October 2017: "It's Time To Do The Math Ourselves!"

As many "Smart Parts" Managers know, I have written many past articles on the importance of having the right parts Set Ups & Controls. I have also touched on how not having these proper Set Ups & Controls can and could lead to problems in the areas of obsolescence and over stocked inventory amounts.

As we enter the last quarter of 2017, I felt it very appropriate to "dig into" these topics again, but with a different twist and a more detailed approach into how these Set Ups & Controls continue to be a "monkey on the back" for many parts managers today.

Even though Dealer Management Systems, (D.M.S.) vendors continue to improve on their products, I think it is actually working against many parts managers. Many, many parts managers today still don't even know how to calculate the proper Days Supply, or True & Gross Turns.

The effect of just "not knowing", has and still does lead to unacceptable obsolescence and overstocked inventory amounts. Then, once you add in manufacturers who offer Vendor Managed Inventories, (V.M.I.), the problem is actually growing in many dealerships today, in my opinion.

In this issue of ACG "Smart Parts", we are going to highlight four specific areas that are, in my opinion, the biggest contributors to obsolescence, over stocked inventories, and most importantly, low "First Time Off Shelf" Fill Rates.

The first area that we will attack is "Days Supply", which some may not know, but actually have two different meanings when managing a parts inventory. It's not just a calculation for how many days of supply to carry on a specific part number. 

The first "Days Supply" definition that we will review is one that I have to say is perhaps one of the biggest misconceptions that some parts managers have today. Many parts managers still confuse "Days Supply" with the inventory "quantity" that should be stocked of a given part number. 

In other words, a "Day's Supply" of a particular part could be 1, 2, 10, or even 20 or more per day. A "Days Supply" of any given part is just that, the number of parts needed of a given part number to get through a single day, or even over a course of days throughout a month, or number of months.

"Day's Supply" of an oil filter can be many in one day, as opposed to "Day's Supply" on a valve cover gasket, which may only sell once a month. This would equate to just one gasket over a thirty day period, thus, a thirty "Day's Supply" of the the valve cover gasket.

To properly calculate the proper "Day's Supply" of any given part, we first have to "do the math ourselves". An example of this would be if a part sells only twelve times a year, which averages out to once a month, the "Low Days Supply", or "Best Reorder Point", (B.R.P.) would be thirty days.

The "High Days Supply", or "Best Stocking Level", (B.S.L.) would be anywhere from 50% to 150% of the "Low Days Supply", (B.R.P.) according to Mike Nicoles guidelines, which I agree with as well. The percentage utilized, (50% - 150%) would be determined on how fast the part moves.

The less a part moves, a lower percentage the "High Days Supply", (B.S.L.) should be applied, and the faster a part moves, a higher percentage should be applied to the "High Days Supply", (B.S.L.) to avoid "out of stock" situations.

On the "Low Days Supply", (B.R.P.) calculation, vast moving parts will have fewer Days Supply, while slow, or slower moving parts will carry a higher "Low Days Supply", (B.R.P.). This may sound confusing, or even backwards to some, but this is how the math works.

Here is the formula to properly calculate the proper "Low Day's Supply", (B.R.P.) of any given part;

Total Annual Days, (365) - Divided By - Total Annual Piece Sales of a Particular Part = Low Days Supply, (B.R.P.), Best Reorder Point.

Example on a part that sells (24) Times Annually;

365 Days - Divided By - 24 Annual Piece Sales = 15 Days Supply, (B.R.P.), Best Reorder Point

Keep in mind that the the "High Days Supply", or Best Stocking Level, (B.S.L.) is calculated from the "Low Days Supply," Best Reorder Point, (B.R.P.) at Mike Nicoles guidelines of 50% - 150%, pending on overall average annual movement.

If a part tends to get overstocked, a lower "High Days Supply" percentage should be used, and if a part is in an "out of stock" situation, even though the "Low Days Supply", (Best Reorder Point, or B.R.P.) math is still correct, then the "High Days Supply" percentage, (Best Stocking Level, or B.S.L.) should be increased.

With all this said, I'm not at all surprised at how some parts managers may be confused on how all this math works because it may appear to be backwards in a way. This is why we need to "do the math ourselves", and we will see that the math doesn't lie, just "black and white" facts. 

What I can't understand is why some of the "Low Days Supply" Set Ups in many Dealer Management Systems are so far off. If we just "do the math ourselves", we would see that these "Low Days Supply" set ups just don't add up, especially if all parts are in a single "standard parts" source.

It's so obvious in many cases that I see that no one...no one has "done the math themselves" as so many part numbers with various annual piece sales differences have the same Low and High Days, (B.R.P. & B.S.L.). There is no logical way that one "Low Day's Supply" calculation can satisfy all parts with so many different movement cycles.

How can a part that sells only 6 times a year be put into the same "Low Day's Supply" category as a part that sells over 100 times a year? If you are a dealer, it would be like carrying the same number of individual model vehicles on the lot, regardless of how each unit sells individually.

The same holds true for parts, as varied parts annual movement cycles requires the right "Low Days Supply" calculations. This is also the reason why parts should be in "part sources" that are ranked by their piece sales movement.

Now, let's take a look at the other "Days Supply" definition, or dilemma as it equates to how many total "Days Supply" that we should have in the parts inventory in the area of total dollars. Keep in mind that this just illustrates how much the total dollar amount of the parts inventory should be, whether active, idle or obsolete.

I'm sure that many "Smart Parts" Managers have heard the term of carrying a 45 "Days Supply" of parts inventory, or a 1.5 Months Supply. This is what this terminology of "Days Supply" represents. Much like new and used vehicle inventory, where the overall "desired" vehicle inventory dollars would equate to a 30 - 45 "Days Supply".

Enough inventory in this case, whether vehicles, or parts to "satisfy" customer demand for a 30 - 45 day period, without replenishment, based on inventory dollar value, not necessarily individual demand of a particular part or vehicle. It's strictly a dollar value number used to base overall "desired" inventory amounts in the marketplace.

Here's how to calculate your "desired" parts inventory amount;

Total Parts Sales at Cost for the Last Twelve Months - Divided By - 8 Gross Inventory Turns = Total "Desired" Inventory Amount

Here's the Example:

Total Annual Parts Sales at Cost = $1,200,000.00 - Divided By - 8 Gross Inventory Turns = $150,000.00, (Desired Inventory Amount)

The last two areas that I feel that "It's Time To Do The Math Ourselves" is calculating parts Gross and True Turn. Especially with many manufacturers offering Vendor Managed Inventories, (V.M.I.'s). It actually comes down to what parts we define as "Normal Stocking Parts".

I've always defined a "Normal Stocking Part" as a part that has met MY Phase-In Stocking criteria and ends up in a normal stocking class. That appears to all be changing now as many of our so called "Normal Stocking Parts" are entering into our inventory as "Non-Stock" parts.

Now, with manufacturers' offering Vendor Managed Inventories, (V.M.I.'s), parts are actually being ordered as "Normal Stocking Parts", when they haven't met our own Phase-In criteria. Thus, unless the parts manager makes manual changes to the stocking status, they will enter in as "Non-Stock" parts as they haven't met Phase-In criteria into the D.M.S. yet.

All this confusion just adds to the "improper" calculation of the parts inventory's True Turn capabilities and accuracy. The True Turn calculation can be highly impacted, both negatively and positively by improper stocking class updates by either the D.M.S., or the parts manager.

So, let's "do the math" and calculate proper True and Gross Inventory Turns, starting with Gross Turns. I will provide the true definition, and then I will give you my "Layman's Term" definition....

Gross Turns Definition;

Total Sales at Cost for the Last Twelve Months - Divided By - Average Inventory Investment for the Last Twelve Months. (NADA & Mike Nicoles Guide: 8 Gross Turns)

A "Layman's Term" Example;

Total Cost of Sales for Last Twelve Months, ($1,200,000.) - Divided By - Average Inventory Investment for the Last Twelve Months, ($150,000.) = 8 Gross Inventory Turns.

Keep in mind that this above calculation represents inventory sales at cost over the period of a year and not necessarily the inventory that we actually stock. In other words, I can sell $100,000 in inventory at cost and technically, none of it has to be actually in stock. 

It just represents inventory "dollars" passing through the inventory asset account and the actual "marketability" and necessary dollar amounts needed to meet customer demand. Gross Turns does not indicate, or represent how well the "stocking" inventory is performing. 

The only true measurement of how well the actual "stocking" inventory, meaning parts that have met Phase-In Stocking Criteria for "Normal Stocking" parts in in the area of the parts inventory's True Turn capabilities.

True Turns Definition;

Total Stock Order Receipts for the Last Twelve Months - Divided By - Total Sales at Cost for the Last Twelve Months - Divided By - Average Inventory Investment for the Last Twelve Months.

This one is very confusing as the actual industry definition refers to "receipted" stock order parts and then calculating total sales at cost, then dividing by the average inventory for the last twelve months. That's the "true" definition, but I've always felt it much easier to calculate the sales of "normal stocking parts" as a percent of total sales at cost, divided by the last twelve months average monthly inventory.

Here's my "Layman's Example", which usually comes extremely close;

Total Annual Cost of Sales on Normal Stocking Parts, ($600,000.) - Divided By - Average Monthly Inventory Investment, ($120,000.) = 5 True Turns

Much simpler calculation, especially with the fact that it's very difficult calculating "Stock Order Receipts" these days with the manufacturers' Vendor Managed Inventories, (V.M.I.'s) and Customer Special Orders not getting receipted properly in the first place. The "Smart Parts" Manager must determine the proper receipting practices and stocking categories.

To this day, I'm still seeing many Dealer Management Systems, (D.M.S.) with the same Set Ups & Controls as they had when first installed by the D.M.S. Vendor. The problem is, often times, the D.M.S. installers and trainers don't even have a clue on what the proper Set Ups & Controls should be in the first place.

Perhaps even worse than that, many parts managers have not even checked, researched or even modified these very important set ups in a very long time, if at all. The simple fact is, if the D.M.S. is not working for the parts manager, than the parts manager has to work the for D.M.S. with countless overrides, adjustments and corrections.

Quite simply, if you are not seeing, or getting the right results from your Dealer Management System, (D.M.S.), or you are having to constantly make adjustments to suggested order amounts, that may just be your clue into getting it fixed and getting it right.

It's time to "Do The Math Ourselves" and make your Dealer Management System work for you...and not the other way around!

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