July 2021: "The Cost Of NOT Reporting Lost Sales"

Lost Sales Reporting is not a new topic that we have featured in the past here at ACG "Smart Parts". Although, in my opinion, it should be the number one topic and priority of any Parts Manager as the primary focus of any Parts Manager is stocking the "Right Parts At The Right Time".

First and foremost, the only way that parts become Normal Stocking Parts is by recording parts demand. There are only two ways that demands are recorded and that is "Sales" and "Lost Sales". Sales will always happen eventually, but Lost Sales is an "elective" practice, or process.

If we choose not to record Lost Sales to industry guidelines of 5% - 10% of total sales at cost, we lose those recorded demands that can impact having the right parts at the right time and additional profits. After all, and just like in the Sales Department, it's much easier to sell vehicles we stock on the lot versus those vehicles we do not stock.

So, before we get into the cost and lost gross profits for lack of Lost Sales Reporting, we have to look at the definition of what qualifies as a Lost Sale. The right definition is also one of the reasons for lack of reporting in the first place. If you would ask ten different people what their definition of a Lost Sale is, you would most likely get ten different definitions.

In my opinion, the definition of a Lost Sales is an easy one as it all boils down to recording "Potential Missed Opportunities" as "demand reporting versus outcome" can truly make a difference. In other words, if there is an inquiry on any part, there should be an expected outcome. 

First of all, if there is a part inquiry, there must have been a vehicle out there that needed the part, whether the part is sold from stock, special ordered or located. If none of the previously mentioned happens, or the customer declines, it is a Lost Sale. 

Even if a Lost Sale is posted on a part that is not a Normal Stocking Part and the customer declines initially, but eventually does special order the part with a previous Lost Sale recorded, the "double demand" of a Lost Sale and eventual sale does not cause an issue.

In those occasions when "double demand” posting of a single part, it just "“ensures”" that the demand was posted, and Parts Phase-In occurs after demand in months criteria has been met. Total demand is affected but is controlled by the Parts Manager as parts do not just jump on the shelf.

It’s much easier to control those parts that do phase in to be considered Normal Stocking Parts as we can’t manage what we can’t see. After all, it’s the parts that we don’t see on the phase in report that could be missed and become Normal Stocking, Active Parts. 

So, What Are The Costs And Lost Gross Profits From NOT Posting Lost Sales?

Let’s get started…

First and foremost, the two major contributors for getting an idea of what we are missing out on from not reporting enough Lost Sales are parts “First Time Off Shelf Fill Rates” and “Time”. In other words, what percentage of the time do we have the "right part at the right time" and how much time are we losing.

Time is money as we all know and the added cost for not having the right part at the right time affects our Service Productivity and adds Acquisition & Holding Costs in the Parts Department. We don’t need a calculator to figure that there are added costs and lost gross profits as a result.

To get started, we will have to use some basic data to come up with approximate costs and lost gross profits. This basic data will include the typical, average dealership with current averages compared to industry guidelines and we will “do the math” to come up with the costs and lost gross profits.

Also used in this exercise is compiled dealership parts data from ACG “Smart Parts” over the past 10 years in approximately 100 dealerships throughout the United States and Canada. Data acquired by ACG “Smart Parts” listed below is prior to training and implementation.

Data also listed by ACG “Smart Parts” are approximations. Results after training, implementation and follow up resulted in at or above industry guidelines in all key areas listed below with Lost Sales Reporting at or above 10% of total cost of sales.

·       Average Parts Sales Per Month: $160,000.00

·       Average Parts Cost of Sales Per Month: $100,000.00 (37.5% GP Retention)

·       Average Number of Technicians: 10

·       Average Service Productivity: 100%

·       Average Customer Pay Effective Labor Rate: $100.00

·       Average Service Labor Gross Profit Percentage: 100%

·       Average Repair Order Count Per Month: 1200

·       Average Parts to Labor Ratio: 90% (Guide: 100%)

·       Average Customer Pay Parts Gross Profit Percentage: 40%

·       Average Service Labor Gross Percentage: 70%

·       Average ACG “Smart Parts” Data First Time Off Shelf Fill Rate: 40% (Guide: 75% - 85%)

·       Average ACG “Smart Parts” Data On Total Parts Purchases: $75.000.00 to Maintain a Industry Guideline of 45 Days Supply

·       Average ACG “Smart Parts” Data Stock Order Performance: 40% (Guide: 75% - 85%)

·       Average Lost Sales Reporting: 1.2% of Total Cost of Sales (Guide: 5% - 10%)

All the data compiled by ACG “Smart Parts” also have one thing in common, and that is a lesser than desired reporting of Lost Sales of 1.2%. As a matter of fact, many of these stores did not report any Lost Sales and are included in the above average.

The results of this lack of reporting and the “trickle down” affect comes into play on all the “Lower Than Guide” Percentages listed above in the ACG “Smart Parts” data categories. All can be traced back to little or no Lost Sales Reporting.

The lack of demands that could have been reported by Lost Sales posting is definitely evident as fewer parts actually “phase-in” to even get in front of the Parts Managers eyes to make the right decisions on what parts to accept on phase-in as Normal Stocking Parts.

Now, let’s do the math and the results of the “trickle down” affect of the lack of Lost Sales Reporting, keeping in mind that time is a big factor to added costs and lost gross profit as time is a “perishable” inventory, especially in the Service.

Service Productivity:

If we use the data provided above and if First Time Off Shelf Fill Rates are at 40% versus the guide of 75% - 85%, and utilizing the data, the Service Department would have a net loss of a minimum of 15% in productivity due to low First Time Off Shelf Fill Rates from chasing and ordering parts.

Part of the reason for the First Time Off Shelf Fill Rates at a below average of 40% in these dealerships used in this study is manufacturers that offer a Vendor Managed Inventory, (V.M.I.). Most manufacturers that offer a V.M.I. only cover approximately 48% - 52% of their total parts numbers.

Much of the 48% - 52% are parts considered to be "A" and "B" ranked parts which are considered to be "fast moving" parts. But what about all those "C" and "D" ranked parts that may sell anywhere from 12 - 36 times annually? Those parts tend to be missed or not included as V.M.I. qualified parts.

These parts missed or excluded from V.M.I. qualified parts are also the "meaty" type parts. Parts such as gaskets, hoses, switches, modules, head bolts, lifters, fuel system parts, etc. These are also usually the parts that carry a higher gross profit margin as they are usually "captive parts".

If the Parts Manager solely relies on utilizing the Manufacturer's V.M.I., all those other parts not qualified are not usually stocked. The only way to pick up those "meaty" parts is to utilize the Dealer Management System with the proper set ups.

That being said, if the Parts Manager is relying solely on the Manufacturer's V.M.I., they can only achieve a First Time Off Shelf Fill Rate of approximately 50% if the V.M.I. is maximized. It seems the overall goal becomes being compliant, or "obedient" to the manufacturer just for the sake of "protecting" the inventory.

We end up just holding parts to eventually return while missing out on opportunities. We should be buying parts to "sell" and not to just protect and hold for 12 months or more. Achieving "First Time Off Shelf Fill Rates" to industry guidelines can only be achieved by maximizing both the Manufacturers V.M.I. and our own D.M.S. with the right set ups.

So, what does this all add up to?...

A loss of an average of 7.3 Billed Hours would be lost combined with 10 technicians due to “down time” and overall Service “Cycle Times”. The Lost Productivity adds up to at least 45 minutes per day, per tech. I have actually had many Service Managers say that time goes much higher than the 45 minutes stated.

Net Results: A loss of approximately $800.00 in Parts & Service Gross Per Day, $17,000.00 Per Month and over $200,000.00 annually.

Are we awake yet?...

Parts Discounts & Allowances:

Once again, utilizing the data provided above, if the Stock Order Performance Guideline is 75% - 85% and the average data collected by ACG “Smart Parts” indicates that the average dealer, prior to training and implementation was at 40%, there is a deficiency of at least 35%.

This deficiency adds up as well for those "unrealized" discounts, allowances and return reserve that is supposed to be used for reducing obsolescence, but unfortunately, those return reserves get used up for returning Special Order Parts. 

And with the average manufacturers’ parts discounts being at 3.5% on Stock Order Purchases and another 3.5% for Return Reserve, the average parts gross loss can be staggering. That’s not even counting the additional cost of Parts Special Orders and Handling.

Net Results from Lost Gross on Stock Order Performance: $2,450 Per Month, $29,400.00 Annually.

Special Orders – Acquisition & Holding Costs:

Utilizing the above data once again, if we are Special Ordering Parts 60% of the time, the Acquisition & Holding Costs on those additional Special Orders can add up rather quickly. On top of the lost time and gross profit in the Service Department from lost “Cycle Time”, the problem just gets worse.

Let alone that many of these Special Orders don’t get billed out and returned, they are actually in our inventory with NO Demands posted as the sale didn’t happen and the Lost Sale wasn’t recorded as we “assumed” that the part would be installed and billed. As an added note, approximately 10% or more of all Special Orders are scrapped or returned to the manufacturer.

Lastly, many manufacturers charge a handling fee for all Special Order Parts Returns and if our Return Reserves are low due to low Stock Order Performance, the cost is on the dealer, no matter which department pays for it.

Net “Cost” Result from Special Orders Above Guide:  $2,625.00 Per Month, $31,500.00 Annually.

Obsolescence Accrual:

We all know about this one, but just how much is it costing us and how much gross are we losing for carrying too much obsolescence? We also know that all parts will eventually become obsolete, but the big question is how much MORE obsolescence are we accumulating from the lack of Lost Sales Reporting?

We do know one thing though and that is that the more we Special Order Parts, the more the obsolescence grows. So, I guess my question is…Why do we want to add to the frustration, cost and lost gross profit from Special Orders?

There of course is a cost from all obsolescence, whether by natural causes, or if we created the mess in the first place. That cost is also represented in the Inventory Acquisition & Holding cost calculation which is 25% - 30% of the total inventory cost, whether Active or Obsolete.

Net Cost of Obsolescence with Data Provided: Minimum of $25,000 Annually, Obsolescence Only

Overall, we just focused on just these four areas, but the cost of not reporting Lost Sales to industry guidelines or better, reveals that the impact on gross profits and costs are very evident. I know that there are many other factors that we could add into the equation over and above Acquisition & Holding Costs.

Costs such as mistakes in ordering, pay plans including commissions, other gross retention issues, staffing, etc. can also be added into the mix, but those are all speculations, which in my opinion do not really hold a true dollar value when it comes down to looking at the true expense and lost gross profit from not reporting Lost Sales to industry guidelines.

All the above information does have a direct connection to Lost Sales that ultimately affect the dealer’s investment and gross profit opportunities, including Parts Gross and True Turns. Return on Investment is our primary function as Parts Managers along with being profitable.

Not only the Parts Department Profits are affected as we impact the profits of all dealership departments. Lost Sales Reporting is the only category that can impact all areas of the Parts Department including profitability, performance and ultimately, the Parts Inventory Investment.

The above exercise with the average dealership reveals that there are approximately $261,000.00 good reasons in dollars that we should consider, or perhaps “reconsider” on just how important Lost Sales Reporting is...Question is...

"How Important Is Lost Sales Reporting To You?"

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...