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