One of the most talked about Parts Department topic for Dealers for many years is Parts Obsolescence. Most dealers, in my opinion, don't really know much about their Parts Department's, but what they do know is Parts Sales, Gross & Net Profits and Obsolescence.
The brutal fact is that Parts Obsolescence will always be there at a rate of 5% - 10% each year. That being said, it's more of a question of what we are doing about it and what processes do we have in place to deal with each and every month.
The problem is that in many dealerships today, Parts Obsolescence just keeps accruing and it doesn't become an issue until it has grown to tremendous amounts. In addition, many dealers don't even realize what it is really costing them to hold the additional parts that have gone obsolete.
The real issue though in my opinion is that dealers don't really have to accept these above facts mentioned. Parts Obsolescence actually can be controlled and eliminated with the right plan that will address this issue on a monthly basis.
I do believe though that more and more dealers today are putting Parts Obsolescence to the forefront compared to years ago. In today's "Parts World", it seems that more dealers are realizing their true costs of holding these additional parts. These "frozen assets" are just tying up cash and just adding more acquisition & holding costs.
The good news is that there is a way to control and eliminate Parts Obsolescence that can be managed by the Parts Manager each month. We don't have to accept these out-of-control amounts of Parts Obsolescence anymore.
In this issue of ACG "Smart Parts", we will reveal our "Five Step Plan" on Controlling & Eliminating Parts Obsolescence once and for all. I will add though that the most important part in all this is that we have to "believe" it can be done.
We also have to know that Parts Obsolescence will never go away as all parts will eventually go obsolete. We just have to accept it and deal with it with a monthly plan that keep us "clean" of those parts with no sales over 12 months, or over 16 months on the Manufacturers Vendor Managed Inventory, (VMI) Program Parts.
Here We Go!...Smart Parts Managers are Just "Five Steps" Away from Being Obsolescence Free Forever!
Let's Get Started!
As mentioned earlier and before we take our first step on getting rid of Parts Obsolescence, we have to have the right "mindset" and to think through this process logically.
If you follow our "Five Step Plan", you will see that it all makes sense and can be done. Each step will also be listed in their proper order making it a true plan to success if taken seriously and seeing it all the way through.
Step One: Factory Return Reserve
Our first step we all pretty much know about as the parts we purchase from the Manufacturer do accrue revenue for returning qualified parts. This is obviously our first step as we should always use the monies accrued to receive 100% of the cost of these parts that are qualified for return.
The problem is that we never really accrue enough Parts Return Reserve to meet the rate of these parts that go obsolete each month and year. The only exception would be high-volume dealers that accrue much more return reserve that keeps their inventories pretty clean.
The other problem with these monies accrued from Parts Return Reserves is that many Parts Managers use these funds for returning Special Order Parts. These parts were either ordered by mistake or never got installed on customers vehicles and not used for returning Parts Obsolescence.
Step Two: Outside Obsolescence Vendors
Our next two steps are extremely important as these steps need to happen right at month 13, or month 16. Depending on the Manufacturers' Vendor Managed Inventory, (VMI) return guidelines on when they are qualified for return
Outside Vendors such as Dealermine, Parts Broker Direct and Find Rare Parts are just a few vendors that we should take advantage of. As soon as these parts hit that 13 or 16 month no sales threshold, we should be sending these parts lists out to these vendors for bids.
Even though the offers may be below actual cost, history tells us that these parts have a 98% chance of never selling again. That being said, the Return On Investment, (ROI) on selling these obsolete parts for parts that cycle through at higher rates is over 300% or higher.
Also, at month 13 or month 16, these parts are much more desirable for purchase from these vendors as they are just now dropping into the obsolescence category. These parts may still be active in other dealers' parts inventories.
This is where it may seem tough for many Parts Managers to let go, we have to stick to the plan because they are not moving in our parts inventory. As mentioned, these parts have a 98% chance of never selling again in our own parts inventory.
It's time to let them go when we have the best chance on getting the most cash for these obsolete parts. It's the best time to take the money and run by investing this cash into those parts that are moving at a much higher rate as well as new parts that may Phase-In.
Step Three: In-House Parts Scrapping Program
Here's the "Missing Link" that we have all needed to become free of Parts Obsolescence Forever. After we have utilized all of our Return Reserve and sent our list of obsolete parts to these vendors mentioned, whatever we have left we will tackle with our In-House Scrapping Program.
Once again, and as mentioned earlier, we have to stick to the plan as far as these parts that have hit that 13th or 16th month with no sales. We can't "overthink" what may or may not sell in the future and just know the facts and what history tells us.
Here's how we build our In-House Parts Scrapping Program...
Much like "back in the day", Used Car Departments may have set up what is called a Used Car "Bruise Account". Each Used Vehicle that was sold had an added amount tacked on to their actual cost of that unit.
For example, if we were selling a Used Vehicle that had a cost of $15,000.00 and perhaps was being sold for $20,000.00. Then, let's say $400.00 was added to the cost of sales of that unit and set aside for the Used Vehicle "Bruise Account".
This additional $400.00 was "banked" into a fund that would offset those Used Vehicle Sales that were sold at cost or below cost. This fund would help the dealer in moving some of those older, aged units from their Used Vehicle Inventory, or "Obsolescence".
Instead of reporting a loss of that unit, they could pull out funds from the "Bruise Account" to lower the cost and actually show a profit on that sale. This would allow the average gross profit of Used Vehicles to remain at expected levels.
The same holds true for parts by setting up a Parts Scrapping Account for Obsolete Parts. This Parts Scrapping Account can be created the same way by pulling out 2% of the Parts Gross Profit on Customer Pay Parts RO Sales where most dealers have a "Parts Matrix" on Repair Parts Sales.
At the end of each month, a journal entry can be made by taking 2% of the Parts CPRO Gross and adding it to the cost of sales. Then, we could take that difference as a debit to CPRO Gross and credited to an Inventory Adjustment Account, thus creating a Parts Scrapping Account Bank.
This reduction in Parts CPRO Gross Profit each month can be replenished by adjusting the Parts "Cost Plus" Matrix. If we are utilizing a "Cost Plus" Matrix on Repair Parts, we can simply increase this matrix by 10% above cost.
This will result in an additional 2% Retained Gross Profit to support the Parts Scrapping Account. This additional gross amount can also be easily managed by the Parts Manager throughout the month by watching these CPRO Parts Grosses each day.
The overall "net result" will be a wash as this 2% gain on CPRO Retained Parts Gross by increasing the "Cost Plus" Matrix by 10% will fund the In-House Parts Scrapping Account. It will also keep CPRO Parts Gross Percentages at current or expected levels.
For example, if the dealer was running at a consistent CPRO Gross Profit Percentage of 42%, the Accounting Department will take 2% of that gross. This will drop the gross down to 40% from the average of 42%. The modifications to the Parts Matrix will then bring it back up to 42%.
Step Four: Obsolescence Prevention
Our Fourth Step isn't one that is often thought of by most Parts Managers, although some Parts Managers try to prevent obsolescence the wrong way. Preventing obsolescence is not just simply buying fast moving parts and ordering everything else as needed.
Many Parts Managers do have a pretty clean slate as far as obsolescence goes, but their First Time Fill Rates are usually very low. The result is lower Service Productivity as parts that we should have based on demand are not in stock when needed.
Obsolescence Prevention, in my opinion is much different as we have to work both ends of the spectrum. We have to have the right parts at the right time with First Time Fill Rates at 75% - 85%. We can't try and control obsolescence at the expense of lower shop productivity.
We have to have the right Parts Phase-In Parameters and most importantly, the right Phase-Out Parameter Set Ups to begin with. We already know that once a part reaches 12 months with no sales, there's a 98% chance they will never sell again.
The best way to Prevent Obsolescence is to set the Parts Phase-Out Parameters around 7 - 9 months so once these parts sell in that time frame, they will not be reordered. They would have to "re-qualify" for Phase-In all over again.
Letting these parts Phase-Out and not letting them back in will lower the amount of obsolescence dropping down into the Over 12 Months No Sales Category. We especially have to be careful if we are enrolled in a Vendor Managed Inventory, (VMI) with the Manufacturer.
These VMI Programs will almost always want you to bring that part back in for replenishment, even if we sell those parts close to the time they need to go away. We need to let them go and not let the VMI Program put it back on the shelf.
Compliance is one thing but letting the Manufacturer add to our obsolescence is another. We always have to juggle and walk that line. Being "Compliant" is one thing, but adding obsolescence should not be the way to stay Complaint, or "Obedient" as I say.
We should always try and shop those parts that are in the 7 - 12 Month Category and sell them in those later months. We have to "stop the bleeding" before they become a problem once they hit 12 Months No Sales.
Step Five: "Don't Buy Obsolescence to Begin With!"
Many Parts Managers don't even realize that some parts they buy will end up obsolete to begin with. Special Ordered Parts are a great example of these parts that we buy could be considered obsolete on first purchase. After all, that's why they are called "Special Orders" to begin with as these parts have not met Phase-In Parameters.
Even though we will always have Special Orders at the rate of at least 15%-25%, we can implement a Special-Order Policy that will ensure that these parts get sold. Unfortunately, in many dealerships today, there is no Special-Order Parts Policy.
Getting deposits of course when applicable, having Order Pre-Appointment Process and an In-House Communication Process with other departments is critical. There also has to be a "consequence" by charging Return Fees to customers and other dealer departments.
There has to be accountability right up front and only authorized dealer personnel should be allowed to order these parts. We also have to be very strict in holding Parts Special Orders to 30 Days or Less. They should be returned between 30 and 45 days, regardless of the cost.
As mentioned earlier and unfortunately, much of the dealers Parts Return Reserve gets sucked up by returning Special Order Parts. Parts Return Reserve is supposed to be utilized for returning obsolescence and not Special Orders ordered by mistake or a lack of accountability.
The old theory of just putting these Special Orders back on the shelf in hopes that someone else will buy it down the road is a myth. Even though we may get lucky from time to time, overall, these parts will just add to obsolescence.
Becoming "Obsolescence Free Forever" is not just a myth, and it can be a reality if we believe it and follow the "Five Step Plan". We have to work both ends of the scale by having the right parts at the right time and managing the obsolescence.
If we do one without the other, we will either have Controlled Obsolescence but Low First Time Fill Rates or great First Time Fill Rates with too much obsolescence. Both can and should be done if we are a "Smart Parts" Manager with the right "Five Step Plan".
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...
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