May 2025: Parts Return Sales: "The Costs & The Effects"

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...

 

April 2025: Managing Dirty Cores: "The Causes & Effects"

As we enter into the Second Quarter of 2025 and keeping our focus on our overall goals this year, we want to add in one area that can and has impacted many of our basic Parts Department Duties & Responsibilities.

Our topic for this month's issue of ACG "Smart Parts" will be devoted to what I refer to as my new "Monkey on My Back" which is "Managing Dirty Cores". Managing Dirty Cores has become a big topic recently and one of my most "Frequently Asked Questions", (FAQ's) over this past year.

But before we get to our "drill down" in this issue, I want to take a look back on how we managed Dirty Cores in the past. Actually, it wasn't really too long ago when Dirty Cores were just another Duty & Responsibility or "routine" that we handled fairly easily each and every month.

Looking back, I remember that a "Dirty Core" was just a starter, alternator, transmission, maybe a steering rack or occasionally an engine. Also, the "Dirty Core Amount" was minimal where we may have paid $250.00 for a starter that had maybe a $50.00 core charge attached to the cost.

Fast forward to today, not only have "Dirty Core Amounts" sky-rocketed, the actual list of parts that have a "Dirty Core Amount" attached to the cost of the part have also expanded to more and more parts than ever before.

I also believe that these increased number of Dirty Cores and Overall Amounts can be attributed to Supply Chain Issues. If "supply in demand" goes up, then the "demand" of getting these Dirty Cores back for redistribution may be driving the price and number of Dirty Cores going up.

One of the biggest additions to the Dirty Core List is Collision Parts due to the increased awareness of the Manufacturers limiting Aftermarket Vendors from "counterfeiting" Collision Parts, which we never had back in the day.

By attaching a "Dirty Core Amount" to some of these Collision Parts, these Aftermarket Collision Parts Vendors, the Manufacturers will be able to limit access to these Collision Parts for "counterfeiting". 

On mechanical parts, these "Dirty Core Amounts" on some engines and transmissions for example have a "Dirty Core Amount" that is higher than the cost of the actual part. Some Manufacturers actually have "Dirty Core Amounts" almost double the amount, or cost of the part!

So!..."How do we "Tackle & Manage" this New "Monkey on Our Back" and just what are the "Causes & Effects" of Dirty Cores today?"

Let's Get Started!...

In my opinion, the best way to start off would be to separate the "Cause & Effect" before we get to the solutions. We will list out the "causes" first, then move on to the "effects" in each category. Then finally, we will move on to the solutions that may help us to either minimize or eliminate the effects by tackling the "root cause".

Dirty Core Cost "Causes":

Dirty Core Costs are out of our control with many Manufacturers adding in astronomical core charges that in many cases out-weigh the actual cost of the part. We have to realize that our "total" Parts Purchase Amounts from the Manufacturer will rise as well.

Another "Dirty Core" Cost Cause is Pricing Updates from the Manufacturer. For example, maybe we buy an engine for a cost of $4,000.00 with a "Dirty Core" value of $5,000.00 in a particular month and then, we bill the engine out the next month. 

The "Cause & Effect" in this case is when we bill the engine out the following month, the cost of that same engine goes down, (after the current month Manufacturer's Price Tape is updated) to cost of $3,000.00 with a "Dirty Core" value at perhaps $4,000.00, especially if this is a warranty situation.

The result is a loss of Inventory Value on both the Ledger Balance Inventory and the Controlled Inventory Balance in the DMS. It's sad, but this does happen and when it does, adjustments have to be made to both inventories to account for the asset loss and to keep reconciliation accurate.

It's amazing to me that we never see this situation go the other way when we perhaps see where the cost of that same engine actually goes up in value the next month with an even higher "Dirty Core" value. Resulting in a positive gain in the Ledger Balance Inventory and the Controlled Inventory Value in the DMS, or "Uplift".

Dirty Core Cost "Effects":

In many cases, and most recently, I had a dealer call me and wanted to know why his Parts Purchases were skyrocketing over the past few months. When I looked at their Parts Purchases in detail, they spent more money on "Clean Core Charges" than they actually spent the cost of these parts purchased.

Some Manufacturers are dealing with more powertrain issues than usual, thus the increased "Clean Core Charges" are added. This is where the "chain of events" gets started, which is on the initial purchase of parts that carry a "Clean Core Charge" of any amount.

Dirty Core Cost "Solutions":

Accounting is where we have to control these amounts from "cradle to grave" when we have the "Clean Core Amounts" eventually becoming a "Dirty Core Amount". We need to have better Asset Management and separate "Dirty Core Amounts" on Page 1 of the Financial Page.

Setting up a "Dirty Core Inventory" separately by adding in an Inventory "Sub-Account" is crucial. By simply adding in a 242C Account, (GM), or 14000C Account for Ford for example will help to keep this Core Inventory separate and easier to track and reconcile.

Another unique idea that I heard from one of my dealers on Warranty Claims that include a Dirty Core Charge, they bill the Dirty Core Amount to the Warranty Schedule, or Account 263C for GM dealers. This will relieve the Ledger Balance and Controlled Balance Inventory and move that amount to the Warranty Schedule pending credit.

Purchases on the P & A Summary can then be broken down on the actual totals purchased for regular parts, (242 GM, 14000 Ford) as a credit to the Parts Ledger Balance on Page 1. Then, the total amount of "Clean Core Purchases" can be entered in as a credit to the "Clean Core Inventory", (242C GM, 14000C Ford) separately.

When the "Dirty Core" is sent back to the Manufacturer, the credit on these Dirty Core Returns can be relieved from the Page 1, Ledger Balance Inventory on the Core Inventory Account. Variances can then be managed easier for Core Credits Outstanding due to Warranty Cores, Work-In-Process, or other Dirty Cores waiting to be return from Counter Purchases for example.

Once these "Dirty Cores" are sent back to the manufacturer, relieving the "Dirty Cores" properly on the DMS is also crucial for proper Accounting and Reconciliation. Simply sending the "Dirty Cores" back and not making the DMS Adjustments will send the Controlled Inventory Balance up.

As each "Dirty Core" is taken off a Repair Order for example, adds that dirty core value to the DMS Inventory. If not properly relieved, this "Dirty Core" Inventory on the DMS will just keep climbing and not be an accurate account of what may be stated on the DMS Parts Monthly Reports.

Another area that we now need to focus on more than ever is the dealers' "Clean Core Amounts" still in the Parts Inventory. Many, but not all Dealer Management Systems, (DMS) can provide this on-going amount each month on their Parts Monthly Summary Report and reported for Parts Reconciliation.

If the DMS does not provide this report as a "canned report", Parts Managers can create a "specific report" on the DMS on those parts on hand that carry a "Clean Core Amount". This will give the dealer a clear amount of how much their Parts Inventory Asset is tied up in parts that carry a "New Core Value".

This is especially important on those parts that carry a "New Core Value" and have not sold in over 12 months, (Over 15 Month, GM) become much more of an issue in the dealers' "Frozen Assets" and need to be dealt with.

The end result is that "New Core Amounts" that the dealer has already paid for is simply tied up in added Parts Purchase Amounts over and above the actual part itself. When shopping out obsolescence, these parts that carry a "New Core Amount" should be the top priority, especially if the dealer has a Collision Center and/or is heavy into wholesale.

Dirty Core Collision Parts "Causes":

If the dealer is heavy into Wholesale, and/or has a Collision Center or both, there are even more causes that "Dirty Cores" can represent. Briefly mentioned above with the effects of "New Core Amounts" that can impact Parts Obsolescence, the causes can go much further.

Dirty Core Returns are not only important for the Parts Department to manage on Service Repair Parts, but Collision Parts also must be managed even further. The timeliness of the return of these cores is critical. Especially when we are dealing with high Collision Center "Cycle Times" already, whether from our own Collision Center or Wholesale customers, time is our worst enemy.

Dirty Core Collision Parts "Effects":

Even though Wholesale Customers are billed a Core Charge once they are invoiced, the actual "handling" of "Dirty Core Amounts" can multiply and hinder timely "Dirty Core Returns" to the Manufacturer and harder to reconcile the Core Inventory on the Ledger Balance.

If we have our own Collision Center, these "Dirty Core Amounts" can multiply as well, thus tying up the dealers' asset and "cash", because that's what "Dirty Core Amounts" represent in the first place, much like Parts Obsolescence as a whole.

The "timeliness" of the Collision Center "Cycle Times" can affect the overall returns and credits of Collision Parts that carry a "Dirty Core Amount". If the Collision Center "Cycle Times" are over a couple weeks, it will have a "trickle down" effect on credits and overall, Ledger Balance Amounts.

Dirty Core Collision Parts "Solutions":

On top of working on the Collision Center "Cycle Times", the Dirty Core Return Process on these Collision Parts that carry a core value with perhaps have a dedicated parts employee that works directly with the Collision Center once repairs are authorized and completed.

On the Wholesale side of these Collision Parts that carry a "Dirty Core Value", credits to these Wholesale Customers on core returns should go hand in hand on with how well and how timely they pay their bills to the dealer. 

If these Wholesale Customers are frequently in the Over 30, Over 60 and Over 90 Day category on paying, then credits should, in my opinion fall into that same category. After all, they really aren't "good customers" if they don't pay in a timely manner.

This may sound a little harsh, but in my opinion, core credits to Wholesale Customers shouldn't indicate a timeliness of payments for parts purchases. If monthly payment is timely, then we should treat their core credits accordingly.

Industry Guidelines Dirty Core "Causes":

Some of the "Dirty Core Effects" actually impact a lot of Industry Guidelines that we monitor each month and year on Parts Key Performance Indicators, (KPI's). Areas such as Parts Gross Profit %, First Time Fill Rates, and Gross & True Turns and Work-In-Process and Obsolescence Amounts just to name a few.

Being that "Dirty Core Amounts" are usually billed at cost, we can see already if we bill out a part on a Counter Ticket, the Overall Gross Profit Percentage is immediately impacted. The "trickle down" effect continues with Parts Gross & True Turn and the Overall First Time Fill Rates at cost.

Industry Guidelines Dirty Core "Effects":

I believe that the fact that "Dirty Cores" are billed at cost will not only decrease Parts Gross Percentage on Counter Tickets, but they will also add cost to the Work-In-Process Parts Amounts, Increased Inventory Turns that are not true, both on the Gross Turns and True Turns.

Fill Rate Effects are also impacted by this added "Dirty Core Amount", over and above the cost of the actual parts billed. Lastly, these "Dirty Core Amounts" can impact Obsolescence Amounts if they move into that category.

Industry Guidelines Dirty Core "Solutions":

In my opinion, the solutions in these "Dirty Core Amounts" in this section on the Industry Guidelines is a combination of all the above and the "timeliness" of how we can cycle them through in 30-45 days. I realize not all can be cycled through in that time span for various reasons mentioned, but we can minimize the overall "Cause & Effect" on this new era of "Managing Dirty Cores"

f 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...

 

March 2025: First Quarter Parts Goals for 2025: "Have We Met the Challenge?"

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...

 

February 2025: Parts Obsolescence Prevention: "What Are Our Best Options?"

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...