As we wind down the year of 2025, we would normally finish up with our ACG "Smart Parts Year in Review". This year, we will take a different approach and start next year with our 2026 Parts Predictions.
The focus on our December issue will be on a topic that has drawn a lot of attention these last couple of years and that topic is Parts Core Values. Not so much an issue of Parts Core Values in itself, but more on the impact of the costs of these cores.
These core impact costs have gone way beyond what we may have thought as it has finally reached a point of what I refer to as the "total net impact". Some Core Values are costing over double the actual cost of many parts themselves.
We also have core costs now added to many Collision Parts which we have never seen in the past. Manufacturers are trying to avoid aftermarket imitation parts from being produced and have now added "core charges" to many collision parts.
Even though these core charges on collision parts are not intended for "remanufacturing" these parts, they do still add up, especially for Wholesale Parts Dealers and Dealer Collison Centers.
In dealerships that do have a Collision Center, these Parts Core Values have impacted Parts Reconciliation immensely. In a department that doesn't usually have a "Parts Effect", except for Work-In-Process, the Dealership Collision Department is now a big player in Parts Reconciliation.
It goes even further than that now as Parts Purchases are highly impacted by the New Core Price. I've seen in many dealerships where the New Core Values actually outweigh the total parts purchases on the Manufacturers' P & A Summary.
So, just how far does this all go?...can Core Values really impact so many areas such as Cash Flow?...Increased Parts Inventory Variances in Accounting?...Credit Turnaround Time...Overall Parts Gross Profit?...Days Supply and Inventory Turns?...
The answer is all the above and much more...
In this issue of ACG "Smart Parts", we will not only reveal our "Top 5 Core Value Impact Areas", but we will also reveal how we have to handle this new beast. We will go through processes that will help minimize the negative effects they can cause.
Before we even start though, we have to start looking at Parts Core Values differently than we have in the past. New Core Purchases and Dirty Core Amounts from those purchases are now causing us to look at our whole Parts Inventory differently.
Let's finish up 2025 and get ready for another New Year here at ACG "Smart Parts"!
As we go through our "Top 5 Core Value Impact Areas", we will split each one into two segments. We will look at the issue itself, or "Impact Area" first, then second, we will go through the solutions, or processes in controlling these Parts Core Charges. At time of purchase all the way down to handling the Dirty Core aspect.
We will also not list these impact areas in any order as they are all part of managing every aspect of these core values. Most important, we have to move all Parts Core Values up on our list of Duties & Responsibilities as "Smart Parts" Managers.
In order to properly "reconcile" the Parts Controlled Inventory, or PAD with the Accounting Department, every one of the "Impact Areas" have to be done religiously each and every month.
Accounting Variances:
I want to start with this one because it seems that this is what it all comes down to. When Parts Purchases and the Accounting Ledger Balance Inventory exceeds the amount of Parts Inventory on the shelf, a "red flag" goes up immediately.
It's always best to have it the other way around with the Controlled Inventory higher than the Parts Ledger Balance by at least 3% - 5% annually. Having a Parts Inventory "uplift" is what we expect each year when the books are closed.
When a "Negative Accounting" variance is discovered, it begins the "back tracking" to find out why. Most often, it's either posting errors in Accounting or perhaps an invoice was improperly recorded by the Parts Department.
All variances in the Parts Inventory start with purchases and with New Core Values added to the purchase of a part, this sends the Ledger Balance even higher. Once these parts are in inventory, even if they carry a ridiculous core value, they are added together as one overall cost of the part.
Our process in this category as Parts Managers is to know that these total costs with the core values need to be considered. Whether we are buying these parts for stock, or as Special Orders, the turnaround time is crucial.
The added cost of the New Core and the time it takes to sell the part and get the credit back on the Dirty Core needs to happen within 30 - 45 Days with Special Orders. Even if ordered for Warranty Purposes, the turnaround time is crucial.
If these parts carry a New Core Value at the start and are added to the Parts Inventory, they need to be "actively" selling within 0 - 6 months where they have an 85% chance to sell with a lower chance of going obsolete.
Either way, the Dirty Core "turnaround" time needs to be within a 30 - 45 days in order to relieve the Dirty Core Value with Accounting. Parts Warranty Cores should also be set up in Accounting with a separate Account Number to separate them from other warranty parts debits and credits.
All Dirty Cores need to be sent back daily, and especially by the third week of each month. This will give us the best chance of receiving credit from the Manufacturer and relieving these core values from the Ledger Balance.
Account & Parts Source Separation:
In my opinion, we need to always know what our Parts New Core & Dirty Core Amounts are, separate from the Main Parts Inventory. Even though these Core Values are part of the whole mix, we need to know these inventory values separately.
The "Impact Area" of Parts Core Values when looking at the Parts Inventory as a whole can be staggering. We need to know how much of our Parts Inventory is tied up in Overall Core Values before we can even tackle this situation.
This separation in Accounting can be set up rather easily by simply adding an account for the Main Parts Inventory with either a prefix or a suffix to the existing Parts Inventory Account Number. An example would be for GM's Parts Account of 242, would perhaps have a "242C" Account for Parts Core Values.
Most importantly though is that The Parts Department has to properly mark all these parts invoices correctly before sending them to Accounting. Otherwise, this process will fail from the beginning and should also be a process performed by the Parts Manager.
The separation on the Parts side in the DMS may be a little more difficult depending on the DMS. Most systems will separate the New & Dirty Core Amounts, but some do not separate New Core Amounts as they are added to the Main Parts Inventory. Most, if not all systems will separate Dirty Core Values.
There is no need to set up separate Parts Sources, or Stocking Groups as it would not make a difference overall. Even if we tried to separate them, the Manufacturer will just "default" them right back into the Main Default Source, which we do not control.
The most important part of this Core Separation is to know what these amounts are in both New Core Values & Dirty Core Values, which we can access. If we are on a DMS that does not provide the New Core Value automatically, reports can be generated to get this New Core Amount each month.
These DMS New Core & Dirty Core Values need to be provided to Accounting at the end of each month for proper separation on the Parts Ledger Balance. This will allow the Accounting Department to track credits and debits accurately.
Handling Dirty Core Credits & Debits:
This is a big one and probably the biggest culprit as to why we have so many discrepancies between the Accounting Ledger Balance Inventory and the Parts Controlled Inventory on the DMS.
These discrepancies occur because they are not properly handled and accounted for right up front in the Parts Department. In most cases, they are also not being attended to often enough as Dirty Cores just pile up.
I've seen Dirty Core piles in dealerships sitting there for extended periods of time, Dirty Cores out in the Service Department or even the Collision Center. I've also seen Wholesale Accounts that are over 30, 60 and 90 Days past due with many credits still pending which include Parts Dirty Cores not returned.
These are the most common areas that tie up all this Dirty Core "cash" that ultimately sends the Parts Ledger Balance skyrocketing just waiting to balance the Parts Inventory. Unfortunately, there are still Parts Managers out there that don't realize that Dirty Cores should be considered as cash waiting to be collected.
If we have these Core Value Accounts separated as we mentioned earlier, it is much easier to "expose" where this cash is and how to get it reconciled each month. Wholesale accounts should never be allowed to go past due more than 45 days, and processing credits should also have a limited timeline.
Even though the Parts Department bills out these Core Charges initially, it's the time waiting to balance these inventories in Accounting being the issue. Even though the DMS Inventory is relieved when they are billed out, parts gross does not get relieved up front as Core Charges are billed at cost.
In my opinion, the Parts Department should have a person, much like a Delivery Driver that picks up Dirty Cores and Parts Returns on a regular basis with Wholesale Accounts as well as their own Service and Collision Departments every day, week and month.
All credits whether Dirty Core Returns or other Parts Returns should not be a process that is done once in a while. It should be a Parts Process that happens daily, just like every other daily routine in the Parts Department.
Reconciliation Discrepancies:
The timing of listing this one is appropriate, right behind our previous one because if we have a daily process managing these credits, it's much easier for Accounting. If we do manage these "turnaround times" more often, it will be much easier to handle the discrepancies when they occur.
In addition to having a daily process, the Parts Manager has to have a basic understanding of how Accounting works. Proper posting is crucial in preventing or allowing fewer discrepancies right up front during the invoicing process.
The Parts Manager also has to have these Dirty Cores binned properly with a dedicated location to accurately account for these Dirty Cores. Just like any other part that we have a bin location for, Dirty Cores are no exception.
Our dealership policies should also be stricter and more decisive as to what parts are qualified for return, and most importantly a timeline as to when they are qualified for return, which should be 45 Days or Less.
This is a tough one for big Wholesale Dealers or even for Dealers that have huge Collision Centers. Most Parts Managers don't want to jeopardize these accounts and tend to be more lenient. But when it comes down to the "nitty gritty", it's usually the Parts Department that is blamed and takes the hit.
The true reality of it all though is that the dealer takes the overall hit, especially when it comes down to negative discrepancies that have to be reconciled at a loss. These losses are also a 100% loss of Gross Profit.
Parts Key Performance Indicators:
Believe it or not, there are a lot of Negative Impacts from these astronomical effects from Parts Core Values, both New Core Values and Dirty Core Values. Many of our Parts Industry Key Performance Indicators, (KPI's) are hit severely.
Parts Gross and True Turns is one of them as these inflated Parts Inventory Amounts can increase or lower these Annual Gross & True Turns. The added amount of the New Core on the shelf can lower True Turns while increasing Gross Turn dollar amounts.
A good example of this is if we have a part that costs $300.00 and the Core Value is $200.00; it will represent a sale on the Gross Turn side of $500.00. This increases the Parts Gross Turn by an inflated amount of $200.00.
On the True Turn side, it could increase or decrease the real Parts True Turns depending on if that part is a Normal Stocking Part or a Non-Stocking Part. If the part that carries an additional core value and is a Normal Stocking Part, the True Turn is inflated.
If the part that carries an additional core value and was a Non-Stocking Part, or is Special Ordered, the Parts True Turn is decreased. These numbers may not seem to be much, but with some of these cores such as engines, transmissions and other power train parts that have enormous core values, it can make a huge difference.
Parts Days Supply can also be heavily impacted as these New Core Values can "fictitiously" drive Days Supply much higher than the Industry Guide of 45 Days Supply. This is why we need to know what our Parts Inventory Values are with and without New Core Values.
I have personally seen some of my dealers Parts Inventory carry as much as 30% of their Parts Inventory Value in added New Core Values. The difference in some of my stores has taken their "actual" Days Supply from 45 Days Supply to 55 Days Supply with the New Core Values added in.
Especially with smaller dealers with lower overall Parts Inventory Amounts, it doesn't take much in added New Core Values to give a false reading on Overall Days Supply. On the Accounting side and the Ledger Balance Inventory also effected, Office Managers, Comptrollers and Dealers are seeing the difference as well.
Lastly, Parts Gross Profit is extremely impacted by all these Core Values, especially Dirty Core Values being billed out on Parts Counter Tickets and Repair Orders. Being the fact that these Core Values are billed at cost, we can see the overall Parts Gross Profit Effect, both positive and negative.
The effects of Parts Gross Profit can be felt both as a "false" positive and negative depending on when they are billed out and when the Dirty Core is credited back in. Again, proving that these Core Value "turnaround" times have to be reduced.
As a matter of fact, and if we look back at what we have covered in this month's issue, it's all about the "turnaround" time that will result in fewer discrepancies overall. Knowledge is also key with the Parts Manager grabbing the reigns on all of this and knowing how Basic Accounting works.
In conclusion, I don't think that these Parts Core Values are going away soon so we have to get on top of this issue. We can't treat Parts Core Values like we did in the past, and it needs to be brought to the forefront and managed each and every day.
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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