February 2016: Reconciling Parts Inventory

In my opinion, the last month of the year and the first month of each new year are the most important two months in the whole year for a parts manager. The overall "cleansing" that comes from year end physical inventory counts to starting fresh in the new year with a clean slate was always a great feeling of accomplishment for me.

Over the years, as most of us do, I learned a lot that helped me have more of the "feelings of accomplishment" as opposed to dreading those end of year physical inventories. Items such as expected variances, inventory write offs, inventory "write ins", duplicate bin lists and accounting differences were not fun experiences for sure.

Reconciling the parts inventory, for many parts managers, including myself years ago was pretty much a "once a year" thing. It wasn't something we worried about month in and month out "back in the day" because inventory values were much more stable with longer life cycles and fewer obsolescence situations.

Today, with the increase of vehicle manufacturers and models compared to even twenty five years ago is astronomical! The overall number of parts and part numbers has skyrocketed to a point where managing the parts inventory has become more of an art and at times, or maybe even a  full time job in itself! 

Parts are becoming idle and obsolete much faster today than ever before while customer demand has increased. The demand on the parts manager to have the "right part the first time" is crucial to the overall success of the parts department. Not only that, this "trickle down" effect also impacts the whole fixed operations including overall shop productivity.

So, not only do we need to make sure we have the correct set ups and controls, Proper phase-in/phase-out parameters, days supply, in house and manufacturer sponsored ordering procedures, etc., we also have to insure that all of the inventory amounts balance when it's all said and done every month.

Reconciling the parts inventory on a monthly basis as opposed to reconciling on an annual basis CAN and WILL make the parts inventory more profitable with higher gross and true turns. Monthly inventory accountability also reduces obsolescence and will increase overall service productivity.

So!...how can simply reconciling the parts inventory on a monthly basis accomplish all this?

First of all, reconciling the parts inventory on a monthly basis "requires" quite a few prerequisites in order to even qualify for monthly parts reconciliation. Obsolescence has to be dealt with along with proper set ups and controls to insure that obsolescence doesn't reoccur. 

We have to stop the bleeding before we just "write it off" and have the same problem next year. After all, there has to be a reason these parts got in the obsolescence category to begin with. As you will see in the next prerequisite, it wouldn't make much sense to count the same, obsolete parts every month.

The second prerequisite is to implement a "perpetual inventory" process where all parts bins are counted on a monthly basis.

An example would be if there are a total of one hundred bins within the Parts Department, then approximately five bins a day would need to be counted and reported. Most Inventory Management Systems provide this option as part of the physical inventory options.

Next, we have to insure proper posting of receipts to the proper accounts on a daily basis. Some of the most common areas with posting discrepancies are outside purchases, tire account, inventory core values, both clean & dirty and finally, the gas, oil & grease account.

Reconciling the tire inventory accounts as well as gas, oil & grease accounts have become nightmares of late due to the vehicle manufacturers getting into the tire and motor oil business.

 Many of these purchases that are indirectly billed from tire and oil vendors through the vehicle manufacturer who, often times, have the improper account posted on their invoice. 

The tire inventory account as well as the gas, oil & grease account have always had separate inventory accounts. Even though they still do, many of these tire and motor oil purchases that involve the manufacturer are being "inventoried" to the parts inventory account, instead of the appropriate inventory account for tires and gas, oil & grease. A huge problem if not watched, managed and reconciled properly.

If a tire, or a quart of oil gets charged out on a repair order utilizing the manufacturers' applied part number that matches what's on the manufacturers' master pricing guide....guess what happens? That tire or quart of oil just got "relieved" and "costed" out of the main parts inventory account, even though the tire and/or oil was receipted into the separate tire and gas, oil & grease inventory accounts.

One other big discrepancy that often occurs when trying to reconcile the parts inventory is the "new" and "dirty core" inventory. Even though most Dealer Management Systems account for the "new core" inventory value on the Parts Monthly Management Analysis Report, many systems do not have an option as to managing the "dirty core" inventory.

Managing the "dirty core" inventory requires manual, monthly physical inventories to be performed as well as managing the returns with "outstanding credits" pending. All of which, must be reconciled with the dealer account and/or office manager.

Here are just some of the advantages to Monthly Parts Inventory Reconciliation;

• Higher Gross and True Turns due to monthly managed obsolescence, bin variances.
• Lower Inventory Management Fees due to Perpetual Inventory practices.
• Higher "First Time Off Shelf" fill rates due to monthly managed obsolescence.
• Increased 0-3 Month Sales Activity from reduced obsolescence.
• Less cost incurred from end of year physical inventory variances.
• Decreased potential for parts pilferage, damage or loss due to accounting errors.

In the beginning of this blog, remember when I mentioned that "cleansing" feeling as well as that feeling of accomplishment at the end of each year and the beginning of the next?...Imagine having that feeling each and every month!

It all starts with getting our house in order and meeting all the prerequisite requirements. Each and every dealership Parts Department that I have either trained and coached in, or managed myself that made it a Standard Operation Procedure, (S.O.P., not Special Order Parts) to reconcile the parts inventory each month also had many things in common......

1. Consistently "at or above" NADA Guide on Gross and True Turns
2. Stock Order Performance or Sales From Stock Ratio above 80%
3. "First Time Off Shelf Fill Rate" above 80% (replicates # 2 above)
4. Obsolescence less than 2% annually (12+ months No Sales)
5. Parts Gross Profit at or above NADA Guide
6. Overall Level Of Service above 90%
7. Annual Physical Inventory Variance Less Than 2% (reported monthly)
8. Service Shop Productivity above 95% - 125%

As you can see, simply reconciling the parts inventory has quite an impact or "trickle down" effect on many areas in the dealers' fixed operations. The advantages are obvious, but in order to ultimately accomplish the task, we have to have a measurement of accountability and perhaps a guideline to implementation.

ACG's "Smart Parts" Monthly Inventory Reconciliation Report may just be that motivation for "Smart Parts" Managers to "get it right" going forward. I can speak from experience when I said that "cleansing" feeling along with starting off fresh each month is a reality.

It's been quite a while since I've offered a FREE "Takeaway" just for being avid, loyal "Smart Parts" Readers and so I decided that this is the month! If you would like a FREE Excel Copy of our ACG "Smart Parts" Monthly Inventory Reconciliation Report with up to five inventories included to reconcile "controlled" versus "accounting inventory, simply email your request to:

dave@smartpartstraining.com 

Don't forget to enter "FREE Reconciliation Report Takeaway" in the subject line of your email request!

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