In any business that includes product, goods, or "inventory", having good "Asset Management" practices is essential to the overall success of any business and that can't be more true than in the automotive dealership.
In the case of the automotive dealership, these assets include the two biggest "assets", which are the Used Vehicle and Parts Inventories. In most dealerships, the Parts Department is the second highest asset, but then again, in some dealerships, the Parts Department is the highest asset in total stated value.
The real question is as in any inventory asset is...
Is this inventory asset really "liquid", meaning...is it really "worth" the dollars represented on the dealer financial?
Even though we show specific amounts of these parts inventories on Page One of the Financial, could we really "exchange" that figure into real cash? One thing for sure though is that we have to insure that amount shown as well as all the other "acquisition and holding costs" that go along with that amount shown.
Whether we can turn that amount into cash or not, these acquisition and holding costs still apply. Industry acquisition and holding costs on any inventory, including in this case, the parts inventory, can be as high as 25%-30% of the total parts inventory investment each year.
When calculating these acquisition and holding costs on the average dealers parts inventory, these costs include, but not limited to are;
- Labor to manage the parts inventory
- Storage space costs & rent
- Insurance costs
- Inventory maintenance costs, i.e. physical inventory counts, cataloging, data processing, etc.
- Depreciation & Obsolescence
- Lost opportunities
That being said, "Protecting The Parts Inventory Investment" has to start with Asset Management, which leads us to breaking down just how we manage this asset. Just like our own personal assets that most of us have such as our homes, automobiles, boats, etc., they all have to be managed to protect the investment.
Believe it or not, we all have "acquisition and holding costs" with our personal assets and I'm quite sure we are all well aware of those costs. So why wouldn't we also consider these costs when managing the dealers second highest asset?
That being said and most importantly, we have to take "ownership" in managing the dealers assets just like we do with our own assets. All the practices in managing our own personal assets need to be applied to the dealers assets. This simple "mind set" will lead to better results in "Protecting The Parts Inventory Investment".
"Now it's time to break it all down and find out how we are going to protect this valuable asset AND give our dealers the highest return on investment expected profit levels..."
Here We Go!...
Investment Security:
First and foremost in protecting the parts inventory investment is securing the investment. Even though securing the investment may sound simple and obvious, ask yourself these questions...
- Are all my entrances and exits to the Parts Department locked and secure at all times?
- Can anyone access the Parts Department other than approved personnel?
- Do technicians walk in and out of the Parts Department throughout the day?
- Are all outside parts storage units locked and secured?
- Are there any parts outside of the Parts Department, including dirty cores?
- Is your Parts Department a general storage area for filing, used office furniture, tire and wheel take offs from the Sales Department, etc.?
- Are parts delivery drivers coming and going in loading areas without management supervision?
- Are parts employees monitored when leaving the Parts Department daily?
- Do you have a camera monitoring system installed in and outside the Parts Department?
- Do I have parts reconciliation issues and variances at the end of each year?
These are just a few questions we all need to ask ourselves because I'm quite sure that we all follow these practices when protecting our own personal assets in our homes. Once again, why aren't we applying these same practices in our Parts Departments?
I think anyone of us can ask these above questions about protecting our own assets in our homes and I would suspect that we all have these basic practices in place in order to protect our own personal assets. Protecting assets of any kind require basic principles and most important is accountability.
Housekeeping:
Here is another practice that most of us follow each day in our personal lives. Unfortunately, in many dealerships Parts Departments that I visit, basic housekeeping practices are not followed. Parts on the floor, shipping and receiving areas untidy, damaged inventory, paperwork scattered and unorganized, safety guidelines not followed, etc.
This is usually a sign that parts inventory accountability and reconciliation is also a problem. If we can't "account" for what we have on our shelves, then most likely there will be parts inventory variances between the Ledger Balance and Controlled Balance Inventories.
Poor housekeeping practices also leads to safety issues as these hazards of parts on the floor, entrances and exits partially or totally blocked can lead to injury and perhaps worse in case of fire or other unexpected occurrences.
In my opinion, the problem with all this is not just a lack of accountability, but also just simple complacency, as each day just seems to repeat itself and we overlook these same things each day. I believe we should have the mindset that each day, we might have "company" over and we want our homes to be tidy and presentable.
Lastly and most important on this subject, if we have good housekeeping practices, it is much easier to insure accurate inventory counts when reconciling the two parts inventory amounts, both the Controlled Balance and the Ledger Balance in the Accounting Department.
Obsolescence:
When it comes down to "Protecting The Inventory Investment", it's not a surprise that we have to include parts obsolescence in the overall equation. Quite simply, if we don't control our parts obsolescence, we are not protecting the dealers' initial parts investment.
Once parts become "obsolete", meaning those parts with no sales after twelve months, there is a 98% chance that those parts will never sell again. Thus resulting in essentially no return on the dealers investment and no real inventory protection on those obsolete parts because they have little or no value.
Even though all parts will eventually become obsolete, we have to control these amounts from getting down into that category in the first place. In order to control the obsolescence, we have to have the proper Dealer Management System, (D.M.S.) Set Ups & Controls.
These proper Set Ups & Controls include parts "Phase-In" and "Phase-Out" Parameters, Stocking Levels such as Best Reorder Points, (B.R.P.), Best Stocking Level, (B.S.L.) that follow the math based on current and annual piece sale ranges.
Plus, if we utilize a Vendor Managed Inventory, (V.M.I.) from the manufacturer, if offered, we have to especially be aware of not just accepting every part and the amount that they recommend because the V.M.I. group demand may not match the dealers D.M.S. demand.
By the way, on the topic of letting the manufacturer control my parts inventory with their Vendor Managed Inventory Set Ups & Guidelines, I'm quite sure that the the dealer does not let the manufacturer control their new vehicle inventory.
So I guess my question is..."Why Do We Let Them Control Our Parts Inventory?"
If not properly managed, these recommended and perhaps excessive V.M.I. amounts alone can add to the dealers parts obsolescence, resulting in a lack of parts inventory investment protection. Parts obsolescence not only increases our inability to protect the inventory investment, it also adds to the dealers "acquisition and holding costs".
Increased obsolescence also lowers the dealers Gross & True Turns which affects not only the dealers Return On Investment as it also impacts the dealers parts profitability as well. The added "acquisition and holding costs" from obsolete inventory still carries the previously mentioned costs detailed earlier in this category.
Accountability & Training:
Even though this subtopic is our last one, it's most likely the first and foremost essential in "Protecting The Parts Inventory Investment". Unfortunately in many dealerships today, the Parts Manager is not trained properly in Standard Dealership Accounting Practices.
In order to have accountability, we have to be first trained in how we "account" for this asset in our daily operations. Proper ordering, receipting and posting practices have to be followed and in the right order to meet reconciliation requirements between the Controlled and Ledger Balance Inventories .
Also, all the previous subtopics have to be followed and adhered to in order to have accountability and reconciliation. Our parts staff also has to be trained in these basic accounting practices if in the positions of shipping, receiving and posting parts inventory.
Cost adjustments both in receiving and billing parts can highly impact inventory amounts that can ultimately affect our ability to protect the parts inventory investment and parts profitability. Basic training on specific guidelines in all the above categories can not be overlooked or assumed.
Proper "paper flow" between the Parts Department and Accounting Office has to be controlled, reconciled and authorized by the Parts Manager each day without exception. Verifying vendor parts invoices with the proper amounts and to the proper accounts is where it all starts in order to insure the two inventories are reconciled to minimal or no variances.
As we can all see, "Protecting The Parts Inventory Investment" goes far beyond just "standing guard" over the parts inventory, it requires that we all "take ownership" of the dealers investment, just like we would with our own personal assets.
Now that we see what it really takes, can we honestly answer this original question?....
"Am I Really "Protecting The Parts Inventory Investment", or Am I Really Just Standing Guard Over It?"
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...
