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...
