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...
