July 2018: Obsolescence: "How Does It Happen In The First Place?"

Talking about parts obsolescence is nothing new of course, and to take it a step further, we should be sick and tired of this topic still being a topic of concern. The unfortunate reality of it all is this topic may never go away if we don't eliminate the root causes of parts obsolescence.

I am definitely not one who just accepts things as they are merely because "that's the way it's always been", especially when it comes to this topic. If any Parts Manager has this frame of mind, then maybe it's time to not only think outside of the box, it's time to "get out of the box" altogether.

One added note before we begin, I have some great business associates and partners out there that actually work with, and help dealers "buy down" their obsolescence and it's their business to do so. But, as a Parts Manager for many years, my goal was to prevent obsolescence from happening in the first place.

Before we get into the contributing factors that create the obsolescence mess in the first place, I think we need to look into the benefits of an "obsolescence free" parts inventory. Imagine if you will, just for a moment, what it would be like if the "Smart Parts" Manager was "obsolescence free".

Picture this if you will...

The "Monkey On The Back" has been lifted and now the dealers' second highest asset is experiencing gross and true turns at, or above the NADA Guidelines. Parts profits rise as now we can experience the highest margins and earn the highest discounts and allowances possible.

Without the obsolescence, my sales activity is much higher, to the point that sales activity in the 0-3 month category meets, or exceeds 75% of the total activity and in the 4-6 month category, sales activity meets, or exceeds 23%, both NADA Guidelines in each category.

This would mean that 98% of the inventory is active in the 0-6 month category! In addition to that, if we maintain a Level Of Service 90%-95% and a Stock Order Performance Level at 85% - 90%, our "First Time Off Shelf Fill Rate" HAS to be 85% -90% as well!

That being said and in addition, the Service Shop Productivity can be maximized, from a Parts Support standpoint, thus increasing overall parts and labor sales and profits. Parts purchase power is at its peak and achieving top levels of manufacturer parts compliance and loyalty are also maximized to gain the highest discounts available.

Even though the topic is obsolescence, I think anyone of us can imagine all the above scenarios, IF we didn't have to deal with obsolescence in the first place. We also have to keep in mind the cost savings from outside purchases, inventory acquisition and holding costs, physical inventory costs, etc.

So now that we have had a moment to dream of an "obsolescence free" parts inventory, let's take a look at what causes parts obsolescence in the first place. We will look at each factor individually and explain how each of them impact this obsolescence "end result".

First and foremost, Parts Manager Training is the Number One contributing factor to parts obsolescence. As you will see in each of the following contributing factors, if we don't know what these factors are, their terminologies, definitions, or even how to manage them, we will have parts obsolescence.

If we can't read or understand the D.M.S., (Dealer Management System) Parts Monthly Management Report, or even understand what the results represent, we can not manage the parts inventory, especially in the area of parts obsolescence.

The second "contributing factor" is Non-Stock Parts as parts that haven't even met phase-in criteria are almost a sure bet to end up in the obsolete category. Parts that are manually ordered, special order parts that are not sold, some V.M.I., (Vendor Managed Inventory) parts that have not met the recommended overall demand are all examples Non-Stock Parts.

Outside of Parts Manager Training, Non-Stock Parts in inventory is the biggest obsolescence contributor. NADA Guide on Non-Stock parts in inventory should be 10% or less, but in many parts departments, especially those I have been affiliated with, the percentage of Non-Stock parts in inventory exceeds 50% and even more.

In my opinion, this huge rise in Non-Stock parts in inventory over recent years is definitely due to Parts Managers diving too deep into their manufacturers Vendor Managed Inventory, (V.M.I.) Stock Replenishment Programs, which we will review further as we continue through our obsolescence "contributing factors".

Speaking of which, our third "contributing factor" are the Parts Phase-In Parameters. If we don't have the proper Phase-In Parameters, we could be actually "phasing in" an obsolete part right from the beginning. I have personally witnessed many dealers' Parts Phase-In Parameters that will phase-in a part after only one or two demands in a twelve month period.

The Phase-In Parameters need to be consistent over a shorter period of time with more demand over a shorter period of time, far less than twelve months, and if possible, measuring both total demand and demand within a given month.

Some D.M.S. (Dealer Management Systems) software systems can actually measure phase-in demand over a period of days, instead of months and can be "weighed" over the a shorter, more recent time period.

Our fourth "contributing factor" to obsolescence is Parts Days Supply criteria. Once a part has met phase-in criteria, the Days Supply criteria takes over the parts life cycle, stocking levels and best reorder points.

During the part's life cycle, the stocking levels can vary extensively and if not managed properly, high quantities of a part can remain, long after a part has phased-out, ultimately becoming obsolete.

Calculating the proper Days Supply is a simple math equation that unfortunately, many Parts Managers don't even know how to figure out.

Many Parts Managers confuse Days Supply with parts quantity. A single Days Supply of a given part could be a quantity of one or a hundred, both equate to a given part's Days Supply.

Calculating Days Supply is simply math as I just mentioned. For example; if a part sells twelve times a year, or annually, this means the part sells on average, once every thirty days. The "Low Days" Supply, or "Best Reorder Point", (BRP) would then be thirty days.

Calculating the "High Days" Supply, or "Best Stocking Level", (BSL) is simply multiplying the "Low Days" Supply by 50% - 150%, pending demand according to the Mike Nicoles Group.

The more a part sells, the lower the "Days Supply", or "Best Reorder Point", (BRP) number. The "Low Days" Supply, or "Best Reorder Point", (BRP) is as follows;

Total Annual Parts Piece Sales Divided By 365 Days A Year 

Number five on our list are the Parts Phase-Out Parameters, which often go unnoticed as Parts Phase-In Parameters are usually the primary concern for Parts Managers. Although, the Parts Phase-Out Parameters are just as important.

Once again, I have witnessed many dealers' Parts Phase-Out Parameters set to far out. It is not unusual for me to see these parameters set at twelve months or even higher.

With today's parts life cycle far shorter than they were as little as twenty years ago, these Parts Phase-Out Parameters should be set at nine months or even less. Parts reaching phase-out status at nine months or less can send a trigger to the Parts Manager and will have less of a chance of hitting the "over 12 Month" category as the three month "buffer" allows the Parts Manager to act quicker to make sure those parts are not reordered for stock replenishment.

Up to number six on our list of obsolescence "contributing factors" with Lost Sales Reporting. Now, one might ask why we would have Lost Sales Reporting on our list and of course, there is a valid reason. If we are not posting Lost Sales, we are missing out on all the "true demand" available to us.

Parts demand is defined as the combined total of Sales and Lost Sales and if we miss those demands from Lost Sales Reporting, we risk the chances of more outside purchases, manual orders, special orders and Yes...more risk of building obsolescence. Total demand helps the "Smart Parts" Manager in stocking only "qualified" parts at phase-in.

Number seven on our list of "contributing factors" to obsolescence is our Parts Special Order Policies, as this one should be obvious to most Parts Managers. If we don't have a Parts Special Order Policy, it is a sure recipe to accumulating parts obsolescence.

Special Order Policies should include deposits and/or prepayments for all Special Orders Parts that fall into the "customer pay" category. Special Order Parts that fall into the "warranty" category should only be ordered if the vehicle is in the shop or has a "future appointment" set by the Service Department BEFORE the customer leaves.

All Parts Special Orders should be approved and signed to maintain accountability and follow up. They should also be accompanied with consequences, cost and a time limit to complete the sale of the Parts Special Orders. Parts returned to the manufacturer must carry a return fee to either the customer, or department responsible for returning Parts Special Orders.

Also, as weird as it sounds, technicians DO NOT ORDER parts!...they REQUEST parts, as the Service Advisor and Manager authorizes the Parts Special Order. They are also responsible for getting the authorization and parts order priority from the customer. The Service Manager and Advisors are also responsible and held accountable the completion of the repairs.

Our last obsolescence "contributing factor" probably impacts our obsolescence today more than any of our other "contributing factors", even though all the previous are ranked above this one. Our number eight obsolescence "contributing factor" is the manufacturers' Vendor Managed Inventory Programs, (V.M.I.).

Ever since the manufacturer got into the game, parts obsolescence has exploded in many dealerships that have a manufacturers' V.M.I. Stock Replenishment Programs. Even though there are benefits to all V.M.I. Programs, there are many risks and high potential for excessive obsolescence and even overstocked inventory amounts of active parts.

Many Parts Managers are not even creating their own stock orders utilizing their own D.M.S. and relying on the manufacturer to determine what their stock replenishment needs are. These V.M.I. Programs can determine what a "select group" of dealer parts demands are, but not all the "individual" dealers parts demands, and what qualifies as a V.M.I. controlled part.

So what ends up happening very often is the Parts Manager may be stocking V.M.I. "qualified" parts that don't even sell, or even meet their own individual stocking requirements and phase-in parameters. Even though they may be protected, often times they still end up in the obsolescence category.

These parts that are so called "protected" still costs the dealer in acquisition and holding costs along with return fees. The other "unseen" cost of holding parts inventory is the lost revenue and gross by these parts occupying shelf space of parts that may turn several times annually.

On the other side of that, many parts that have met their own individual store's stocking requirements and phase-in parameters are not stocked or replenished on a normal basis because they haven't met the overall V.M.I. Program qualification standards in the group as a collective. 

The "art" of managing a parts inventory seems to be slowly slipping away from many Parts Managers as they don't even utilize their own D.M.S. as intended. Creating a D.M.S. Stock Order is still as crucial as it's always been to determine individual store's stock replenishment needs. There is more out there than just the manufacturer's V.M.I. Program.

One thing I have always maintained and believed is that I have never been one to stock inventory to "protect" and to be the manufacturer's second warehouse. I have always purchased and stocked parts to sell, not to hold and protect. That's a definite recipe for accrued obsolescence and overstocked inventories that will repeat itself year after year....

"Are you carrying too much obsolescence?....just remember, you have to stop the bleeding first, then you have to know the factors that cause obsolescence in order to eliminate it completely."

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