April 2025: Managing Dirty Cores: "The Causes & Effects"

As we enter into the Second Quarter of 2025 and keeping our focus on our overall goals this year, we want to add in one area that can and has impacted many of our basic Parts Department Duties & Responsibilities.

Our topic for this month's issue of ACG "Smart Parts" will be devoted to what I refer to as my new "Monkey on My Back" which is "Managing Dirty Cores". Managing Dirty Cores has become a big topic recently and one of my most "Frequently Asked Questions", (FAQ's) over this past year.

But before we get to our "drill down" in this issue, I want to take a look back on how we managed Dirty Cores in the past. Actually, it wasn't really too long ago when Dirty Cores were just another Duty & Responsibility or "routine" that we handled fairly easily each and every month.

Looking back, I remember that a "Dirty Core" was just a starter, alternator, transmission, maybe a steering rack or occasionally an engine. Also, the "Dirty Core Amount" was minimal where we may have paid $250.00 for a starter that had maybe a $50.00 core charge attached to the cost.

Fast forward to today, not only have "Dirty Core Amounts" sky-rocketed, the actual list of parts that have a "Dirty Core Amount" attached to the cost of the part have also expanded to more and more parts than ever before.

I also believe that these increased number of Dirty Cores and Overall Amounts can be attributed to Supply Chain Issues. If "supply in demand" goes up, then the "demand" of getting these Dirty Cores back for redistribution may be driving the price and number of Dirty Cores going up.

One of the biggest additions to the Dirty Core List is Collision Parts due to the increased awareness of the Manufacturers limiting Aftermarket Vendors from "counterfeiting" Collision Parts, which we never had back in the day.

By attaching a "Dirty Core Amount" to some of these Collision Parts, these Aftermarket Collision Parts Vendors, the Manufacturers will be able to limit access to these Collision Parts for "counterfeiting". 

On mechanical parts, these "Dirty Core Amounts" on some engines and transmissions for example have a "Dirty Core Amount" that is higher than the cost of the actual part. Some Manufacturers actually have "Dirty Core Amounts" almost double the amount, or cost of the part!

So!..."How do we "Tackle & Manage" this New "Monkey on Our Back" and just what are the "Causes & Effects" of Dirty Cores today?"

Let's Get Started!...

In my opinion, the best way to start off would be to separate the "Cause & Effect" before we get to the solutions. We will list out the "causes" first, then move on to the "effects" in each category. Then finally, we will move on to the solutions that may help us to either minimize or eliminate the effects by tackling the "root cause".

Dirty Core Cost "Causes":

Dirty Core Costs are out of our control with many Manufacturers adding in astronomical core charges that in many cases out-weigh the actual cost of the part. We have to realize that our "total" Parts Purchase Amounts from the Manufacturer will rise as well.

Another "Dirty Core" Cost Cause is Pricing Updates from the Manufacturer. For example, maybe we buy an engine for a cost of $4,000.00 with a "Dirty Core" value of $5,000.00 in a particular month and then, we bill the engine out the next month. 

The "Cause & Effect" in this case is when we bill the engine out the following month, the cost of that same engine goes down, (after the current month Manufacturer's Price Tape is updated) to cost of $3,000.00 with a "Dirty Core" value at perhaps $4,000.00, especially if this is a warranty situation.

The result is a loss of Inventory Value on both the Ledger Balance Inventory and the Controlled Inventory Balance in the DMS. It's sad, but this does happen and when it does, adjustments have to be made to both inventories to account for the asset loss and to keep reconciliation accurate.

It's amazing to me that we never see this situation go the other way when we perhaps see where the cost of that same engine actually goes up in value the next month with an even higher "Dirty Core" value. Resulting in a positive gain in the Ledger Balance Inventory and the Controlled Inventory Value in the DMS, or "Uplift".

Dirty Core Cost "Effects":

In many cases, and most recently, I had a dealer call me and wanted to know why his Parts Purchases were skyrocketing over the past few months. When I looked at their Parts Purchases in detail, they spent more money on "Clean Core Charges" than they actually spent the cost of these parts purchased.

Some Manufacturers are dealing with more powertrain issues than usual, thus the increased "Clean Core Charges" are added. This is where the "chain of events" gets started, which is on the initial purchase of parts that carry a "Clean Core Charge" of any amount.

Dirty Core Cost "Solutions":

Accounting is where we have to control these amounts from "cradle to grave" when we have the "Clean Core Amounts" eventually becoming a "Dirty Core Amount". We need to have better Asset Management and separate "Dirty Core Amounts" on Page 1 of the Financial Page.

Setting up a "Dirty Core Inventory" separately by adding in an Inventory "Sub-Account" is crucial. By simply adding in a 242C Account, (GM), or 14000C Account for Ford for example will help to keep this Core Inventory separate and easier to track and reconcile.

Another unique idea that I heard from one of my dealers on Warranty Claims that include a Dirty Core Charge, they bill the Dirty Core Amount to the Warranty Schedule, or Account 263C for GM dealers. This will relieve the Ledger Balance and Controlled Balance Inventory and move that amount to the Warranty Schedule pending credit.

Purchases on the P & A Summary can then be broken down on the actual totals purchased for regular parts, (242 GM, 14000 Ford) as a credit to the Parts Ledger Balance on Page 1. Then, the total amount of "Clean Core Purchases" can be entered in as a credit to the "Clean Core Inventory", (242C GM, 14000C Ford) separately.

When the "Dirty Core" is sent back to the Manufacturer, the credit on these Dirty Core Returns can be relieved from the Page 1, Ledger Balance Inventory on the Core Inventory Account. Variances can then be managed easier for Core Credits Outstanding due to Warranty Cores, Work-In-Process, or other Dirty Cores waiting to be return from Counter Purchases for example.

Once these "Dirty Cores" are sent back to the manufacturer, relieving the "Dirty Cores" properly on the DMS is also crucial for proper Accounting and Reconciliation. Simply sending the "Dirty Cores" back and not making the DMS Adjustments will send the Controlled Inventory Balance up.

As each "Dirty Core" is taken off a Repair Order for example, adds that dirty core value to the DMS Inventory. If not properly relieved, this "Dirty Core" Inventory on the DMS will just keep climbing and not be an accurate account of what may be stated on the DMS Parts Monthly Reports.

Another area that we now need to focus on more than ever is the dealers' "Clean Core Amounts" still in the Parts Inventory. Many, but not all Dealer Management Systems, (DMS) can provide this on-going amount each month on their Parts Monthly Summary Report and reported for Parts Reconciliation.

If the DMS does not provide this report as a "canned report", Parts Managers can create a "specific report" on the DMS on those parts on hand that carry a "Clean Core Amount". This will give the dealer a clear amount of how much their Parts Inventory Asset is tied up in parts that carry a "New Core Value".

This is especially important on those parts that carry a "New Core Value" and have not sold in over 12 months, (Over 15 Month, GM) become much more of an issue in the dealers' "Frozen Assets" and need to be dealt with.

The end result is that "New Core Amounts" that the dealer has already paid for is simply tied up in added Parts Purchase Amounts over and above the actual part itself. When shopping out obsolescence, these parts that carry a "New Core Amount" should be the top priority, especially if the dealer has a Collision Center and/or is heavy into wholesale.

Dirty Core Collision Parts "Causes":

If the dealer is heavy into Wholesale, and/or has a Collision Center or both, there are even more causes that "Dirty Cores" can represent. Briefly mentioned above with the effects of "New Core Amounts" that can impact Parts Obsolescence, the causes can go much further.

Dirty Core Returns are not only important for the Parts Department to manage on Service Repair Parts, but Collision Parts also must be managed even further. The timeliness of the return of these cores is critical. Especially when we are dealing with high Collision Center "Cycle Times" already, whether from our own Collision Center or Wholesale customers, time is our worst enemy.

Dirty Core Collision Parts "Effects":

Even though Wholesale Customers are billed a Core Charge once they are invoiced, the actual "handling" of "Dirty Core Amounts" can multiply and hinder timely "Dirty Core Returns" to the Manufacturer and harder to reconcile the Core Inventory on the Ledger Balance.

If we have our own Collision Center, these "Dirty Core Amounts" can multiply as well, thus tying up the dealers' asset and "cash", because that's what "Dirty Core Amounts" represent in the first place, much like Parts Obsolescence as a whole.

The "timeliness" of the Collision Center "Cycle Times" can affect the overall returns and credits of Collision Parts that carry a "Dirty Core Amount". If the Collision Center "Cycle Times" are over a couple weeks, it will have a "trickle down" effect on credits and overall, Ledger Balance Amounts.

Dirty Core Collision Parts "Solutions":

On top of working on the Collision Center "Cycle Times", the Dirty Core Return Process on these Collision Parts that carry a core value with perhaps have a dedicated parts employee that works directly with the Collision Center once repairs are authorized and completed.

On the Wholesale side of these Collision Parts that carry a "Dirty Core Value", credits to these Wholesale Customers on core returns should go hand in hand on with how well and how timely they pay their bills to the dealer. 

If these Wholesale Customers are frequently in the Over 30, Over 60 and Over 90 Day category on paying, then credits should, in my opinion fall into that same category. After all, they really aren't "good customers" if they don't pay in a timely manner.

This may sound a little harsh, but in my opinion, core credits to Wholesale Customers shouldn't indicate a timeliness of payments for parts purchases. If monthly payment is timely, then we should treat their core credits accordingly.

Industry Guidelines Dirty Core "Causes":

Some of the "Dirty Core Effects" actually impact a lot of Industry Guidelines that we monitor each month and year on Parts Key Performance Indicators, (KPI's). Areas such as Parts Gross Profit %, First Time Fill Rates, and Gross & True Turns and Work-In-Process and Obsolescence Amounts just to name a few.

Being that "Dirty Core Amounts" are usually billed at cost, we can see already if we bill out a part on a Counter Ticket, the Overall Gross Profit Percentage is immediately impacted. The "trickle down" effect continues with Parts Gross & True Turn and the Overall First Time Fill Rates at cost.

Industry Guidelines Dirty Core "Effects":

I believe that the fact that "Dirty Cores" are billed at cost will not only decrease Parts Gross Percentage on Counter Tickets, but they will also add cost to the Work-In-Process Parts Amounts, Increased Inventory Turns that are not true, both on the Gross Turns and True Turns.

Fill Rate Effects are also impacted by this added "Dirty Core Amount", over and above the cost of the actual parts billed. Lastly, these "Dirty Core Amounts" can impact Obsolescence Amounts if they move into that category.

Industry Guidelines Dirty Core "Solutions":

In my opinion, the solutions in these "Dirty Core Amounts" in this section on the Industry Guidelines is a combination of all the above and the "timeliness" of how we can cycle them through in 30-45 days. I realize not all can be cycled through in that time span for various reasons mentioned, but we can minimize the overall "Cause & Effect" on this new era of "Managing Dirty Cores"

f 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...

 

March 2025: First Quarter Parts Goals for 2025: "Have We Met the Challenge?"

As we approach the end of the First Quarter of 2025, we have to look back to January when we first set our goals with our "Top 5 Parts Focus Points" and where they have led us to this point. We laid out the plan in January, then started to break it all down in February starting with Parts Obsolescence Prevention.

The remaining list of our "Top 5 Parts Focus Points" in the First Quarter of 2025 include Parts Monthly Reconciliation, Perpetual Inventories, Pricing Strategies & lastly, our Overall Parts "Mindset". Our last four will be our "focal point" of this month's issue of ACG "Smart Parts" as we close in on finishing the First Quarter of 2025.

It may seem like we spent a lot of time by devoting our whole February Issue on Parts Obsolescence Prevention, only to turn right around in March with the other four, but there are many reasons for that decision.

Let's start by looking back to our January Issue and list out all of our "Top 5 Parts Focus Points" for the First Quarter of 2025 in their proper order. 

• Parts Obsolescence Prevention
• Parts Monthly Reconciliation
• Parts Perpetual Inventory Process
• Parts Pricing Strategies
• Parts Overall "Mindset"

Even though they have already been mentioned, I want everyone to look at the order of the five and imagine for a moment how Parts Obsolescence Prevention may actually impact the bottom four. If you think that they are not related in any way, you may just be missing something that we will soon find out in this issue.

Actually, and in my opinion, you cannot be successful in Parts Obsolescence Prevention Plan unless you actually include the other four key elements in our "Top 5 Parts Focus Points" in the First Quarter of 2025.

After all, the most important part of having a Parts Obsolescence Prevention Plan, is to have the intention of keeping it under control in the future. Thus, the use of the word "prevention" and not just getting it get out of hand, or until it becomes a major priority.

Now! Let's See How All the Rest of Our "Top 5 Parts Focus Points" for the First Quarter of 2025 Actually Play into the Whole Mix!

If you haven't figured it out by now that our "Top 5 Parts Focus Points" for the First Quarter of 2025 heavily revolves around Parts Obsolescence Prevention. The real question is just how it does and why it plays such a big role.

In this issue of ACG "Smart Parts", we will lay out how we can actually control, reduce and prevent future Parts Obsolescence by utilizing our other four Parts Focus Points to achieve our First Quarter Goals. More importantly, how we can put Parts Obsolescence in its place and under control for good.

After we have done that, we can move on to other Parts Goals for this year and beyond. If you could imagine for a moment what our world would be like if we had an "on-going" Parts Obsolescence Prevention Plan where we didn't have to carry that "Monkey on Our Back" all the time.

So, let's get the ball rolling and bring in our other four Parts Focus Point for the First Quarter of 2025 that will help us put this Parts Obsolescence Monster in its proper place. I believe you will find in the end that these other four to be the keys to success in actually achieving our Parts Goals in many other areas.

Here We Go!

Parts Monthly Reconciliation:

Performing a Parts Monthly Reconciliation each month, believe it or not can help us control and prevent Parts Obsolescence by keeping track of the Parts Ledger Balance Inventory Amount versus the Parts Controlled Inventory Amount in the DMS. 

If we reduce and prevent Parts Obsolescence, we would be left with those parts that are actively moving between 0 - 12 months constantly. If we have a significant amount of Parts Obsolescence that we are constantly dealing with, it makes it that much harder to determine our variance amount between the Parts Ledger Inventory Amounts versus the Parts Inventory Controlled Amounts in the DMS.

For example, if we had an overall Parts Inventory Amount of $400,000.00, of which $100,000.00, (25%) is considered to be obsolete and sitting there, it could actually "mask" variances on a month-to-month basis or especially at the end of the year.

Case in point, if the Parts Inventory Amount between the Parts Ledger Balance Inventory and the Parts Controlled Inventory Amount in the DMS was off by $25,000.00 in a given month or year, it would represent a 6.25% variance in the total Parts Inventory including Parts Obsolescence.

If we didn't have that $100,000.00 in Parts Obsolescence, that percentage would jump to 8.33% in the variance between the Parts Ledger Balance Inventory versus the Controlled Parts Inventory Balance in the DMS, which would be much more noticeable.

Having an excessive amount of Parts Inventory over the Industry Guideline of 45 Days, includes Parts Obsolescence, and Parts "Overstock" Amounts which makes it more likely that these variances will be evident.

It all comes down to "checks & balances" at the end of the year and no matter what the Overall Inventory Amount is, the Parts Inventory has to be reconciled each year. Doing this practice on a monthly basis just makes it so much easier to prevent those end of year surprises. 

It's also much easier to discover inventory variances on a monthly basis where we can look back over the last 30 days, versus waiting until the end of the year. Tracing down these parts variances is much easier looking back over 30 days as opposed to trying to find them over the course of the year after the Annual Physical Inventory is performed.

Parts Perpetual Inventories:

Performing Parts Perpetual Inventories is often confused with performing Parts On-Going "Bin Checks". First of all, performing Parts Perpetual Inventories mean that the whole Parts Inventory is counted each and every month.

In other words, if we have 100 total bins, we will have to physically count at least 3 - 4 bins per day. By the end of the month, all bins would be counted, and we would have a "Before Inventory" count and an "After Inventory" count. This process is repeated each month with final monthly counts submitted into the Accounting Office.

Performing and correcting inventory amounts by random "Bin Counts" or "Bin Checks" is just that. Although it does help to get a sample of incorrect counts and perhaps a variance percentage, but it does not hold water from an Asset Accounting Standpoint at the end of the year.

The reason that Perpetual Inventories plays a huge part in Parts Obsolescence Prevention standpoint is quite simple. If we are carrying an excessive amount of Parts Obsolescence, it simply means that we have that many more parts to count each month if we are doing Perpetual Inventories.

A successful Parts Perpetual Inventory Process can only be achieved by having Parts Obsolescence in check to Industry Guidelines with all bins counted each month. Having a Perpetual Inventory Process has been proven to result in the lowest Inventory Variances between the Parts Ledger Balance Inventory versus the Parts Controlled Inventory Balance.

Lastly, I would only recommend implementing a Parts Perpetual Inventory Process only after a Parts Physical Inventory has been completed. Starting this process with a "verified" Parts Inventory Count is the only way to insure this "constant" process will be accurate going forward.

Parts Pricing Strategies:

In my opinion, having the right Parts Pricing Strategies is the Number One Parts Focus Point in Controlling & Preventing Parts Obsolescence. Unfortunately, many dealers don't include their Parts Obsolescence when creating their Parts Pricing Strategies, or "Policies".

Parts Pricing Strategies usually include a Parts Matrix and perhaps a "Weighted Parts Averaging" Pricing Strategy for Competitive Parts to achieve a desired overall Retained Parts Gross Profit Percentage at or above Industry Guidelines on Customer Pay Repair Orders and Over Counter Retail.

This is all well and good, but have we ever thought that we should include a "Parts Scrapping" Account when developing our Parts Pricing Strategies, or "Policies" in the first place? What if we added a couple percentage points to our overall Customer Pay Parts Retained Gross Percentage Goal to set some aside for Parts Obsolescence?

Many dealers actually use this Pricing Strategy for their Used Vehicle Inventories, often referred to as a Used Vehicle "Bruise Account" to offset gross losses on those vehicles. It works the same way for the Parts Inventory if we would just set aside monies devoted to Parts Inventory Protection on Obsolescence.

Many dealers do have some monies that they set aside for Parts Scrapping, which is a good thing. But if we would include this account in our Pricing Strategies to begin with when we develop our Parts Matrix and Weighted Average Competitive Price Parts, it becomes much easier to maintain overall gross retention amounts and maintain a healthy Parts Scrapping Account.

In other words, if I'm the dealer and my overall Parts Retained Gross Profit Percentage goal was 42% - 45% on Customer Pay Repair Orders and Counter Retail, I would just bump that goal by 2% for my Parts Scrapping Account.

I would then adjust my Customer Pay Parts Pricing Strategies up by 2% in my Parts Matrix and Weighted Average Priced Competitive Parts. At the end of the month, and if I achieve an Overall Customer Pay Gross Retention of 44%, I could then make a Journal Entry in Accounting to add that 2% to my overall Customer Pay Parts Cost of Sale. 

The Journal Entry would then lower my overall Parts Customer Pay Gross Retention down to 42%, (still at Industry Guide) and then move those monies over to my Parts Scrapping Account. Easy to manage by both the Parts Manager and the Office Manager as the Parts Manager can monitor this gross percentage daily.

In other words, if my Customer Pay Cost of Sales were $100,000.00 in a given month, my Cost of Sales would be adjusted up by 2%, ($102,000.00) this reducing the gross by 2% and the $2,000.00 would be moved over into my Parts Scrapping Account.

The reason this process is much better than just putting aside a "set amount" each month for Parts Scrapping is because the overall Customer Pay Gross Percentage set aside will always "flow with the gross" each and every month. Putting aside a "set" amount may affect the overall Customer Pay Gross each month as it will vary each month.

Setting aside a "specific" percentage of Customer Pay Gross Profit, along with utilizing all of our options is the only way to have a successful Obsolescence Prevention Program.

Utilizing our Obsolescence Vendors on a monthly basis once those obsolete parts hit that 13th month, or 16th month, (GM Dealers), while they are still fairly fresh will give us higher closing ratios on what they accept and at a higher offer price.

Parts Overall "Mindset":

Our last in our "Top 5 Parts Focus Points" for the First Quarter of 2025, is rather short and simple. In my opinion, and as "Smart Parts" Managers, we have to take ownership of our Parts Departments. 

Imagine for a moment, if we actually did own our Parts Department and now it's "Dave's Auto Parts", would we think and do things differently? We have a huge responsibility as we control this huge asset for our dealers.

Let me ask a few questions and imagine for a moment that you are the owner of your own Auto Parts Store, or perhaps you actually own your Parts Department...

• Would I want to know the amount of the parts I paid for on my Ledger Balance Inventory and if it actually matches total amount that I have on the shelf in my Parts Controlled Inventory? (Monthly Parts Reconciliation)
• Would I want to make sure that my Parts Inventory Count was accurate at all times? (Parts Perpetual Inventories)
• Do I want to keep Parts Obsolescence under control without adding more Parts Acquisition & Holding Costs while remaining profitable to Industry Guidelines? (Parts Pricing Strategies)
• Do I have what it takes to achieve my goals in every quarter of every year and achieve High Inventory Gross & True Turns, High Returns On Investment & Profits while Protecting My investment? (Parts Overall "Mindset")

I think now that we all know that our "Top 5 Parts Focus Points" for the First Quarter of 2025 are worthy, essential and play a huge role in achieving our Overall Goals throughout the year. Perhaps the most important question now in all this is...

"Are YOU Going to Meet This Challenge by the End of the First Quarter of 2025?"

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...

 

February 2025: Parts Obsolescence Prevention: "What Are Our Best Options?"

As we continue forward into 2025, and to follow up on our "Top 5 Parts Focus Points" in the First Quarter of this New Year, we will expand on those "Top 5 Parts Focus Points" by breaking things down even further.

As a reminder, let's look back to our January issue when we revealed our initial "Top 5 Parts Focus Points for 2025" listed as follows...

• Reducing, Controlling & Eliminating Parts Obsolescence
• Parts Monthly Reconciliation
• On-Going Parts Perpetual Physical Inventories
• Parts Pricing Strategies & Policies
• Parts Mindset for 2025

The first listed "bullet point" above is what we will breakdown in this month's issue of ACG "Smart Parts", followed by our March issue which will focus on the rest of our "Top 5 Parts Focus Points" in the First Quarter of 2025.

The reason for this issue being totally devoted to Parts Obsolescence is quite simple. The Parts Inventory is the second highest Dealer Asset and Parts Obsolescence highly impacts the other "Top 5 Parts Focus Points" in the First Quarter of 2025.

If you could just imagine for a moment if we didn't have to deal with Parts Obsolescence, how much would that impact our other "Top 5 Parts Focus Points?" Parts Monthly Reconciliation would be much more accurate, our Pricing Strategies would be more focused with lower Acquisition & Holding Costs and Pricing Strategies would be more aggressive. 

The result of all the above would definitely impact our overall "Parts Mindset" for the New Year ahead. Who would have thought that Parts Obsolescence would impact so many other areas? But if you think about it, and as many Parts Managers believe, Parts Obsolescence highly impacts our overall Parts "Mind Set".

All the above being said, we definitely have to put Parts Obsolescence to the forefront and format a game plan in place to reduce, prevent and eliminate Parts Obsolescence. 

Pretend for a moment if a Parts Manager didn't have to be concerned with Parts Obsolescence, just how would it change the overall "Parts Mindset" on all these "Top 5 Parts Focus Points" for the First Quarter of 2025, or any other time for that matter?

Now that we have an idea of where we are going in our February issue of ACG "Smart Parts", let's start out by getting this "Monkey Off Our Back" early on in 2025. More importantly, let's put a plan together that will keep that "Monkey Off Our Back".

Here's The Plan!

When tackling Parts Obsolescence and before we start out on our Parts Obsolescence Reduction Plan, we have to consider a few important facts about Parts Obsolescence in general...

• Parts will go obsolete at a rate of at least 3% - 5% every year.
• Parts Inventory Acquisition & Holding Costs are currently at a rate of 25% - 30% of our Total Inventory Value each year.
• The IRS Standard Accounting Method indicates that any inventory or commodity that has not sold in 12 months or more is only actually worth half of its purchase value, (50%).
• Reinvested Obsolescence Revenue "Return Cash" can result in an overall Return On Investment, (ROI) of 300% or more on parts that turn 30+ times a year.
• Parts "Pre-Purchased Obsolescence" Rates are exceeding 25% or more each year meaning many parts are purchased that do not meet minimum Stocking Requirements, thus being obsolete when we first purchase them.

Now that we have a sense of why Parts Obsolescence can impact our Parts Gross & True Turn Capabilities, Overall Parts Profitability, First Time Fill Rates and Service Productivity, let's focus on our "5 Step Breakdown" on how we can use all of our tools in our toolbox to Control and eventually Eliminate Parts Obsolescence.

Number One: Utilizing Manufacturer Return Reserves

Our first option on controlling Parts Obsolescence is a "no brainer" as all Parts Managers know that when we accrue Manufacturer Return Reserves, we are going to use those funds to the utmost on parts returns eligibility at 100% on the dollar.

The problem is for most Parts Managers is that we can never "accrue" enough Return Reserve to offset the rate these parts going obsolete each year. Unfortunately, even though these Return Reserve Accruals never seem to be enough, many Parts Managers still fail to use all these reserves each year.

In addition, and for most dealers, these Return Reserves are often used for other returns such as Special Orders and Parts that were ordered incorrectly. Unfortunately, this was never the intent for Parts Return Reserves as they were initially intended for Obsolescence Protection.

On the other hand, there are a small percentage of dealers out there that are very big into wholesale and actually do have an abundant amount of Return Reserve.

 This gives these dealers a huge advantage with higher Return Reserves that can protect them from obsolescence and actually be in a position of buying obsolescence from other dealers.

Number Two: Utilizing Parts Obsolescence Vendors

Our Number Two is actually the most popular option in getting rid of Parts Obsolescence and in my opinion, is not used enough. It seems that many dealers still cannot fathom selling off their obsolescence for $.50 cents on the dollar or even much less.

When we look at the above "bullet point" on what these parts are "really worth" after they hit that 12 Month - No Sales Category, many dealers think that these obsolete parts are still worth what they paid for them, or more. Unfortunately, and as history tells us, these parts that have not sold in the last 12 months only have a 2% chance of ever selling again, thus making them virtually worthless from an asset standpoint.

This is also evident as the IRS Standard Accounting Method stating that all goods, commodities, or inventories are only worth half their value after 12 months, no sales. This includes all retail institutions such as Walmart, Best Buy, Lowe's, etc. This is why you see many of these retail institutions selling their obsolescence at 50% off or more after the peak sales season has ended.

If we look back to our Number One for a moment on Return Reserves, this is why we need many more options on getting rid of Parts Obsolescence. This is also why our Number Two is definitely a viable option and should actually be our Number One after utilizing whatever Return Reserve we accrue.

There are many Obsolescence Vendors that we can research and take advantage of. Here is a list of just a few that we have had significant success with...

• Dealermine - www.dealermine.com
• Parts Broker Direct - www.oecconnection.com
• Parts Voice - www.partsvoice.com
• Find Rare Parts - findrareparts.com

There are others as well, but I will have to say that timing is everything. Meaning that these Obsolescence Vendors are in the World Market and partner up with companies such as Ebay and others. That being said, prices and offers for obsolete parts may vary at different times.

In other words, we could send a list of obsolete parts in November and the offer may be lower than if we send that same list in January of a New Year. This is why I recommend using several vendors at the same time. After all, one person's trash is another person's treasure, especially at different times during the year.

Number Three: In-House Scrapping Program

In my opinion, every dealer should have an "In-House Parts Scrapping Program", much like most dealers have with their Used Vehicle "Bruise Accounts", or "Push-Pull" Accounts. 

Many dealers actually do have Parts Scrapping Accounts where they set aside a particular amount each month, which is great. I actually recommend setting aside a "percentage" amount of Customer Pay Parts Gross each month, which in most part, we control via Parts Matrix and Flat Pricing.

Setting aside an actual percentage of Customer Parts Gross gives us a few extra advantages. First, setting aside a percentage will flow with CP Parts Gross each month, whether up or down. It's also much easier to control the CP Parts Gross with Parts Pricing Strategies such as the Parts Matrix and Flat Pricing as mentioned.

From an Accounting standpoint, the Monthly Journal Entries are easily managed as this percentage can be charged back to the Customer Pay Retail RO Cost of Sales. Then, this "charge back" to CPRO Gross can be applied to a separate "Parts Inventory Adjustment" Account for "banking" our Parts Scrapping Account.

This Accounting Practice is also used quite often for Advertising "Charge Backs" to various other Sale Accounts such as Service Coupons and Sales Promotions. This makes it much easier for the Accounting Department as well as Department Managers to monitor gross percentages during the month.

If we do the math, and if we use a "Cost Plus" Parts Matrix, by increasing our "Parts Plus" Matrix by just 10%, it will result in a 2% increase in Parts Retained Gross. 

So, if our Parts Customer Pay Parts Gross Percentage target is 42%, we could adjust our "Cost Plus" Matrix by 10% and gain a 2% additional gross, which we could "tuck aside" towards our Parts Scrapping Account and still be at Industry Guide.

Number Four: End of Year Dealer "Write Offs"

If you are a Parts Manager that is lucky enough to have your dealer afford to "write off" Parts Obsolescence, it is truly a gift. Also, we cannot expect this gift every year as these situations are far and few between. 

Also, if you are fortunate enough to realize this benefit, be assured that you need to work on not expecting this each year. Most importantly, you need to be taking this gift as a sign that an Obsolescence Prevention Program needs to be implemented, starting with our Number One.

Also, there are some legal aspects concerning Parts "Write Offs" as this tax benefit truly does not legally allow us to resell these parts. Many dealers think that they can "write off" these parts and then reprice them down to $.01 and resell them for virtually a 100% profit.

These parts need to be destroyed and trashed with no resale attempts. Many dealers today still decide otherwise by storing them in a different location and providing their list of these parts to other vendors.

Number Five: Monthly Parts Obsolescence Prevention Process

It would definitely make sense after all this discussion on Parts Obsolescence that we would implement a process that would prevent this situation from happening again. This means that we need to finish this off with a "Monthly Parts Obsolescence Prevention Process" so we don't have to deal with this on a higher scale.

Our Number Four and Number Five are the most important steps in our "5 Step Breakdowns" in keeping Parts Obsolescence from getting out of hand. Even though we can never really "prevent" obsolescence from happening, we can definitely "control" it by attacking it early on.

First and foremost, we have to put a stop on buying Parts Obsolescence right out of the gate! We have to have a Special-Order Policy in place with accountability. Only authorized personnel should be authorized to order parts in the first place.

Special Order Parts should only be authorized if there is an Open Repair Order, or by "Pre-Appointment Only". Received Special Orders over 30 Days must be returned with handling fees charged to the department authorizing and initiating the Special Order in the beginning.

We don't need to be adding to the problem of Parts Obsolescence by buying it up front. After all, they call them "Special Orders" for a reason because we don't stock these parts as they have not met Parts Phase-In Requirements.

Implementing a "Monthly Parts Obsolescence Prevention Process" simply means that we will deal with Parts Obsolescence each and every month. Each month as parts age from 12 Months - No Sales to 13 Months - No Sales, we will then market these parts to Obsolescence Vendors instead of waiting.

With the exception of Vendor Managed Inventories, (VMI) Programs from the Manufacturer that may require holding these parts for 15 months, the best time to market these parts that have not sold in my inventory is now at 13 months. The results I have experienced by doing this monthly is interesting...

• First, these parts are still "fresh" and tend to attract more Obsolescence Vendors for purchases at higher prices.
• Second, the lists are smaller and more manageable, so they tend to also have a higher closing ratio and lower freight expense, no matter who is paying the freight.
• Third, by sending these lists to all Obsolescence Vendors, it is not uncommon that a "bidding war" ensues between the Obsolescence Vendors.
• Fourth, the "Parts Scrapping Account" does not get affected as much as more of these parts are purchased, leaving a credit balance in the Parts Scrap Account at the end of the year.

Having a "Parts Obsolescence Prevention" Program just makes sense as opposed to letting it build to a point where options are much fewer with lower Return On Investment. Much like anything else we do in Parts, we have to be proactive, always looking ahead in giving our dealers their best return and now is the time...

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...

January 2025: First Quarter 2025: "Top 5 Parts Focus Point"

As we start off yet another year here at ACG "Smart Parts", and before we get into the first issue of our "Top 5 Parts Focus Points" in the First Quarter of 2025, I would like to start off with a little editorial to kick things off. Then we will dive into our first issue of 2025.

ACG "Smart Parts" has now been publishing monthly blogs and articles for nearly 15 years as we are now publishing our 178th issue in January of 2025. I've often been asked how we can keep going on focusing on Parts each and every month for almost 15 years.

After all, how much more can we write about Parts after all these years? What can be new and exciting over what we already know about Parts? What can we learn that will help us to continue on in our industry that may give us that "edge" over anyone else?

Surprisingly, writing these articles and blogs for almost 15 years goes much further than the basic questions mentioned. Even though our industry is constantly changing in many areas, it all comes down to "Coaching".

Much like in many professional sports, even though many professionals are experts in their field, we believe that everyone still needs a Coach. Someone that will keep us on our toes on the basics as well as picking out areas that need improvement or "tweaking".

It's easy to lose sight by taking our eyes off the ball with our everyday Duties & Responsibilities, we need that "coach" to put us back on track or perhaps keep us on track. This is why we move on each month, concentrating on what needs to be focused on while all the while, forging forward on to new goals and new heights.

That being said, our first issue of ACG "Smart Parts" in 2025 will be devoted to what we need to focus on entering this New Year. Even though the content may not necessarily be new, the real question is...

"Are We Ready for the New Year and What Do We Need to Focus on Right Out of the Gate?"

Here we go "Smart Parts" Readers as we venture into 2025 with our first issue!...

January 2025: 

First Quarter 2025: "Top 5 Parts Focus Points"

Moving on to a New Year has many benefits for the Parts Department as the clock has been rewound back to zero in many areas. Calculating Parts Gross & True Turn starts over, Year to Date Sales & Gross Percentages, Sales Activity rewinds and End of Year Parts Reconciliations have given us a new start.

In this issue of ACG "Smart Parts", we will key in on our "Top 5 Parts Focus Points" in the First Quarter of 2025 starting in January through March of the New Year. Getting a jump in Parts, in my opinion is most important every New Year as these first few months can highly impact the Parts Asset and Profitability for the whole year ahead.

Let's Get Started!...

Number One: Reducing and Eliminating Parts Obsolescence

Even though we wound down last year with perhaps some "parts write-offs" to close out the year, many dealers out there enter the New Year with an excessive amount of parts obsolescence. Even though they may have made adjustments at the end of the year, they still tend to carry over a good portion of their obsolescence.

We first must accept the fact that parts will go obsolete at a rate of at least 3% - 5% each year no matter what we do. So, the question really isn't if we will accrue more parts obsolescence as it is more of a question of what we will do about each month going forward.

January of each year is the best time to get a game plan of first getting rid of our obsolescence and then having a follow up plan to control it going forward. Letting it build every year without a plan will just lead to a never-ending cycle that won't go away.

With a New Year to work with, we can start our 12-month plan to get rid of it and prevent it from growing in the future. Many Obsolescence Vendors and Dealers that are interested in purchasing obsolescence are usually very hungry to buy obsolescence at the beginning of each New Year as opposed to the end of their fiscal year.

This allows dealers that have an excessive amount of obsolescence to get their best Return On Investment, (ROI) early in the New Year. Unfortunately, many dealers don't even pay attention to their parts obsolescence until the end of each New Year when they are reconciling their Parts Inventory, including "write offs". Their attention to their parts obsolescence should actually be spent in the first part of each New Year.

Number Two: Parts Monthly Reconciliation

Our Number Two follows "hand-in-hand" with our Number One focus early on in the first quarter of the New Year. What better time to set up a Monthly Parts Reconciliation Process? Why wait until right after we finished up the previous year when we had to "balance the books" and end of year Parts Physical Inventories for most dealers?

Unfortunately, and once again, the majority of dealers do not make it a practice of reconciling their Parts Inventories each and every month. Even if they would perform this "practice" each month and monitor their Parts Inventory amounts between the Ledger Balance Inventory compared to the Controlled Inventory in the DMS, it would be a plus.

Even if they just monitored the monthly variances and make one final Journal Entry at the end of the year, it would at least allow them to see if there are any major discrepancies each month. It's much easier to go back over 30 days to find errors versus trying to find these discrepancies over a whole year.

Most importantly, it's a great practice for Parts Managers to get into this practice as, in my opinion, they need to take more "ownership" in their dealers Number Two Asset as if it were their own.

Number Three: Perpetual Inventories - Daily/Monthly Bin Checks

Our Number Three can't go without mention as there are more transactions in the Parts Department in a single day than there are in the whole dealership in a month. Thousands and thousands of part numbers that are in our Parts Inventory are managed daily and cannot go without some sort of on-going accountability.

The best time to start a "Perpetual Inventory" Process is right after a Physical Inventory is performed to verify a fresh, new starting point. Although, Many Parts Managers confuse "Perpetual Inventories" with Daily, or Monthly "Bin Checks".

The difference between the two is quite simple as performing "Perpetual Inventories" means that the whole inventory is counted each month and reconciled with Accounting each month. Performing "Bin Checks" just means that we may count a certain number of bins each day or month as a sampling of the whole inventory to get an idea of what variances there may be.

The first of the year is a great time to start a process of either or both of the two to avoid any major discrepancies in the inventory counts throughout the year. The worst thing in my mind is to find out that we may have issues and too late by the end of the year.

Number Four: Parts Pricing Strategies - Menu Pricing

Last month we talked about one of our "End of Year" duties should be to review our Pricing Strategies, Service Menu Pricing and our Overall Parts Gross Percentages. In the first quarter of 2025, we need to act and implement these Pricing Strategies based on the results, in this case, in 2024.

Retail customers tend to adapt to price adjustments at the beginning of a New Year versus during the current year. Keep in mind, I'm not implying that just because we are entering into a New Year that we should increase our prices just because it's a New Year.

It's just a "better" time to make adjustments based on previous years' results. Managing our Parts Gross Profit, other than perhaps Warranty Parts Pricing and Collision Parts Pricing is our responsibility and for the most part, we control it.

Our Industry Guidelines are specific, and, in my opinion, we deserve to achieve the Industry Guidelines for our dealers. What better time than the first of the year to set these new goals and holding ourselves accountable to them in the New Year?

Our Menu Pricing should also be updated at the beginning of the New Year as we have to balance these prices to Industry Guidelines and our cost while remaining competitive in the Marketplace. 

Lastly, we need to review our Parts Matrices to balance Captive Parts versus Competitive Parts. A successful matrix is one that works in achieving our overall Parts Gross Goals while remaining competitive. Even though the same matrix can bring different results between dealers, it's all about developing that balance on parts that we can matrix versus those parts that we cannot apply a matrix.

Number Five: A New Mindset for 2025

Perhaps one of the most important in our First Quarter Focus in 2025 is our overall "Parts Mindset". Even though it is our Number Five, if we don't have the right mindset in today's world, we may just be missing the boat in the overall scheme of things.

We all know that backorders, supply chain issues and overall parts availability is a way of life as it rains everywhere, and we all have to deal with it. The difference, in my opinion, between those who succeed and those that don't is the way we approach each day.

Even if we have the best DMS Set Ups & Controls, parts availability is what it comes down to. Our DMS, (if set up properly) is only providing information and the DMS does not know if parts are on backorder, or unavailable, it simply saying that we need these parts based on the proper math.

It all comes down to the Parts Manager making the proper decisions and to have the determination to do whatever it takes to get these parts and get these vehicles off the lift and on the road.

We have to have the "mindset" in my opinion to believe that someone out there has to have these parts that we need. Even though that may still not produce these "harder to get parts", we cannot sit back and wait until they may become available down the road.

We also need to include our Service Managers in our "Stock Order Meetings" to help us make those critical decisions on what parts we need to stock. Parts Managers look at a Stock Order much differently than a Service Manger does.

We, as Parts Managers tend to make Stock Order decisions based on the price of the part, Model Usage, History, Overall Amount of the Stock Order and Low & High Model Year Usage. After all, what if these parts we buy end up obsolete? The fear of buying parts that may not sell weighs heavily on the Parts Manager's mind.

The Service Manager on the other hand is looking at the part itself and what parts are tying up vehicles in the shop along with relative parts to complete the overall repair. In other words, what good would it do to stock the turbo without the associated bolts, gaskets and hoses?

We have to go above and beyond to do our jobs, much more than ever before, but if that's what it takes, then that's what we have to do. We can't let our guard down and just wait for things to happen instead of making things happen in 2025 and beyond.

Lastly, in my opinion, we have three basic responsibilities in our role as Parts Manager...

• Achieve and Maintain "First Time Off Shelf Fill Rates" of 75% - 85%
• Achieve and Maintain Parts Profitability to Industry & Dealer Guidelines
• Protect the Dealers Investment in Gross & True Turns as well as Controlling Parts Obsolescence to Industry Guidelines of 0% - 5%

Happy New Year "Smart Parts" Readers!

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...