Parts Department impacts all dealer departments and can subsequently impact all dealer departments' net profit. 

Controlling Parts Purchases goes far beyond the tag line of this issue of "Smart Parts". We have to take a closer look at how we conduct our business in general. If we are to succeed and be profitable, we have to invest wisely and control what we spend. If controlled properly, higher returns on investment are 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

October 2015: Controlling Parts Pricing & Discounting

In my opinion, there is a big difference between "managing" and "controlling" the average dealership Parts Department. Managing Parts Gross Profit, Expenses and Net profit, as we discussed in the last three part series is actually the "net result" from having the Proper Controls.

As we "kick off" the first of this three part series with "Controlling Parts Pricing & Discounts", I want to start out by asking "Smart Parts" Readers this question....

"Can you name one other dealership department other than the Parts Department, that allows other dealership departments to have control of pricing & discounting?" 

Pretty interesting when you think about it as other departments such as Service, Sales and even Collision Departments play a big role in parts final pricing. Not to mention, who has the power to give discounts in the D.M.S., (Dealer Management System).

Even though the Parts Department bills the part out and controls the "initial" price of each part, the final pricing is controlled by Service, Sales and the Collision Centers. I don't ever remember the Parts Department ever having that control over New & Used Vehicle Sales or even how much labor should be charged on each customer pay repair order.

If the parts price is "perceived" to be too high, or if mistakes are made in estimating job price, it's usually the parts that get discounted most often. I know that this may offend some Service Managers out there, but I don't think many of them can say that it hasn't happened before.

I do understand that parts need to be priced competitively on service menus items as well as "add on" accessory items in the sales department. I also know that most Parts Managers participate in the initial pricing with other department managers on these items, but once again...who's ultimately in control?

Even though the Parts Department needs to remain competitive on these items, safeguards should be in place. One feature is to use password protect features on the D.M.S. to maintain pricing controls and prevent unauthorized discounting.

In many dealerships, service and parts discounts are charged back to gross profit accounts as opposed to being charged to an expense account such as advertising. Even though this is a very common accounting practice, it is much harder to maintain accountability as these discounts just get lost in the "sea of gross profit".

Many Parts Managers don't even realize how much of their gross profit is lost to discounting until the month is over when it's far too late to recoup the lost revenue. Once again, discounts given on parts by other departments "with control" of our parts sales and gross profit.

So, how do we regain control of our gross profit lost due to others controlling our parts pricing and discounts?

First of all, we have to realize a couple of basic facts.....

Other than "over the counter" parts sales, parts invoicing is heavily controlled by repair orders in the service and collision departments. Other than having some control by utilizing password protect features on the D.M.S., the Parts Department does not have much control. 

With that said, the "Smart Parts" Manager has to regain control by managing the tools "within our control" to offset these basic facts. We have to have pricing policies that insure overall profit retention with the proper offsets in our escalation matrix that will balance with discounts.

Parts gross profit retention must be controlled daily in order to maintain proper gross profit percentage levels. The parts escalation matrix should be utilized on "captive parts" in the right cost of sales ranges on a consistent basis. 

A reduction of parts gross retention of 5 - 10% due to competitive pricing and discounts can easily be regained by modifying the parts escalation matrix. Modifying the non-competitive, captive parts in the $10.00 - $25.00 parts cost range by 20% can easily overcome this gross retention loss. This cost range is where 80% of our parts sales come from.

Another big key to controlling the gross profit retention is to know what the lost gross amounts due to pricing policies and "qualified" discounts are on a daily basis. This information is readily available on most Dealer Management Systems on a daily basis, whether the amounts are charged back to gross, or an expense account.   

In order to regain control of our parts pricing and discounting structures, we have to know how to play the game and do it on a daily basis. It's not uncommon or unusual to make these parts escalation matrix modifications far more often than most Parts Managers do.

Even though the facts are what they are, there is no reason to lose parts gross profit. Just because other departments may have the initial control of parts pricing policies and discounting, there is no reason to lose ultimate control of achieving proper gross profit retention. 

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 2015: "Managing Parts Department Net Profit"

As I mentioned in the intro, I believe that managing the Parts Department Net Profit requires a daily routine to insure a predictable "bottom line" each month. Not to say that managing Parts Department Gross Profit and Expenses doesn't also require managing on a daily basis.

Generally speaking, many Parts Managers don't even have a daily routine on managing the Parts Department Net Profit. Most often, in the last week of each month there seems to be more of a mad rush on getting as many sales in as possible before the month closes.

This is not unusual of course because we have to get sales in first before we even have gross and net profit. Although, sometimes this attention to sales and gross can effect the net as expense seems to take a "back seat" during this mad rush to the finish.

In order to have a predictable net profit, we must have a daily routine on how we manage sales, gross and expense. This daily routine cannot happen without forecasting as well as setting goals and guidelines. Much like managing our households, we have to know how much is coming in and how much we spend.

We have to have a budget and manage it daily in order to afford a home, possibly raise a family and have all the nice things in life, including saving for retirement. Much like managing the Parts Department Net Profit, we have to have a plan and live by that plan each day.

So!....where do we start and how can we manage a monthly "predictable" net profit on a daily basis?....

First of all, we have to have the skill, ability and knowledge to understand dealer financial information. We also have to have access to this information with open lines of communication between the Parts Manager, Dealer Principle and Office Manager.

Many years ago, dealer managers were not allowed to have access to financial information as it was considered to be a forbidden practice. Times have definitely changed as it would be next to impossible for a dealer manager to manage net profit without this information.

Second, the Parts Manager needs to have D.M.S. (Dealer Management System) accounting information in regards to all sales, gross and expenses entered each day. Most times, this information is available on the D.O.C. (Dealer Operating Control) Report.

Even though many Parts Managers already have access to this information on a daily basis, I wonder just how many actually look at these entries on a daily basis. Here are a few questions to ask yourself...

• How many Parts Managers have actually challenged or questioned certain expenses?

• Have they ever "drilled down" any expense by looking at a "detailed journal" as opposed to just the total expense?

•  What is a "detailed journal" anyways?....

Having access to the "detailed journals" of each account allows the Parts Manager to "drill down" certain expenses that may be questionable. For example, if I was to question, let's say the Office Supply expense and I notice that mid-month, it's way over budget already. 

Looking at the "detail journal" of that account would break down each Office Supply expense entry. Often times I have found that I got charged for an Office Supply expense that was supposed to be charged to a different department altogether.

If I had waited until after the financial was completed at the end of the month to notice this incorrect expense entry, it would have too late. Can't go back now and change it as the month is over and perhaps I have to beg for a credit next month.

Being able to monitor and understand each and every sales, gross and expense account daily is crucial to managing Parts Department Net Profit. If you don't get and understand the information, you will never have predictable results in the end.

The third key part of managing the Parts Department Net Profit is the Parts Manager must know and budget for fixed expenses and some semi-fixed expenses each month. Knowing beforehand what to expect on certain expenses going into each month allows the Parts Manager to factor in those expenses on a "per day" basis, or average.

In other words, if I break down my "known expenses" per day, then I can set my sales and gross goals accordingly. Managing the "unknown expenses" is where it gets tricky as close communication with the Office Manager and the Dealer is required.

Often times, Parts Managers seem to find it easy to spend other people's money, in this case, the dealer's money. Managing the dealer's "check book" should be just like managing our own. Believe it or not, there isn't a "never ending" balance to the dealer's check book.

Managing personnel expense is also key to insuring a healthy "bottom line" as this expense carries the most weight out of all expense categories.

Managing the "metrics" on proper staffing, not only in total number, but also each parts department job category. Areas such as counter staff, inventory clerks, drivers and management all come into play.

Having the right people and the right number of people to perform every day department duties & responsibilities can be quite a juggling act. Most importantly, we must make sure that the total Parts Department Personnel Expense falls within guidelines set by the manufacturer or other industry guideline.

Lastly, we have to have Parts Department Expense Controls to insure that only "qualified" individuals have access to make purchases. The "purchase order" book, or computerized  purchase order system is the dealer's check book and should be treated as such.

 I prefer using the D.M.S. (Dealer Management System) Purchase Order Process as it has full accountability.

I believe that all Parts Department personnel should have at least a basic knowledge of how expenses can impact net profit. They should also know the overall department's goals, guidelines and expectations and be accountable to them.

The "bottom line" is that if we want predictable results on Parts Department Net Profit each month, it starts with managing it on the first of each month and each day after. As we all know, the dealer looks at his financial from the bottom up, so we should start there as well....

 

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 2015: Managing Parts Department Expenses

To me, one of the biggest "sins" that any automotive dealership manager and not just the Parts Manager can make is creating a "wealth" of gross profit, only to waste it away by not managing expenses.

There are many successful Parts Managers out there who are absolute wizards at creating and accomplishing tremendous sales and gross profit numbers, but unfortunately, they have never been properly trained to manage department expenses.

Back in the day, it was quite rare that any manager ever received any dealer financial information to even try to manage expenses. It was always a surprise about the 10th of each month when the dealer came out screaming because the department was in the "red" once again for the previous month.

Not surprisingly, I still see this situation happening today in many Parts Departments as well as other Fixed Operations Departments. The one common denominator in all these cases that I have witnessed in these dealerships is "lack of control" when it comes to managing expenses.

Even though this one common denominator seems to be present each time, there are still many "factors" to this lack of control. This is where I want to begin "drilling down" part two of our series on "Managing Parts Department Expenses"


Lack Of Control Factors:


Lack of control to me is just an easy way out, or one might say "an excuse" for perhaps lack of management, knowledge or education, experience, or information. Keep in mind that I am excluding those dealers that have "over allocated" uncontrollable expenses added to the Parts Department.

In order to be a profitable Parts Manager with healthy "bottom line", he or she must have access to the dealer's financial statement on sales and gross and expense pages for the Parts Department. Furthermore, the Parts Manager needs to have access to this financial information on a daily basis.

Even though pretty much all dealerships have daily access to sales and gross information on their Dealer Management Systems, (D.M.S.), many do not have daily access to what's being posted into accounting as far as final posting adjustments and expenses.

Accessibility to this information is vital to managing expenses, but even more crucial than the information is understanding the information. There is no substitution for the proper education and knowledge needed to manage any business, especially business administration skills.

Experience also plays a huge role in overcoming "lack of control" factors as skill ability and knowledge can get you there, but experience keeps you there. Learning from past experiences or mistakes can groom any manager to being successful and profitable.

In my opinion, if a dealer wants to be profitable in the Parts Department, they have to start with eliminating these factors from happening in the first place by employing the right manager for the job. Skill, ability, knowledge, experience and access to the proper information has to be in the fore front.

Once these "lack of control" factors have been eliminated, the proper foundation has now been set to go to the next level in Managing Parts Department Expenses. There has to be "goal setting" as well a set of rules and guidelines as to what is expected, acceptable and reasonable.....


Goals, Guidelines & Definitions:


Now that we have the right person for the job, there has to be an "net profit" expectation or outcome that the Parts Manager has to shoot for which leads to a few questions.....

• How much of my gross profit can I keep after expenses are backed out?
• How much should I be paying to staff my department with the right people?
• What percentage of my expenses should be allocated as "semi-fixed" expense?
• How can I control these "fixed expenses" that are actually "non-controllable"?

These and many other questions can impact the "bottom line" if we don't know the answers to these questions going into each month. Knowing what the "expense to gross" percentage guidelines are in all expense categories gives the Parts Manager a road map to achieving expected net profit expectations.

Expense control begins with knowing just how many expense dollars are allocated to each expense category. I have always considered my "expense to gross" allocations as my "check book" and I couldn't spend what I didn't have...No credit cards allowed when it comes to paying the Parts Department bills!

Every Parts Manager needs to know their respective expense allocation percentages provided by either their manufacturer, 20 Group such as N.A.D.A., N.C.M. or any combination of these groups in order to manage the Parts Department expenses.

Most dealer financials are broken down into three expense categories;

• Personnel Expense
• Semi-Fixed Expense
• Fixed Expense

I know that most "Smart Parts" Managers already know about the three expense categories, but believe it or not, many Parts Managers do not know. More importantly, a high percentage of Parts Managers couldn't even give me at least five examples of a "semi fixed" expense when I did my own recent poll!

How could these Parts Managers' control these "semi-fixed" expenses if they didn't even know what a "semi-fixed" expense was in the first place?

Outside of the people we hire in the personnel expense section of the financial, semi-fixed expenses are the most controllable on a monthly basis. By far the biggest expense factor as to what goes to the bottom line each month in the Parts Department.

The "Bottom Line":

The "Bottom Line" that I am going to close with is not the one you would expect as we will get into that in part three of our series on "Managing Parts Net Profit". The "Bottom Line" I am referring to in this case is if we don't do a few basic things such as...

• Eliminate The "Lack Of Control" Factors
• Set Proper Goals & Guidelines
• Understand Definitions & Financial Information

No need to worry....there will be no "Bottom Line"!!

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 2015: Managing Parts Gross Profit

As we move into the second half of 2015, ACG "Smart Parts" will take an "in-depth" view on what I feel are the three most important skills areas that a Parts Manager needs to manage well in order to be successful.

As in any retail business, sales provide the revenue needed to feed the engines of most successful companies. The same is true for today's automotive dealership in the areas of sales, service and parts even though the parts department is a little different in my opinion.

As "Smart Parts" Readers, I believe you have all have read my blogs and posts long enough to have an open mind and sometimes, thinking "outside the box" is a requirement in processing the content each month.

With that said, I believe that parts gross profit drives the parts departments' engine and not the parts sales. Of course we know that a sales transaction has to occur in order to have gross profit come into play in the first place as sales minus cost equals gross profit.

Let me explain further as we will look at a few key areas that help the Parts Manager control & manage parts gross profit. The first area we will look at is a key driver in overall parts sales and is ultimately, the biggest contributor to parts gross profit.

Number One: Parts Demand

In my opinion, parts demand is the number one contributor in the total amount of gross profit attained as well as the overall gross profit retained percentage.

Having the right part at the right time allows the Parts Manager to not only meet and exceed sales objectives, it also allows the Parts Manager to achieve the highest gross profit as well.

Having the part in stock always makes it easier to attain the highest levels of gross profit as opposed to chasing or special ordering parts at a higher cost, or even potentially losing sales on stock out situations.

It goes even further than that as we have to be posting all of our demands in the first place, sales and lost sales, in order to phase in the right parts with the right number of days supply depending on individual parts sales movement.

So before we even try to maximize our gross profit by having the right parts at the right time, we have to have the right set ups & controls.

We also have to make sure we phase out those parts that do not have demand so we can have the inventory revenue and space to stock those parts that are selling with higher gross levels.

Wow!...all this set up "stuff" is impacting the amount of gross profit as well as the percentage of gross retained? It's pretty amazing to me that when we started out talking about sales leading to gross profit, who would have thought that we would end up talking about inventory management?

This is why I believe that the success of the Parts Department side in today's Automotive Dealership can not be measured by sales and gross objectives alone.

They are merely a residual of the Parts Manager's ability and skill level in managing inventory and increasing overall demand.

Managing demand may be the number one key driver in a Parts Manager's ability to manage gross profit.

Our second key driver also plays a big part in achieving expected sales and gross numbers and percentages, but unfortunately, is one of the most "under managed" and "under utilized" tools in a Parts Manager's tool box.

Number Two: Parts Escalation Matrix

One the best ways we can manage and retain expected parts gross percentages is right under our finger tips. Even though most Parts Managers utilize a parts escalation matrix for customer pay parts sales, many still fail to achieve N.A.D.A.'s overall customer pay parts retained gross percentage of 40% - 42%. 

How could this be if we are utilizing an escalation matrix for "over-the-counter" and service repair order customer pay part sales? Isn't that the reason to have an escalation matrix in the first place?

There are many contributing factors that eat away at our customer pay gross profit. Just naming a few such as; discounting service repair orders, advertised specials, discounts charged back to gross instead of being charged as an advertising expense, under estimating repairs, chasing parts at a higher cost, etc. and probably more!

The problem is, even though the Parts Manager as well as other department managers may already know this, nothing gets done about it! We just seem to think that this is the way it is and we have to accept it. 

When in actuality, the only thing that should be acceptable is attaining the dealers' rightful customer pay retained gross profit percentage of 40% - 42%. We just have to get it back!

Achieving expected gross profit percentages, believe it or not, is as easy as it sounds. I mentioned earlier that the parts escalation matrix is one of the most "under managed" and "under utilized" tool in the Parts Manager's tool box in many dealerships today.

If I were to ask, (and I have!) many Parts Managers today..."When was the last time you made any modifications or changes to your Parts Escalation Matrix?..."

What kind of answers to you think I got or would get from most? If you guessed..."I don't know"....You are correct!

In my opinion, reviewing and managing the Parts Escalation Matrix should be done on a monthly basis to insure overall customer pay gross retention is at guide levels. Even though we have to remain competitive in some areas, we also have to gain a little more gross on captive customer repair parts.

Believe it or not, it doesn't take that much of an positive percentage adjustment to attain 40% - 42% in overall customer pay parts gross retention. Another fact is that 80% of our parts sales come from the $10.00 - $30.00 parts cost range. 

Impacting this range with a positive escalation percentage will definitely increase gross retained percentages. As long as fair judgement is used on higher cost items with an eventual cap, higher gross percentages can be achieved without sacrificing customer retention.

As a matter of fact, a simple increase of 20% in this cost escalation range, ($10.00 - $30.00) will impact the overall customer pay parts gross retention anywhere from 2% - 6%! A little here and there can make a huge impact overall.

As an example, if a previously "escalated" part cost $25.00 and the previous matrix of cost X 100% sold the part at $50.00, increasing the matrix to 120% would sell that same part for $55.00. If properly presented to the customer, the outcome, or perception will be the same.

So, if a customer would have paid $50.00, the customer would also most likely have paid $55.00 for that same part. Especially if it was part of a repair in the shop. If the customer would pay $120.00 for the repair originally, the customer would also most likely pay $125.00 for that same repair.

Couple of things to keep in mind in this thought process though. The first one is, we should not matrix competitive parts as those parts should be "family priced" with "cost averaging".

The second is that there are occasions with value line parts carried by many manufacturers can often times have a list price even higher than the matrix price. The higher list of the two should be utilized and visible on the parts computer screen as a "List Alternate".

Utilizing a "cost plus" escalation matrix as opposed to a "list plus" escalation matrix gives the Parts Manager total control of the customer pay parts gross profit. Cost is always a constant and list price can vary from each manufacturer on various parts. 

Costing up, just like selling Used Vehicles, allows the manager to control the retained gross profit. The new "adjusted" list price now contains the appropriate retained gross profit.

Utilizing a "list plus" escalation matrix can actually take away the Parts Manager's ability to control parts gross profit as "suggested" list price is determined by the manufacturer. This leaves the gross profit margin, or percentage as a variable. 

In many cases, when utilizing a "list plus" escalation matrix, we may get more gross, sometimes we may get less and sometimes we may even get too little or even too much! Out of control gross profit controls can only lead to out of control results.

We must have an overall "mindset" that we are not overcharging the customer as we mentioned earlier that 40% - 42% IS the guideline and if not attained, the customer is paying LESS than what guide dictates.

Properly utilizing a parts escalation matrix allows the Parts Manager to actually be more competitive while still maintaining proper gross profit retention overall. A "win - win" for both the dealer and the consumer.   

Compared to the retail industry in general which averages much higher retained gross margins, automotive parts are a pretty good bargain for the consumer. Ever see ridiculous "mark downs" when out shopping at a clothing or department store? There has to be a LOT of gross built in there somewhere!

Our last key area in managing gross profit, in my opinion pretty much dictates how well the first two key indicators are managed. What works for one Parts Manager in one area of the country just may not work for another Parts Manager in another area of the country...

Number Three: Marketability 

Marketability determines a whole host of things from demographics, average population age, median income, demand, culture, etc. In my opinion, it's the Parts Manager's biggest obstacle that may be out of his or her control.

Keep in mind that within the Parts Department walls, control is what it's all about, but once you add a variable, especially marketability, overall gross can be impacted both positively or negatively. The Parts Manager's decisions concerning parts demand and pricing can be impacted heavily as well.

Marketability makes it even much more imperative that the Parts Manager's skill levels include basic inventory management skills that we started this article with. Return on investment is the primary focus in adapting to any market area.

Once again, "inventory management skills required" on how to steer the ship on managing and measuring parts gross and true turn numbers. "Gross Turn" determines how much we need and "True Turn" determines how well our stocking inventory moves.

Maintaining market share is one thing, but expanding into market areas requires an even higher skill challenge as investment strategies and pure "guts" with a vision allows those few Parts Managers to achieve gross profits higher than any other department in their respective dealerships.

The really amazing thing to me is that managing a Parts Department, no matter how large or how small, it still requires the same skill sets and it all starts with inventory management. Without these basic skills and knowledge on how to create demand, expected gross profit levels will not be attained.

So, when you think about the life cycle of a part, how it's born, how it's raised and how it matures...always remember that a part will be sold and a part will someday be put to rest. It's just a matter of making a difference in the life cycle of that part by how much you make of it!

In order to even get to a sales transaction, we have to revert back to "Part 101" to know that a sale is actually a demand and it's the demand that drives the sale.

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

 

Parts Ordering Process: "A Lost Art"

One of the reasons for the title of this month's issue of "Smart Parts" may take a few of us back quite a few years when ordering, receipting and stocking parts wasn't as easy as it is today.

Creating a stock order was definitely a challenge as Inventory Management Systems, (I.M.S.) were just evolving in the late 70's to early 80's.

Prior to the computer age, creating a stock order was more like "writing" a stock order, then combining these normal stock parts with customer orders.

Many of us may still remember walking the parts aisles and writing down "tagged" parts that may be or close to a stock out situation.

I don't think the younger Parts Managers today could even fathom running a parts department prior to the computer age. About the only electronic device we had back then was a "teletype" machine to transmit the orders, which replaced mailing in the stock and customer orders.

Parts order "answer backs" rolled out almost like a ticker tape on special rolled paper instead of over a computer screen a couple times a day. The parts manager would then make appropriate order changes pending availability in the parts distribution chain.

Parts orders were then picked up at the local Parts Distribution Center, (P.D.C.) via a "will call" pick up order which our own drivers picked up each order. Cross shipped parts would take days to arrive by mail or perhaps even U.P.S.

The first computers used in the parts department were actually used for transmitting data to the manufacturer such as financial data, new vehicle orders, new vehicle invoices and warranty claims submission.

It was also used to transmit parts orders with data saved to a cassette tape and downloaded to the manufacturer each night.

The hardest part of managing an inventory back then was the time lapse between stock orders which could be only once or twice a month. As you could imagine, these long lead times made it difficult in calculating a decent days supply.

One of the only advantages we had back then was that a majority of part numbers had multi-year model coverages. This allowed for better stock order performance with less part numbers and a higher days supply to get through those long lead times.

The biggest difference that I see comparing the parts ordering and receipting process back in the day versus today is that it seemed more "hands on" back then.

Don't misunderstand me, I was extremely happy when the computer age hit the modern day parts department. I just think we learned a lot of "common sense" parts department practices that his remained with us to this day.

Remembering bin locations, part numbers, superseded part numbers and part group numbers were just a few things that were grilled into us. Replaced down the road by much more efficient  Electronic Parts Cataloging, much of those older practices have also become extinct.

Even part numbers have changed over the years. Back in the day, part numbers actually meant something as often times, you wouldn't even have to look up the part number. The part number would include the type of part, year, make and model of each particular part. 

Leading up to where we are today, what have we really learned and how have these changes over the years effected how we order, receipt and stock the right parts at the right time? I, for one believe these changes have really impacted our current parts department practices.

In many cases, we have lost control of the parts ordering process with many manufacturers offering stock replenishment programs. Many Parts Managers today totally "trust" the manufacturer with their stocking parameters and the dealers' money.

Even though these manufacturers totally control the amount of earned discounts and allowances that a parts manager can earn, should they really control the parts manager's purchasing power? Should they really tell a parts manager what to stock and what not to stock?

I agree that there are a lot of advantages to these programs, but I don't believe that they should totally replace the Parts Manager's common sense decisions within each dealership.

Inventory protection in controlling  obsolescence is definitely important, but should it be the number one reason for trusting the manufacturer with your money?

After all, isn't the real number one reason for stocking the right parts at the right time is to avoid obsolescence in the first place? Shouldn't our number one goal be "First Time Off Shelf Fill Rate" and profitability? What could this loss of control and parts ordering "Lost Art" lead to?

I believe that this loss of control can lead to many potential concerns in how a Parts Manager controls the inventory. One of the most prevalent area that I see in reviewing many dealers' Monthly Management Reports is Outstanding Orders.

Often times, I see Monthly Management Reports show these Outstanding Orders in excess of 25% of the total inventory value! What does this mean and what effect does it have on the whole scope of things?

Keep in mind that each dealers' Inventory Management System, (I.M.S.) can only control and manage information or data going in and going out. "Garbage In & Garbage Out"....

If the Parts Manager doesn't properly manage these Outstanding Orders, the I.M.S. will not reorder parts at the Best Reorder Point, (B.R.P.) up to the Best Stocking Level, (B.S.L.). If parts are manually receipted without using the proper order or control number, that order still remains outstanding.

This means, in many cases that the I.M.S. will not suggest new orders until outstanding orders have been receipted or relieved. Once again, my fears realized as many Parts Managers are turning over their inventory control and money to the manufacturer. 

Overall, I am definitely "IN" on all these new innovations and advancements to our industry overall, but I really think they should all be taken in the proper perspective. Managing the parts inventory will always require common sense solutions and common sense inventory management.

No matter what lies ahead, I believe that our ultimate goals well never change. Achieving a "First Time Off Shelf Fill Rate" of at least 85% or more will increase overall shop productivity, great true and gross turn numbers, high customer retention and gross profits at or above expected levels. 

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 2015: "Do I Really Need To Post Emergency Purchases?"

Here we go again!...

Another one of those great questions that I hear from Parts Managers quite often. Much like Lost Sales, reporting Emergency Purchases carries many different "perceived" definitions by Parts Managers.

What is an Emergency Purchase anyway....and why should we even have any nowadays? You would think that with today's technology, dedicated deliveries by the manufacturer, stock replenishment programs and a vast array of inventory resources that we should never have an Emergency Purchase.

Not only that, why even bother with posting Emergency Purchases when it really doesn't have any effect on my I.M.S. (Inventory Management System)? No effect on inventory turns, overall off shelf fill rates, sales activity cycles or even phase-in/phase-out criteria....so why bother?

I once had a conversation with a Parts Manager on this topic of Emergency Purchases. I had to first determine what his definition of an Emergency Purchase actually was. To do this, I had to actually create a scenario of a "stock out" situation and ask him if these particular scenarios qualify as Emergency Purchase situations.

These scenarios, which I will detail shortly as Scenario A and Scenario B, will have only one minor difference within the same particular situation. The amazing thing is how the outcome changes with this one minor difference within the scenarios.

Here we go......

Scenario A:

Technician comes to the back parts counter and requests a set of front brake pads for a particular vehicle model that the parts department does not stock. The vehicle is technically in a "car down" situation and the Service Advisor wants the parts department to try and locate the brake pads.

The parts counter person locates the set of brake pads at another dealer location within an acceptable distance and "chases down" the brake pads. So my obvious question to this Parts Manager was..."Does this situation qualify for receipting and posting the brake pads as an Emergency Purchase?"

His answer was an obvious "Yes". Great!....we both agree...

Scenario B:

Every part of this second scenario is the same as the first except that when the parts counter person starts calling around to try and locate the brake pads, no other dealer stocks the brake pads.

The Service Advisor asks the counter person if they can get these brake pads overnight on the daily stock order and the answer was "yes", so the brake pads are ordered overnight.

So now....I ask this Parts Manager the same question as in Scenario A. "Does this situation qualify for receipting and posting the brake pads as an Emergency Purchase?"

This time his answer was "No". Hmmm....this time we disagree....

I asked him why it wasn't an Emergency Purchase in this case and he simply said that it was no longer an Emergency Purchase because it was being ordered on his daily stock order. Now I'm really confused because in my opinion, the situation didn't really change, only the source of where the part was coming from changed.

So why does this matter anyway?

First of all, there are only two reasons why we don't have a part on the shelf. Either we stock the part and ran out, or we never stocked it in the first place because the part never met phase in criteria.

In  my opinion, this is where it all starts with our definition of what an Emergency Purchase truly is. Current NADA guidelines indicate that Emergency Purchases should be only 10% or less of total our parts purchases at cost.

We all know that we do have Emergency Purchases and posting these receipts honestly and properly can give Parts Managers a world of information even though posting them will not change a lot of information on the Inventory Management System.

Whether I stocked the brake pads and just ran out, or even if I never stocked the brake pads in the first place, receipting them as an Emergency Purchase could provide valuable information.

 Information that could eventually lead to my future decision making process going forward concerning possible adjustments to my days supply or even my phase-in criteria in various parts sources.

Even though the demand was still filled and there was no real lost sale, shouldn't I be concerned about the "car down" situation and lost productivity in the shop while waiting for these brake pads to arrive? These are the questions that should concern me. Maybe having that added information could be vital.

If I am honest and have a clear definition of these situations, I can manage my Emergency Purchases Report and gain some insight as to any changes or modifications that may be necessary in my Set Ups & Controls. Especially if these Emergency Purchases exceed the NADA guidelines of 10% or less.

In my opinion, reporting "potential" Emergency Purchases is just as important as reporting "actual" Emergency Purchases. Common sense is not so common sometimes as we seem to get caught up with all these restrictive definitions instead of throwing caution to the wind and just getting the information into the system where we can make logical determinations and decisions when needed.

One other thing is for sure...a failure to report Emergency Purchases honestly will definitely impact your "First Time Off Shelf Fill Rate". There should be no debate in the fact that not having the part the first time upon request, this rate will drop and so will shop productivity.

To me, it's all about the customer and providing the best customer service as possible. Actually, after reviewing the above scenarios, I don't think that customer really cares if I ran out of those brake pads or if I even stocked them in the first place. They just want their vehicle repaired and back on the road within a reasonable time frame.

In conclusion, Emergency Purchases do cost us money in lost gross profits and lost shop productivity so it does make sense to track and control them as much as possible. It all begins with an honest and direct reporting system. If we don't, we are only fooling ourselves in order to make the numbers look good.

So, if your Emergency Purchases are non existent, or at a very low percentage, you might want to reconsider what this information can really provide. Don't fool yourself or your dealer if you think you don't have Emergency Purchases because they are there, whether they are reported or not.

Honest reporting leads to honest results...

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