Over the next few months, ACG "Smart Parts" will be going "back to basics" as we review some topics that we may have taken for granted. After all, there's nothing new here when we drill down this month's topic of the simple procedure of ordering, receiving and posting parts into inventory.
The topic may not be new, but why then are there so many dealerships out there with Parts Accounting Issues such as high variances between the Parts Ledger Balance Inventory and the Controlled Balance Parts Inventory on the Dealer Management System, (D.M.S.)?
Why are there so many dealerships out there with inaccurate numbers on their D.M.S. Parts Monthly Management Reports?...and why are there still many Parts Department's out there with substandard numbers on their Industry Composites on Parts Inventory Management?
You would think that this basic function of ordering, receiving and posting parts into inventory would be a pretty simple process that we all know and perform pretty much every day. Why should it even be a topic of discussion in the first place?
One of the main reasons and the answer to all the above questions is a lack of knowledge, training and understanding of Accounting and Managing Parts. The unique relationship, or partnership between the Parts Manager and Office Manager/Comptroller has to be one of total understanding on how this process works on both ends.
Let's start with the relationship, or partnership between the Parts Manager and the Office Manager/Comptroller...
The Parts Manager has to have Basic Accounting Training and Experience on Managing Asset Accounts, Expense Accounts, Payables & Receivables, Sales & Cost of Sales, etc. and convert that language over to Parts Sourcing, Ordering, Receiving & Pricing, as well as both Sales and Cost of Sales.
The Office Manager/Comptroller has to have Basic Parts Manager Skills & Abilities in the areas of matching Sales & Cost of Sales to Parts Sources, or Stocking Groups. The Office Manager/Comptroller also has to be able to identify credits and debits to the proper Ledger Inventory Accounts that match the Parts Inventory Controlled Inventory Sources.
All these have to be set up properly to begin with even before we order our first part number as all these so called "lines of communication" have to be connected accurately and understood by both the Parts Manager and the Office Manager/Comptroller.
Now that we have our basic partnership, or relationship established, we now have to get all the ingredients together and get them in the right order even before we start ordering, receiving and posting parts. Who would ever have thought that there would be so much going into this process before we even ordered our first part?
Here are the ingredients that we will need to start our "Proper Ordering & Receiving" Process...
Parts Sources/Stocking Groups:
All Parts have to be in their proper Parts Source, or Stocking Group separated and "connected" to the proper Inventory Ledger Balance Inventory Account. The Main Parts Inventory, Tire Inventory, Gas, Oil & Grease Inventory and perhaps Accessories need to be separated by Source, or Stocking Group in order to be accounted for properly on the Accounting Ledger and Financial Statements.
This is where things can go haywire right off the bat as parts may be ordered from one Source and receipted into a different Source. This may result in a receipt into one inventory account but then sold out of another inventory account. Most Dealer Management Systems are set up to "default" to one overall Main Source, or Stocking Group.
This "Default Source" is usually where all the problems begin because if we don't receipt the part into its proper source, it will automatically be receipted into this "Default Source". This Source is where all parts initially come into the D.M.S. until manually moved to a different, desired Source. This "Default Source" is also the Source that the Manufacturer recognizes in system integration.
Parts could be ordered and receipted in the wrong Source, or Stocking Group, causing the Sale & Cost of Sale going to the wrong inventory account in Accounting leading to inventory variances as well. An example would be a quart of oil that was ordered perhaps out of the Gas Oil & Grease Source, or Stocking Group, but then got receipted to the Parts Main Inventory Source, or Stocking Group.
The results of ordering and receipting in two different Sources means the receipt on the oil "added" to the dollar value to the Gas, Oil & Grease Inventory, but the sale "debited" the Parts Main Inventory. This leads to the variances in the Accounting Ledger Balance in the Sales & Cost of Sales Accounts.
If the person ordering and receipting the parts does not catch the proper Sourcing right up front, the snowball begins to roll and get bigger. The Parts Source, or Stocking Group and Ledger Balance are not the only problem as price can also be affected as Sales & Cost of Sales will hit wrong accounts.
Parts Order Types:
Depending on the D.M.S. brand, there can be several "Order Types" which determines our Overall Fill Rates, First Time Fill Rates, Gross & True Turns, Stock Order Performance, Emergency Purchase Amounts, Sales from Stock versus Non-Stock and Inventory Investment of Stock and Non-Stock Parts.
Some of the most common Order Types are...
- Stock Order
- Supplemental Stock Order, (Forced Order - Dealertrack Dealers)
- Customer Order
- In & Out Purchases, (NG - Dealertrack Dealers)
- Other Orders
- Emergency Purchases
We only order parts for two reasons, which is either for stock or a customer. That being said, no matter what source or vendor we order the parts from, if it's for the shelf, it should be either a System Generated Stock Order, or Supplemental/Forced Order from other Stocking Vendors.
Customer Order:
Even though this one is pretty obvious, as to when we should use it, it still gets confused with Emergency Purchases at times. All Customer Orders should be separated from Stock Orders even though some Customer Orders may be added to the Stock Order when transmitting the order. Adding Customer Orders to the Stock Order also results in false Stock Order Performance Percentages.
In & Out/NG Orders/Other Orders:
In & Out, Other Orders, or NG Orders, (terminology pending which D.M.S.) should only be used on Aftermarket, or Other Makes Parts Purchases that we do not intend to stock.
This Order Type will record the sale and show up in Sales History, but they will not track these sales demands for potential future Phase-In. This Order Type is basically an "in & out" function that will record the Sale & Cost of Sale for Accounting Purposes.
Emergency Purchases:
Emergency Purchases should only be used for tracking "Stock Out" situations, meaning that we normally stock the part, but ran out and had to chase for a customer. This information is vital to managing, and /or modifying Stocking Levels. It does not mean that we use it for buying "Emergency Stock" due to Supply Chain Issues as those purchases should be Supplemental Stock Orders.
Receipts:
As we receipt these above Order Types, it's just as important to receipt them as ordered and not manually. Back Orders, Cross Ship Orders and Cancelled Orders should also be updated during this receipting process in order to maintain the proper "linking" of these orders by Order Type and Order Number, or Control Number.
All Stock Order Receipts need to be matched up to the Proper Source, or Stocking Group to ensure proper billing for Sales & Cost of Sales as well as relieving the Proper Parts Inventory on the Ledger Balance Inventory in Accounting and the Controlled Balance Inventory in the D.M.S.
As you can see, there is a lot more to the "Proper Ordering & Receipting" Process than perhaps meets the eye. In my opinion, this detailed breakdown is necessary for accurate reporting on Parts Monthly Management Reports, 20 Group Composites and most importantly, our Parts Inventories "Checks & Balances" on the books and in the D.M.S.
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...
