As we move on into May, we will continue our theme that we shared in our April Issue of ACG "Smart Parts". In April, we focused on the "Costs & Effects" of what Dirty Cores represent. Now it's time to continue in May with the "Costs & Effects" of Parts Return Sales.
Parts Return Sales is also one of those areas that we have to deal with as it's just a part pf doing business, much like any other retail operation such as Amazon Prime, Best Buy, Lowe's, Walmart or even at the local grocery store.
Believe or not, there is an actual measurement here as Industry Guidelines has these Parts Return Sales set to 5% or less of Total Parts Sales at Cost. This measurement can be debated as some say the actual number should be 10% or less.
Either way, there is a measurement that we need to pay attention to monitor trends as there are many costs incurred from Parts Return Sales. The interesting thing here that I have noticed over the past couple of years is that the actual rate of Parts Return Sales is on the rise.
So, whatever measurement is used, we have to take notice and wonder why Parts Return Sales are rising in many Parts Departments today, especially in higher volume Parts Departments, although this rise has also impacted smaller volume Parts Departments.
We all seem to know the most popular reasons for Parts Return Sales such as the wrong part was ordered, didn't need the part, customer never came back and so on. All that being said, all these basic reasons for Parts Return Sales have always been there. Why now and why so many and most importantly...what are the costs for these increased parts returns?
In this issue of ACG "Smart Parts", we will break it all down again with our "Top 10 Impact Areas" that are driving not only Parts Return Sales, but we will also break down why the increase over recent months and years.
The real question is....
"Why are Parts Return Sales Rising & What are the True Costs & Effects?"
Let's Find Out!...
First and foremost, let's look at the overall picture of our daily operations as we all know that parts will be returned at times and for various reasons that we have mentioned. But what we don't always look at is how often they happen because we just go on with our daily routines.
Of course, many if not all Parts Departments have some guidelines on returns whether we charge return fees, or maybe not allowing parts returns on electrical parts or Special Order Parts and perhaps requiring deposits or pre-payment.
In my opinion throughout all this is that many Parts Managers don' even track their rate of Parts Return Sales. We also have to first define Parts Return Sales as in many Dealer Management Systems, (DMS) simply taking a part off a Repair Order can trigger those parts into the "Return Sales" category on the DMS Monthly Management Reports.
Even though the sale never happened as the part was taken off the repair order for other reasons such as billed to the wrong RO, billed to the wrong line on the RO or the wrong quantity was billed out, it still may trigger a Parts Return Sale on the DMS.
Beyond all these normal transactions that we all deal with as mentioned above, it's now time to look further and find out why these "actual" Parts Return Sales are climbing and what are the true "Costs & Effects" of rising Parts Return Sales.
We will break down our "Top 10 Impact Areas" that will reveal either the cost and/or the effect on the overall results of Parts Return Sales and how they impact the Financial Statement or Overall Inventory Values.
Acquisition & Holding Costs:
We will start all this off with one of the "unseen" costs of what Parts Return Sales can impact. Parts Acquisition & Holding Costs will not be found on any Financial as these costs are assumed at a rate of 25% - 30% of the Annual Parts Inventory Value like any other Retail Companies that resell goods to the consumer.
These Acquisition & Holding Costs include handling of goods, (or parts), building rent, inventory insurances, heat, power & lights, advertising, depreciation, etc. in order to maintain the parts inventory.
Parts Return Sales fits into this category immensely, especially in the handling of goods category, restocking fees, damaged goods and so on. Parts Return Sales, if in access, can drive these Acquisition & Holding costs even higher than the average.
Manufacturer Return Fees:
Even though manufacturers vary on what they charge dealers for parts returns, this cost is usually absorbed by the Parts Department which has always amazed me. Especially in the Service Department and in our Collision Centers.
Even though these Return Parts Sales were initially authorized by these other departments, when they are returned for whatever reason, didn't need or the customer never came back, the Parts Department sucks it up and ends up paying these return fees.
In my opinion, whoever authorized the Parts Special Order is ultimately responsible for the Parts Return Fees implied, unless the wrong part was ordered by the Parts Department. In the case of GM, Parts Return Fees can add up to 35% of the cost of the part.
These return fees should be charged back to the department and/or a portion of the Return Fee be charged the actual individual that authorized the Special Order in the first place. Even a small portion to the individual sends a message and results in fewer returns.
Collision Center Parts Return Sales:
Dealership Collision Centers are a huge contributor to higher Parts Return Sales and for good reason, but they have to take more responsibility for these Parts Return Sales. In their defense, they have to work with Insurance Companies, Supplements, Unseen damaged parts and so on.
That being said, there are ways to recoup some of these expenses that are incurred from Parts Return Sales. Especially if a vehicle ends up being totaled and all the original parts are still sitting there, many Insurance Companies will pay these return fees charged by the manufacturer as well as internal handling fees.
It just seems to be always "assumed" that the Parts Department sucks it up again and pays for these parts returns. Collision Parts ordered in excess, or perhaps "just in case we need it" should also be addressed.
Service Department Return Parts Sales:
Parts Return Sales in the Service Department don't usually add up to the what the Collision Center returns in cost, but as far as the number of Parts Returns Sales in the Service Department...they can be staggering for many reasons.
Parts ordered in error, no matter whose fault, parts ordered "just in case", customer never came back, didn't fit right, etc....the lists goes on. The bottom line is that all these reasons add up to Parts Return Sales.
Most often times, these Return Parts Sales end up on the shelf and eventually just adds to Parts Obsolescence. "Just put it back on the shelf and we will sell it to someone else!", or..."Just send it back!"
Not that easy as in most Parts Departments today, they can never accrue enough Return Reserve from the Manufacturer to even match the number of parts that get returned from Parts Return Sales.
As I mentioned earlier, there has to be some accountability, or "consequences" in place with an Internal Parts Special Order Policy. Someone has to pay, but it shouldn't always be the Parts Department as ultimately, it's the dealer who is paying.
Wholesale Parts Return Sales:
This is the big one as unfortunately there are many Wholesale Collision Centers out there that are surviving solely on our Parts Departments. Especially if these Wholesale Collision Centers are in the 30-, 60-, or 90-Day Accounts Receivables Category.
This is not anything new as for years, many Wholesale Collision Centers will order parts that are approved by the Insurance Companies, only to repair the fender and return that fender to the Parts Department for credit.
I have actually witnessed Wholesale Collision Centers keep up with their Monthly Parts Bill from the dealer with Parts Returns. This has gone on for years and the only way to stop it is to charge shipping and handling fees, no matter how we may feel, thinking that they are a "good customer".
There are actually many Dealership Parts Departments doing what I would be doing today is having all my Wholesale Collision Centers pay by credit card right up front. This way the payment is received up front, and shipping and handling fees can be applied when applicable.
Smaller Wholesale Collision Centers that cannot utilize a credit card for payment for credit limit reasons can be put on a 30-day credit limit only, if qualified and with a background credit check. After 30 days with non-payment, they would be cash or check only at that point.
Damaged Parts/Repacking Fees:
We all know that pretty much every manufacturer has some sort of added fees for damaged parts and repackaging fees. This one is also a big one as we all know the process of applying for credits takes months in some cases.
We also know that denied credits is another nightmare as it also trickles down to Parts Reconciliation with Accounting, sending inventory variances skyward. The timeliness of Parts Return Sales has many negative effects as prices are everchanging.
By the time we actually receive any credits for these Parts Return Sales, the price we paid when we bought these parts have changed, minus any other fees from damaged parts or repackaged parts. Any of these fees should also be passed down to the party responsible for ordering them in the first place.
Parts Wholesale Gross Profit:
Many of the Higher Volume Wholesale Parts Departments gain most of their profits on the backside for the manufacturers, especially today. That being said, it tends to cause what I call the "push and pull" affect, or a huge juggling act.
In order to receive this back-end money from the manufacturer, we have to maintain purchase amounts to qualify for the maximum discounts and allowances available. The "push" side comes from our purchases and the "pull" comes from getting the money in.
When we factor in the up front and back-end money, we have to come to a balance of total gross and net profit that meets or exceeds industry and dealer expectations and guidelines. If added costs are factored in that we mentioned above, we will not receive the expected net profits overall.
Obsolescence From Parts Return Sales:
We all knew that this one was coming as Parts Obsolescence is "the pit" where everything will end up and hide. If you look back to all of our reasons mentioned above that cause Parts Return Sales, we cannot think that there won't be a negative effect on Parts Obsolescence.
Parts Obsolescence is where the evidence becomes proof of how well we manage the Parts Inventory Investment. Even though Higher Volume Parts Departments have a better opportunity of protecting their parts investment due to higher purchase and sale amounts, obsolescence is still a huge concern.
Simply adding Parts Return Sales to the Parts Inventory is not a solution by hiding them on the shelf when they are returned will eventually show its ugly head. Dealing with them up front by charging these Parts Return Fees to the authorizing parties as we mentioned above is the best way to stay ahead of the game.
Managing Parts Return Sales:
As mentioned earlier, we all have Parts Return Sales, but are we inventorying these parts accordingly? We have to inventory these Parts Returns Sales and separate them from our Normal Active Inventory.
If these Parts Return Sales are Normal Stocking Parts, then they would of course be sent to their original assigned bin location. But if these Parts Return Sales are from the Special Order Category, they need to be "binned" or "housed" separately.
Special Order Parts Return Sales should never be given a Normal Stocking Part bin location as they will be "masked" as a Normal Stocking Parts. Parts with bin location are meant for Normal Stocking Parts and not "SPORD" parts mixed in.
They should also be "binned" or "housed" in temporary locations or bins that are viewable at all times to create awareness over a 30-day period and cycled through the return process each month.
Managing Parts Returns Measurement Reports:
Lastly, we need to be looking at our rate of Parts Return Sales each month to monitor trends. Whether you are at Industry Guide of 5% or less, or the trends follow a 10% or less Parts Return Sales Rate, we have to look at these trends like any other management trends we monitor.
We also have to factor in those parts on Repair Orders that were simple taken off the Repair Order for various reasons we mentioned earlier. Often times we may see our Parts Return Sales jump way up because we billed an engine on the wrong Repair Order.
The good news is, and if we are looking at these Parts Return Sales Management Reports, we will see when it happens and have the answers right up front as to why the increase happened in the first place.
In Closing:
As to the answer to our original question to rising Parts Return Sales, it's actually pretty simple. With the increased amounts of Vehicle Makes & Models, with the average numbers of parts in the Manufacturer's Pricing Guides, the chance of errors will rise in the order process and mistakes will happen.
One other reason, especially for Wholesale Parts Dealers, is that we tend to want to take care of our so called "best customers", only to find out that they are taking advantage of us and playing the game to their benefit and not ours.
Finally, the manufacturers are not making it very easy to receive our credits with added New & Dirty Core Value Parts Costs which makes it even harder to reconcile our inventories and gross profit percentages.
"Bottom line is that we need to follow these Return Parts Sales Reports just as much as we watch all of our other Parts Key Performance Indicators, (KPI's) as it takes much more today to manage our "true" Parts Gross & Net Profit Areas."
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...