One of the main goals as "Smart Parts" Managers is to always have "the right part at the right time". Believe it or not, having the "right part at the right time" in today's world is a much tougher task than it was just a few decades ago.
More and more vehicle manufacturers have jumped into the market while existing manufacturers continue to expand their vehicle model base. Along with the on-going new vehicle technology added to all these new vehicles and models, replacement part number expansion has skyrocketed.
In addition, part number coverage is not what it used to be a few decades ago. For example, "back in the day", we would have had just one part number for a set of front brake pads that fit many models for several years. Today, we could have several different brake pad numbers that fit the same model vehicle for just one model year.
All this has led to a nightmare for parts managers trying to hit that elite goal of having "the right part at the right time" at least 75% - 85% of the time on that first visit to the parts counter. Also, and to add insult to injury, many manufacturers are not making it any easier.
Since the evolution of vehicle manufacturers' wanting to control the dealer's parts replenishment inventory, otherwise known as Vendor Managed Inventory, (V.M.I.), many parts managers have abandoned creating their own stock order in the Dealer Management System, (D.M.S.)
The days of running stock orders on our own D.M.S., getting much higher return allowances and discounts, easier parts return policies from the manufacturers have been replaced by manufacturer-controlled inventories, lower discounts and return allowances, and program compliance, or "obedience" as I prefer to call it.
What many may not know is that most of the manufacturers' V.M.I. programs only cover approximately 50% of the manufacturers total inventory coverage with mostly A and B parts covered. That being said, and if we do the math, the best we can do on inventory "breadth" is about 50%. If we aren't utilizing our own D.M.S. to run our stock orders for the "rest" of the parts, increasing our own inventory "breadth" is nearly impossible.
Here in lies the big question...
"How are we going to increase our parts inventory breadth AND reduce our overall inventory amounts?"
Here We Go!...
The first thing that we have to do when considering increasing our parts inventory breadth goes back to my intro. We have to know what our customers are asking for and what they are buying as those two combined add up to parts demand. What they are asking for equals Lost Sales and what they are buying equals Sales Demand.
The second thing we have to do is manage and control our parts obsolescence in order to maintain a broader inventory breadth. There are always new parts coming in, or phasing in that meet total demand for normal stocking status so we cannot afford to hold obsolete inventory beyond the parts life span.
The life span of a part today is far shorter than it was decades ago. Here are a few facts on today's life span of a part courtesy of Mike Nicoles, Inc.
- Parts with no sales in 6 months = 49% chance of no future sales
- Parts with no sales in 9 months = 67% chance of no future sales
- Parts with no sales in 12 months = 98% chance of no future sales
Let's back that up with the NADA Guideline for Sales Activity...
- Parts Sales Activity 0 - 6 Months Should Equal 85% of Total Sales
- Parts Sales Activity 7 - 12 Months Should Equal 10% - 15% of Total Sales
- Parts Sales Activity Over 12 Months Should Equal 0% - 5% of Total Sales
As you can see, we cannot afford holding parts beyond their expected lifespan and the way we control this obsolescence from happening in the first place is to have our own D.M.S. set to the proper phase-out settings to where we can sell and phase these parts out well before 12 months.
If we set our phase out setting between 7 and 9 months, we still have a 35% - 40% chance of selling these parts and they will not be restocked unless these parts meet parts phase in criteria all over again. Unfortunately, we may have to hold the manufacturer's V.M.I. parts much longer before we can return them.
So, now that we have looked at controlling our obsolescence to current parts life cycle times, we can now focus on expanding the parts inventory "breadth". Increasing parts inventory "breadth" can only come from one direction and that is from total parts demand recorded into the dealers D.M.S.
When we talk about total parts demand, that includes total Parts Sales and Lost Sales Reporting to industry guidelines or higher into our own D.M.S. which gives us what our customers are asking for and what they are buying.
Reporting Lost Sales into our manufacturer's V.M.I. Program can provide demand for a group of dealers, but it will not have as much of an impact as it would if reported into our own D.M.S. as we control the total number of parts demands before phase in and not the manufacturer.
The number one ingredient to increasing overall inventory "breadth" is reporting Lost Sales to industry guideline or higher, which is a minimum of 5% - 10% of total sales at cost, although I prefer 10% or higher. Unfortunately, Lost Sales Reporting is considered a chore in many parts departments and not taken seriously.
Actually, we should be looking for Lost Sales and areas we can post even more as the more "input" we give to our D.M.S., the more "output" we will get towards our goal of increasing our inventory coverage, or "breadth". But, before all that, we have to look at the definition of a Lost Sale in order to increase these demands.
We all know that if you asked 10 different people what the definition of a Lost Sale is, you would probably get 10 different answers. The end result would be a lack of, or no Lost Sales Reporting, which is really sad because when you think about it, the definition is really simple.
The best opportunity to report Lost Sales is at the time of inquiry as one of four things are going to happen when you are asked to research a part....
Number One: We have the part and we sell it...
Number Two: We don't have the part and we create a Special Order...
Number Three: We don't have the part and we chase it as an Emergency Purchase..
Number Four: None of the above happens and we post a Lost Sale...
We also have to look for these Lost Sales as "Potential Missed Opportunities" and record these demand opportunities to increase parts inventory "breadth". Lost Sales Reporting should not be considered a chore and we should hold our staff accountable in consistent, accurate reporting.
Keep in mind, even if we report an excessive amount of Lost Sales, it doesn't matter as these parts that phase in from Lost Sales don't just jump on the shelf. They will only phase in to a Suggested Stock Order where the parts manager makes the final decision whether to stock the part or not. One thing for sure is that we can't manage what we don't see.
Let's look at some areas for Lost Sales Reporting Opportunities...
- Special Order Parts before they are sent back to the manufacturer
- Aged Back Orders not received
- Aftermarket parts sold in place of manufacturer parts with a Lost Sale posted under the manufacturer's part number
- Service Quotes on unsold, non-stock parts
Each one of these above examples do not have any demand posted as the sale did not happen under the manufacturer's part number. Even though there was an initial "need" for the part, the D.M.S. has no idea that there was a need, or a demand for the part.
Reporting Lost Sales isn't anything new that we didn't already know about, but I guess what many don't get is just how important they are when it comes down to increasing our parts inventory "breadth". The other thing is that we need to encourage Lost Sales Reporting as it is just as important as recording customer "Ups" in the Sales Department.
Increasing our parts inventory "breadth" also increases our parts profitability as we all know, and just like in Front End Sales, we make our most profit on the vehicles and parts we have on the lot and on our shelves. If we manage and control our obsolescence and increase our parts inventory "breadth" we will actually have more coverage and less inventory.
We will also capture the "peak sales" of parts during their shorter life span compared to years ago. Keeping our obsolescence at twelve months or less, and selling that obsolescence at even half the market value or less, the Return On Investment, (R.O.I.) by re-investing any revenue we receive from the obsolescence into parts that are moving can bring an R.O.I. of 300% or more.
Last and most important, if we do not utilize our D.M.S. with the proper set ups & controls in conjunction with manufacturer's V.M.I. as opposed to relying solely on the manufacturer to replenish our inventory, we will never achieve a broader inventory.
All we would accomplish is increased Obsolescence, more Special Orders and Emergency Purchases, lower Parts & Service Gross Profit, lower Parts "First Time Off Shelf Fill Rates" and increased Parts Acquisition & Holding Costs. The tools are right in front of us...it's time to get back to basics and use the D.M.S. as intended.
Let's increase the "muscle" of our parts inventory and get rid of the "fat" as the end results will be that we can have a leaner and meaner parts inventory that will give our dealers' the best Return On Investment and higher profits.
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...
