August 2019: "Show Me How To Fix It!" - Part Three: Managing Stocking Levels

As we move on to part three in our five part series titled, "Show Me How To Fix It!", managing Stocking Levels, in my opinion requires constant maintenance, unless your are fortunate enough to have a Dealer Management System, (DMS) that automatically adjusts and manages Stocking Levels through predetermined algorithms.

These predetermined algorithms measure Dynamic Days Supply, (DDS) and Weighted Daily Demand, (WDD) instead of most Dealer Management Systems, (DMS) that utilize "ABC Source Ranking" by Annual Piece Sales. The DDS and WDD are constantly working in the system to ensure proper Stocking Levels.

ABC Source Ranking requires the Parts Manager or the System Administrator to create separate sources with annual piece sales ranges along with the proper Low and High Days Supply for each annual piece sale range.

To my knowledge, there are only a couple Dealer Management Systems, (DMS) out there that provide this option that measures DDS and WDD automatically. For most other systems though, we, as Parts Managers have to set up our own Stocking Levels for each one of our Parts Sources in the DMS via ABC Source Ranking.

Unfortunately, many Parts Managers out there do not even know how to "properly" set up their Parts Sources with the appropriate Best Reorder Points, (BRP, or "Low Days Supply") and Best Stocking Levels, (BSL, or High Days Supply). 

As I've mentioned many times in previous articles, most Parts Managers that I have met are very intelligent and very qualified to manage their Parts Departments. But when it comes down to these five Key Performance Indicators, (KPI's) that we are focusing on, many Parts Managers haven't had the opportunity to "learn" them.

As a matter of fact, many dealership Parts Departments that I have visited and still visiting today have the same set ups on Phase-In/Phase-Out Criteria and Stocking Levels that they had years ago. Some even had the same initial setups that they had when their DMS was initially installed well over twenty years ago!

Not only that, if you throw in the Manufacturer's Vendor Managed Inventory, (VMS) setups, (if offered), now you have the perfect recipe for disaster. The most "imperfect" scenario of running out of the parts you need the most and overstocking of parts you don't need has just been born.

So, how do we get this ship turned around and going in the right direction? 

First of all, and before we get down to "fixing" the problem, we have to know how these Stocking Levels work in the first place. We have to also know that one of the biggest, if not the biggest factor in all this is how many times a part sells over the course of a year, also known as "annual piece sales".

In addition to factoring in our "annual piece sales", we also have to fine tune it even further by knowing the "peaks and valleys" of "annual piece sales". Once we categorize, or group these parts together within the same "annual piece sales" range, we can then set the appropriate BRP's and BSL's, or Low and High Days Supply.

One of the ways that I simplify what I'm referring to, especially when I have the Dealer Principle in the room, is by the following scenario...

I would start off by asking the dealer what is their highest selling new vehicle on the lot was as well as their lowest selling new vehicle on the lot. After I received the answer on both the high and the low, my next question would be...

"Would you have the same number, or inventory of those two vehicles on the lot at the same time?" 

Of course, the answer would be "No", and once again I would ask "Why not?...

The final answer was obvious as they would run out of the new vehicles that they sold the most as well as having too many of the new vehicles that sold the least, resulting in overstocked, or "over-aged" units that they would have to get rid of.

The worst part of that scenario is that they would have to chase down, or "dealer swap" the new vehicle that they ran out of, resulting in lower gross profits, or even potentially losing the sale in the first place as the customer would shop elsewhere.

The similarities between selling vehicles and selling parts is really no different except for the number of parts versus the number of vehicles. The irony is that dealers would definitely "fix" the new vehicle inventory, but many don't put the same priority on their Parts Department.

Okay!....Let's Get Down To Fixing It!

Fixing any problem always starts with identifying the problem and the root causes that lead us to undesirable results. If the Parts Department is experiencing too many "stock out" situations and experiencing never ending obsolescence, you can be assured that we have a situation much like the above new vehicle scenario.

The first step in "fixing" Stocking Levels is to separate the parts inventory into separate sources or "groups" that have similar "annual piece sales" ranges, referred to as "ABC Source Ranking". Each piece sale range requires different setups for Best Reorder Points, (BRP or Low Days Supply) and Best Stocking Levels, (BSL or High Days Supply).

For example, if a part sells only 12 times a year sells on average once a month, or .03 times per day, (WDD). A month contains 30 days on average, so the Best Reorder Point, or Low Days Supply on that part would be 30. That's the math portion which is irrefutable, but it's the Best Stocking Level, or High Days Supply setting that is most important.

According to Mike Nicoles, (who I agree with), the Best Stocking Level, or High Days Supply should be set at 50% to 150% of the Best Reorder Point, or Low Days Supply. That being said and with the above example, my Best Reorder Point, or Low Days Supply would be 30, and my Best Stocking Level or High Days Supply would be 45, 60 or 75.

The "constant" number in all this is the Best Reorder Point or Low Days Supply as that is basic math. If I had a part that sold 100 times a year, that would mean my Best Reorder Point, or Low Days Supply would be 4, (100 divided by 365 days a year = 3.65, rounded up to 4). 

Faster moving parts always carry a Lower Reorder Point or Days Supply, which confuses many, but we have to remember that "Low Days Supply" or "Reorder Point" doesn't mean quantity as quantities vary in a given "Low Days Supply" or "Reorder Point" of any part number. 

A Four Days Supply of a part that sells 100 times a year just means when I get down to 4 Days Supply, I am down to a quantity of 4 parts left, I need to reorder back up to my Best Stocking Level, which would be reordering back up to 6, 8 or 10, (50% - 150% of Low Days Supply, BRP).

Let's use a different annual piece sale range....let's say that I have a part that sells 865 times a year,  meaning that I sell on average, 2.37 of that part per day, (WDD of 2.37 rounded up to 3). When I get down to a Four Days Supply, 3 X 4 = 12, (our BRP), I then need to order back up to my BSL, which would be 18, 24 or 32, which would be 50% - 150% of my BRP, or Low Days Supply.

The trick is managing which Best Stocking Level, (BSL) or High Days Supply to use...50%, 100%, or 150% and at what time of year. I could sell a part 12 times a year, but what if it was an Air Conditioning part that sold 12 times a year, but all sales were in three months out of the whole year?

This is why Managing Stocking Levels carries a high maintenance factor as we have to "manage" the parts annual activity during the "peaks and valleys" of the part's life cycle. We have to know when to increase and decrease the BSL, or High Days Supply.

Lead Time is also a factor in calculating Best Reorder Points, or Low Days Supply. Usually the lowest or minimum amount of "Lead Time" is 3, or perhaps even 4. One day to place the order, one day to receive the order and one day to post and "shelf" the order. This is why the lowest BRP, or Low Days Supply should never be less than 3 or 4, which I prefer 4.

We've looked at fast moving parts and how our BSL's, BRP, Low and High Days Supply should be set, but what about slow moving parts? After all, we don't want to get stuck with them after they phase out, so how do we prevent those situations?

As you might have guessed, if fast moving parts carry a Lower Days Supply, (BRP), then slower moving parts need to carry a Higher Days Supply, or BRP. Sounds kind of opposite, but it's true and remember what I wrote earlier...."Low Days Supply, or Reorder Points Don't Mean Quantity as Quantities Vary!"

In other words, if I have a part that only sells 3 times a year...a part that just barely meets phase-in requirements, sells only on average every 120 days approximately. So, my BRP, or Low Days Supply, or Best Reorder Point, BRP would be set at 120 Days. My Best Stocking Level, or High Days Supply would be set at 50% of the Low Days Supply, or Reorder Point which would be 180.

Even though my options of choosing my High Days Supply can be 50% - 150% of my Low Days Supply, I prefer the lower percentage as this part has low movement. If movement increases, then my Low Days Supply, or BRP would get lower and I would increase the percentage for better safety stock on my High Days Supply, or BSL.

So!...with all this happening all around us, how do we "manage" all these part numbers that are constantly changing from "peaks and valleys" to various "annual piece sales" ranges to different Best Reorder Points or Low Days Supply and various percentages on what should be my Best Stocking Level, or High Days Supply?....Enough Already!

The good news in all of this is that most, if not all Dealer Management Systems can automatically move these parts all around to different sources that carry the correct Stocking Levels for those parts with different "annual piece sales" ranges.

As parts sales increase and decrease throughout their life cycle, the DMS will automatically place them in the right source with the right Stocking Levels, both Low and High Days, or the right BRP and BSL. Keep in mind, even though the system will move these parts automatically, we still may have to adjust and modify from time to time for seasonal and "captured" piece sale ranges.

The trick, if any is to have the right amount of part sources, based on "annual piece sales" that connect to the system's "Default Source". The DMS "Default Source" is the main source that the system identifies with on all new parts that enter the system, whether they phase-in or not.

Once a part enters the system via way of the "Default Source", and once phased-in, it will then "feed down" to the proper "sub-source" that contains the appropriate Low and High Days Supply, (BRP/BSL) based on "annual piece sales". The system will move them back and forth, through ABC Source Ranking if necessary based on current averages at the end of each month.

Lastly and most importantly, doing the proper math on Low and High Days Supply, (BRP/BSL)  within these annual piece sales ranges is critical. Also, having the right number of sources for each annual piece sales range is equally important and I usually recommend at least eight for ABC Source Ranking by Piece Sales.

No matter what D.M.S. you may have, managing Stocking Levels is the most important Key Performance Indicator, (K.P.I.) out our Top Five, after the part phases into the system, that will insure that we have "the right part at the right time".

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