One of the most inaccurate and often times understated "Business Ratios" on our Parts Monthly Summary, or Management Reports is Parts True Turn. Sad thing is that many dealers and parts managers don't actually look at this number stated on the report.
Even worse, many dealers and parts managers don't pay much attention to this Key Performance Indicator, (K.P.I.) unless the Parts True Turn number is brought up in conversation perhaps at a 20 Group Meeting, or when we see our parts obsolescence starting to rise.
In my opinion, there is nothing more important than the Parts True Turn number from an investment standpoint. I'm quite sure many dealers look at their new and used aged vehicle inventory, so why would the parts inventory be any different?
The answer to that question is really quite simple as many dealer owners or principle don't have the time, energy or even worse...the desire to look at their parts inventory the same way as their new and used vehicle inventories.
If we do have that mindset, then we might as well just throw in the towel because that one K.P.I. of Parts True Turn going unnoticed, or cared about leads to a "trickle down" of mass proportions. As a matter of fact, the biggest effect is Missed and/or Lost Opportunities in the overall Fixed Operations Gross Profit.
Some may disagree with me on that one, but let's take a look at some of these "trickle down" effects that Parts True Turn, or should I say the "lack" of proper parts inventory True Turns of at least 5.0 times, (current industry guidelines) annually.
Each one of these Missed and/or Lost Opportunities in the overall Fixed Operations Gross Profit can be linked to less than desirable Parts True Turn Numbers. Which in fact, effects our Service Absorption percentages and our break even number of units on the front end.
Let's break it down with my list of Missed and/or Lost Opportunities...
- Increased Parts Obsolescence
- Lower Parts Return on Investment
- Higher Acquisition and Holding Costs, (25% - 30% of Total Inventory Value)
- Lost Parts Gross Profit due to Emergency Purchases
- Lost Gross Profit from Lost Service Productivity and Cycle Times,
- Low "First Time Off Shelf Fill Rates"
- Lower Manufacturer Purchase Discounts and Accrual Amounts
- Lower Customer Satisfaction and Retention Percentages
- Lower Service Absorption in the Fixed Operations and Break Even Units
The above effects of less than desired Parts True Turn numbers are directly linked and I could probably find more as these are just a few. The biggest one to me in the above list is the Lost Service Productivity by not having the right parts on the shelf the first time.
Unlike the parts inventory, time is a perishable inventory and just fifteen minutes of lost time from a technician due to low Parts True Turn numbers can cost as much as $50.00 to $100.00 in lost parts and service sales for just one tech that we can never get back.
So, let's define and breakdown this term we call Parts True Turns and how parts are even classified and/or qualify in this category.
I mentioned earlier that there is a possibility that some dealers' Parts True Turn number may be understated, especially if you are a dealer that utilizes the manufacturers Vendor Managed Inventory, or (V.M.I.). This is due to many parts purchased on these programs are not entered into the D.M.S. as Normal Stocking Parts, which is the key ingredient to measuring Parts True Turn.
In order for a part to "qualify" in the Parts True Turn number is the part has to meet phase-in requirements. Many parts purchased from the Manufacturer's V.M.I. Program may meet "their" criteria for phase-in, but not necessarily the dealer's phase-in requirements. Thus, on these instances, the parts need to be manually phased-in, or given a status on Normal Stocking, or Active.
Let's now take a look at the actual definition, or "formula" for accurately measuring Parts True Turn. After reading the actual "formula", we will break it down in "layman's terms" as you will see from the actual definition, or "formula"....Here Goes!...
"Total Stock Order Receipts for the Last Twelve Months - Divided By - Sales at Cost for the Last Twelve Months - Divided By - Average Inventory Investment for the Last Twelve Months"
That's a lot to absorb if you are reading this for the first time! It all begins with Stock Order Receipts and the sale of parts that qualify for Normal Stocking Status, or Active Status to begin with. That's where it all starts as I can actually "manipulate", or even "miss" parts that are considered for Normal Stocking or Active Status.
In "layman's terms", True Turns could be calculated based on sales at cost of Normal Stocking or Active parts divided by total parts sales at cost annualized. Stock Order Receipts can be deceiving as many parts managers actually order Special Order Parts as part of their Stock Orders, thus giving us...again...inaccurate and higher True Turn numbers.
I can actually go back to the parts phase-in process as well which is where parts first qualify for Normal Stocking or Active Status. If my parts phase-in criteria is not set up properly, I could actually be "understating" or even "overstating" my Parts True Turn. We have to have the right number of total demands recorded, (Sales and Lost Sales) over the right period of time.
For example, if my phase-in criteria was set for just one or two "hits" or demands over a extended period of time, I could be seeing a higher True Turn number and would be "overstated". On the other hand, my parts phase-in criteria could be too restrictive by requiring many more "hits" or demands over a period of time, thus giving me a lower True Turn number.
In my opinion, in order to realize an accurate Parts True Turn number and to achieve expected or desired results on my monthly reports AND at an industry guideline of 5.0 or above, I would need to do the following...
- Install the proper phase-in criteria in my D.M.S. of either 2 or 3 demands in 6 months or less
- Properly record Lost Sales at 5% - 10% of total sales at cost
- If utilizing the manufacturer's V.M.I., insure all parts purchased are receipted as Normal Stocking or Active Status
- DO NOT order Special Order, or Non-Stock parts with less than 2 or 3 demands, (pending phase-in requirements) as part of a Normal Stock Order.
- Special Orders and Non-Stock Parts need to be ordered separately and receipted separately from Normal Stock Orders
- Eliminate & Control Obsolescence over twelve months to 0%
- Control Stocking Levels of Normal Stocking or Active Parts to the proper Best Reorder Point, (BRP) and Best Stocking Levels, (BSL) to prevent overstocking Normal or Active Parts.
Bottom line is that we first have to have a deep interest and concern for our True Turn number, especially if you are the dealer, trying to achieve the proper Return On Investment from my parts inventory.
If I am a "Smart Parts" Manager, this IS our bottom line when looking at our Parts Inventory Business Ratios. As we now know...so much is riding on our Parts True Turn number at 5.0 times minimum annually...if we haven't done so already....it's time to "Turn It Up!"
If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...