The first couple of months of each year, as "Smart Parts" Managers, we have a tremendous opportunity to purge and "refresh" our parts inventories. In addition to the physical inventories that are usually performed in December of the previous year, we also have the opportunity to "reset the clock" on key inventory management areas.
Once we enter into a new year, "annualized" calculations such as Gross and True Turns, "First Time" and Overall Off Shelf Fill Rates, Stock Order Performance, Level Of Service, Demand Filled From Stock Ratios, Rates Of Change and Sales Activity Cycles are all highly impacted from the first couple of months of each year.
As the year progresses, annualized calculations kind of settle in, especially around June and July where it becomes much more difficult to positively impact some of these Key Performance Indicators, (K.P.I.) from an inventory management perspective.
This "refreshing" of the parts inventory can be a great thing, but if we don't act, or "stop the bleeding" in some of these key areas, we will just see this new year repeat the results of the previous year. More importantly, if we don't understand how these numbers are calculated in the first place, we can pretty well assure ourselves that the results will repeat themselves, year after year.
First of all, we have to know industry guidelines in all these above mentioned areas of Key Performance Indicators. We also have to know and understand how to do these calculations ourselves and not relying solely on our Dealer Management Systems, (D.M.S.).
Before we get into how these Key Performance Indicators, (K.P.I.) can be misconstrued, incorrect and misleading, let's first look at some of these industry guidelines set by various industry groups such as NADA, Mike Nicoles, NCM and ACG.
Once we know and understand these guidelines, we will then look at how to calculate these Key Performance Areas, (K.P.I.), without utilizing our own Dealer Management System, (D.M.S.)
Once we know and understand these guidelines, we will then look at how to calculate these Key Performance Areas, (K.P.I.), without utilizing our own Dealer Management System, (D.M.S.)
Guidelines - Definitions - Formulas
Stock Order Performance/Demand Filled From Stock Ratio:
Overall Stock Order Performance, or Demand Filled By Stock Ratio, indicates how well the stock order purchases compare to overall purchases, or "demand". The formula to calculate Stock Order Performance, or Demand Filled From Stock Ratio is:
YTD Sales, (at cost) of *Processed "Normal Stocking Parts" - Divided By - YTD Total Sales at Cost.
Industry Guideline: 75% - 85%
(*Parts ordered and receipted as "normal stocking parts" and have met basic stocking criteria)
Level Of Service/Sales Closing Ratio:
Level Of Service, or Sales Closing Ratio is defined as the ability of the parts department to provide parts from stock to customers. As you can see from that definition, this category can be misleading in itself.
Technically, if I receipt my "Customer Orders" as normal stocking parts, I could actually score well in this category, but never even have the parts on the shelf to begin with.
In addition, as you will see from the formula below, if the parts manager doesn't record Lost Sales and Emergency Purchases, it will also lead to false calculations on this particular Key Performance Indicator, (K.P.I.)
It all depends how these parts are ordered and receipted in the first place and how the D.M.S. is calculating the information that is entered by the parts manager.
This is the main reason why I am a huge advocate of measuring "First Time Off Shelf Fill Rates". The formula to calculate Level Of Service, or Sales Closing Ratio is:
This is the main reason why I am a huge advocate of measuring "First Time Off Shelf Fill Rates". The formula to calculate Level Of Service, or Sales Closing Ratio is:
YTD Sales, (at cost) Minus YTD Emergency Purchase Receipts - Divided By - YTD Total Sales, (at cost), plus YTD Posted Lost Sales.
Industry Guideline: 85% - 95%
Gross Turnover Ratio:
Here's another Key Performance Indicator, (K.P.I.) that, if not understood, can also be misleading. The formula to calculate Gross Turnover Ratio is:
Total Sales, (at cost) for the Last Twelve Months - Divided By - the Average Inventory Investment for the Last Twelve Months.
Industry Guideline: 8 Gross Turns Per Year
As you can see and read from the formula, Gross Turns is just an indicator that measures inventory "dollars" turning in the parts inventory. Technically, I could have a Gross Turn Rate of 8 or better and not even have a single dollar of inventory on the shelf. It's just a measurement of gross dollars of inventory receipted and sold through the parts inventory account, including outside purchases.
Measuring Gross Turns is extremely important though as it's a measurement of the proper inventory amount and "Days Supply" of any given inventory. In other words, if you take the average cost of sales monthly, multiplied by twelve, then divide that total by "8 Gross Turns", that will equal the proper inventory amount with a (45) Days Supply.
True Turnover Ratio:
True Turnover Ratio is more of a direct measurement of how the "stocking inventory" is performing. This Key Performance Indicator, (K.P.I.) can also be misleading if not totally understood. The formula to calculate True Turnover Ratio is:
Total Sales, (at cost) of Stocking Parts for the Last Twelve Months - Divided By - the Average Inventory Investment for the Last Twelve Months.
Industry Guideline: 5 True Turns Per Year
Once again, just by reading the formula, you can see that this measurement "keys on" parts that are supposed to be "normal stocking parts". That means these "normal stocking parts" must meet basic stocking criteria set by the Dealer Management System, (D.M.S.). Criteria such as Phase-In and Phase-Out Parameters, Best Reorder Points, (B.R.P.) and Best Stocking Levels, (B.S.L.).
Here's where it gets tricky and potentially misleading...
The Dealer Management System, (D.M.S.) is only going to reveal results as entered. In other words, if the Parts Manager receipts in Special Order Parts for example, as "normal stocking parts", this will give us a misleading True Turnover Ratio.
Just because the Special Order Parts were ordered on the Stock Order, it doesn't mean they qualify as "normal stocking parts" because they haven't met basic stocking criteria as mentioned above. Also, if we don't utilize the D.M.S. Special Order Parts Program, these parts could also be considered as "normal stocking parts" by the D.M.S., depending on which system is utilized.
So even though the D.M.S. Monthly Management Report says one thing, it doesn't necessarily mean these Key Performance Indicators, (K.P.I.) are actually true and realistic. This is why the Parts Manager's "Belief System" has to be truthful and accurate when reporting this information into the Dealer Management System, (D.M.S.).
True Turnover Ratio can only be measured "truthfully" if we follow the proper procedures in basic reporting practices and utilizing the Dealer Management System, (D.M.S.) as intended. We all know the old saying...."Garbage In?....Garbage Out!"
Another big contributor to misconstrued, misleading and incorrect information comes from our manufacturers and their Vendor Managed Inventory, (V.M.I.) Programs. So, not only did we have enough problems already with the above mentioned situations, let's get the manufacturer in there to really cause mass confusion to our Monthly Management Reports.
To start with, Vendor Managed Inventories, (V.M.I.'s) combine individual dealer set up criteria along with "group" criteria to define what the dealer should stock, or in their minds, the dealers' "normal stocking criteria". Problem with that is, no one's telling the various Dealer Management Systems, (D.M.S.) that these V.M.I. Parts should be considered as "normal stocking parts".
Parts receipted on the Vendor Managed Inventory, (V.M.I.) are coming into most Dealer Management Systems, (D.MS.) as "non stocked parts" instead of "normal stocking parts". The reason for this is quite simple as many these V.M.I. Parts have not met the individual Dealer Management System's, (D.M.S.) basic stocking criteria.
This means that even if the manufacturer is considering these parts as "normal stocking parts", they are not considered as such by your own system until they have had enough demand. All of which will impact the D.M.S. Monthly Management Report in a negative way when measuring True Turns, Stock Order Performance and "First Time" Off Shelf Fill Rates.
Parts purchased on the manufacturers' V.M.I. Programs should be considered as "normal stocking parts" and should be included when measuring the above mentioned Key Performance Indicators, (K.P.I.). The only way they can be measured properly is by positive actions taken by the Parts Manager.
One way to do this is to insure that the manufacturers Vendor Managed Inventory, (V.M.I.) parts are receipted into a "default parts source" that brings these parts in as "normal stocking parts". If the particular Dealer Management System, (D.M.S.) is unable to perform that task, then the Parts Manager would have to manually receipt these parts as "normal stocking parts".
As you can see, there's even more potential today for misleading and inaccurate information to find it's way to the D.M.S. Monthly Management Report. Unfortunately, too many parts managers trust what their D.M.S. Monthly Management Report tells them as many have never "done the math" themselves.
In my opinion, there IS too much misleading and inaccurate information on the D.M.S. Monthly Management Reports today. This is mostly due to the manufacturers' Vendor Managed Inventories, (V.M.I.'s) parts not being receipted with the proper stocking status. That one item alone effects so much on the Monthly Management Report as mentioned above.
There is no better time than the beginning of a new year to correct these inefficiencies in reporting to the Dealer Management System, (D.M.S.). The sooner we get these issues corrected, the sooner we will see accurate "annualized" information on the Monthly Management Report going forward.
It's time "Smart Parts" Managers, for us to get back to basics and "do the math" ourselves in order to get the right information on these Monthly Management Reports. Most importantly, it's time to give our dealers accurate information that will "truthfully" inform them on how their parts investment is performing.
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
