May 2018: Getting Rid Of Obsolescence Forever: "Is It Possible?

If anyone were to ask me what has changed in our parts industry over my last 38+ years, particularly in automotive dealerships, I would have so many to list that I could spend one whole blog on the changes. But, there is one topic that would never make this list and that is parts obsolescence.

One might think with all the technology, innovations and manufacturer assistance with Vendor Managed Inventories, that we would have this "Monkey On Our Back" issue called parts obsolescence issue put to bed by now.

Even though we hear new terms like inventory protection and idle inventory management along with all these new fancy Dealer Management Systems, (D.M.S.), obsolescence is still a major concern for many dealer owners and parts managers. In my opinion, it has actually gotten worse over the last several years.

There are many logical reasons for these increases in obsolescence, such as increased part numbers per manufacturer due to the increase of vehicle models, increased vehicle components, and shorter part coverage lifespan just to name a few.

All that being said, we are basically talking about part numbers that have to follow the same guidelines and parameters today as they did years ago.

Parts still have to be tracked by demand, phased-in to the D.M.S, carry the proper, mathematical days supply, and phase-out when demand diminishes, then they are returned to the manufacturer or scrapped.

So, why are we still dealing with this "Monkey On Our Backs" called Obsolescence? 

In order to come up with the right solution(s) to any problem,  we need to begin by identifying how the problem got there in the first place. In the area of parts obsolescence, as we mentioned, there are many reasons, or causes that can lead to unacceptable obsolescence amounts.

To me, we have to define what obsolescence is in the first place, and not to be confused with the term "idle inventory".

Quite simply, all parts are idle until they sell and in my opinion, we should be more concerned with what has not sold over a period of time, which, for the most part has been set at 12 months no sale.

In order to get rid of obsolescence forever, we will need to have an action plan, which consists of four basic steps;

1.) Identify The Obsolescence: "How Did It Get There?"

2.) Make The Appropriate Adjustments: "Stop The Bleeding!"

3.) Make A Decision: "Get Rid Of It!"

4.) Maintain Control: "No More Obsolescence!"

We will walk through each one of these steps individually, in detail in order to accomplish the mission of getting rid of this "Monkey On Our Back" forever. We will also provide the proper sources and resources needed to staying obsolescence free.

Let's get started...

1.) Identify The Obsolescence: "How Did It Get There?"

Believe it or not, identifying obsolescence can't go understated even though one would think that this should be obvious to most parts managers. I mentioned earlier that obsolescence is sometimes referred to as "idle inventory" and that alone can be confusing.

I have always followed my mentor's guidelines as Mike Nicoles has always defined obsolescence with these simple truths about parts with no sales over the course of a year and beyond;

• Parts With No Sales After 6 Months = 49% Chance Of No Future Sales
• Parts With No Sales After 9 Months = 67% Chance Of No Future Sales
• Parts With No Sales After 12 Months = 98% Chance Of No Future Sales

These numbers and percentages have held true for years and to me, should be where we set the bar on what is truly obsolete in our inventory. The chance of selling parts over twelve months is minimized to just 2% and with those odds, I would consider all parts over twelve months obsolete and should be dealt with.

As far as how these parts got to this point of being obsolete in the first place, in my opinion, is more of a problem today than it was years ago.

Many parts managers today have "given up the reigns" of controlling their parts inventories to the manufacturers, and some, unfortunately have never learned, or forgotten how to make the appropriate adjustments in their Dealer Management Systems, (D.M.S.)

Phasing parts into the D.M.S. is one thing, but if the Phase-Out parameters are set beyond 10 months, obsolescence can be pretty much guaranteed. The idea should be to stay ahead of obsolescence game by keeping these parts OUT of the 12 months no sales category.

Another added "obsolescence contributor", if you are a parts manager that utilizes a manufacturers Vendor Managed Inventory, (V.M.I.), are these parts that we comply, or "obey" to stock, even if they may have not met phase-in criteria in your dealership.

The most often asked question that I receive is..."How do I get rid of my obsolescence?" and I always have to respond with..."I can help you with that, but...we have to Stop The Bleeding first"...

Let's move on to Number Two....

2.) Make The Appropriate Adjustments: "Stop The Bleeding!"

"Stopping The Bleeding" is probably the most important step in becoming obsolescence free forever. Believe it or not, obsolescence starts even before any part hits the shelf. There are several questions that we need to ask ourselves before we even "shelf" any part that could become a high obsolescence risk....

• Should we even be stocking this part in the first place?
• Have these parts met my own phase-in and stocking criteria?
• Are my phase-out parameters aggressive enough?
• Are we being "compliant" or are we being "obedient" to my Manufacturer's V.M.I.?
• Are we more concerned about inventory protection than actual parts sales?
• Are we relying on the manufacturers' stocking recommendations more than what our own Dealer Management System, (D.M.S.) recommends?

In order to "Stop The Bleeding", we need to have the right answers to all of the above questions and more. We  also need to have strong policies and procedures to stop the build up of obsolescence coming from improperly ordered parts and special order parts not picked up, etc.

In addition to having the right phase-in and phase-out parameters, we also need to have the proper days supply in all annual piece sales ranges to minimize overstocking, which could eventually increase obsolete amounts once these overstocked parts hit the 12 months no sales category.

3.) Make A Decision: "Get Rid Of It!"

Once we have "Stopped The Bleeding", we can now move on a make some decisions on just how we get rid of these obsolete parts that are in the 12 months no sales category. There are many options that are available to us, including some new options that some "Smart Parts" Managers may not be aware of.

With several options available to us, I feel we should list these options in the order of priority as well as which of these options will give the dealer the best return on investment on the obsolescence while minimizing the losses.

a.) Utilize all manufacturer return allowances and return policies available. Even though there are very few dealers that can accrue enough return allowances to match their obsolescence, maximizing the "dollar-for-dollar" return is 100%, or perhaps even more with price increases over time.

b.) My second choice for ridding the obsolescence would be networking the inventory through various websites such as OEConnect, Cash Discovery Programs, Cobalt, Parts Voice and Ebay to name a few. 

One of the latest and most successful programs out there is the "North American Dealer Parts Exchange", (nadpe.com). As their website explains, this program works much like match.com, where your inventory is matched up with dealers that would purchase your obsolescence in exchange for purchasing fast moving parts that may be considered obsolete in someone else's inventory.

Here's a clip and some quotes from their website;

"WHAT WE DO FOR PARTS MANAGERS"

"NADPE is a Dealer-To-Dealer cloud-based marketplace that allows you as the Parts Manager to trade away your Slow-Moving, Idle, and Obsolete parts inventory, for Fast-Moving, Active parts inventory you sell everyday.  The trades are done between dealers of the same brand within your region, using the massive data we collect from each dealership.  We effectively present bulk matches for your Slow-Moving Parts to be reallocated, and redistributed to the right dealers – but not without your review and approval first.  Imagine if you only knew what you could move between other dealers in volume, and without the work of collecting the data to find out."

"HOW IT WORKS"

"We take all the dealers within our network, and cross-match your Slow-Moving inventory with the Fast-Moving inventory data of every dealer in our database – finding bulks matches.  We are similar to Match.com – but for Parts Inventory."

"All the parts you wish you could return to the manufacturer, and can’t, with the lack of Parts Return Allowance, NADPE supplements your ability to move just as much with other dealers in your region.  Many dealers use NADPE to essentially double their return dollars, and use NADPE in tandem with their Manufacturer’s return program."

"Unlike any other option available to Parts Manager’s in the industry, NADPE allows you to exchange those Idle Parts for dealer cost, without losing a single penny."

c.) My third choice would be selling off the obsolescence for "pennies on the dollar" with either other dealers that have accrued more return dollars than they need as they may be very big into wholesale and can afford to buy up other dealers' inventories.

There are also companies out there such as Dealermine that will evaluate and buyout dealers' parts obsolescence for approximately half the actual value, thus providing "dealer cash" that can be turned into fast moving inventory which will eventually yield higher return on investment for the dealer at several inventory annual turns.

d.) Lastly, if the dealers' parts inventory has a lot of "blue sky", meaning that the "controlled inventory" reported on the Dealer Management System, (D.M.S.) is at a higher value than what is reported on the front page of the financial, then the obsolescence can simply be "written off" and scrapped up to the "blue sky" amount.

4.) Maintain Control: "No More Obsolescence!"

After we have identified our obsolescence and how it got there in the first place, "stopped the bleeding" and finally gotten rid of our obsolescence with the best return on investment, it's now time to keep it from ever happening again.

I do believe that we will always have parts that slide down into the 12 months no sales category, whether it's parts that are non-returnable when we purchase them, low cost parts below manufacturer return limits, accessories, etc.

With that said, we will need to implement a program and set up what I call a "Scrapping Account" each month where we can set aside funds that will be there to scrap those parts once they hit that fateful 12th month.

This "Scrapping Account" can be set up quite easily in Accounting in the "Parts Inventory Adjustment" account. Each month, a set percentage of the parts total cost of sales is credited to the parts inventory adjustment account and charged back to the parts department monthly gross.

To offset this reduction in gross profit, we will adjust and increase our parts "cost plus" escalation matrix on "captive parts" in the $10.00 - $30.00 parts cost range by 10%.

The realized net profit from the increase of 10% will result in an approximate 3% net to gross number. Approximately 80% of our total parts sales comes from this $10.00 - $30.00 cost range.

For example, if I wanted to get rid of $30,000.00 in obsolescence and I've exhausted all my options in Step 3., I can could set up and utilize my scrapping account. The breakdown on how this all works is as follows;

Average Month's Parts Cost Of Sales: $100,000.00

Inventory Adjustment Amount Credit: $3,000.00 (3%)

Additional Gross Profit From 10% Escalation Matrix Adjustment: 3%

Gross Profit Debit Amount: $3,000.00

Total Amount Of Obsolescence: $30,000.00

Months To Eliminate and Scrap Obsolescence: 10

In my opinion, parts obsolescence should be a "thing of the past" and never be allowed to happen if we utilize all of our options and a "mind set" that it can be done.

We will even provide our ACG "Smart Parts" Excel Scrapping Calculator to help those "Smart Parts" Managers calculate the right percentage to use in your "Parts Inventory Adjustment" account based on your individual obsolescence amounts. 

Email Us Today To Request and Receive Our FREE "Smart Parts" Take Away!

ACG "Smart Parts" Excel Scrapping Calculator

dave@smartpartstraining.com

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