Tuesday, January 4, 2022

January 2022: The Top 10 "Do's" And "Do Not's" For 2022

In our last issue of ACG "Smart Parts", we focused on our "Top 5 Parts Focal Points for 2022". In that issue, we highlighted some key areas of Parts Management where, if we would just "think outside the box" a little more, we may just achieve even better results in 2022.

We looked at some industry guidelines in a different light where if we did raise our expectations, we could achieve new heights. We also looked at possibly more Accounting Training, D.M.S. Utilization, managing Stocking Levels more aggressively and even thinking "outside the box" on our Pricing Strategies.

Now, as we move into 2022, we have to take a hard line look at what we seem to accept versus what we shouldn't accept. We can't accept the status quo anymore if we want to be profitable in the dealership and especially in the Parts Department.

As we move on down from our Number 10 down to our Number 1 "Do's" and "Do Not's", some "Smart Parts" Managers may to do a little "self evaluation", or perhaps a "reality check" on how we conduct our business each day. As I've mentioned often times, we have to take ownership of our Parts Departments as if we were the owners.

Each category will have a section on what we should do and what we shouldn't do, or perhaps what we are doing versus what we should be doing. The big question is...

"Are We Willing To Make The Appropriate Changes To Do What We Should Be Doing?"...

Even if some may agree or disagree with the overall Top 10 "Do's" and "Don'ts" for 2022 as far as how they are ranked, most will agree on the topics. Once again, we should all keep an open mind as we count them down and know that all the solutions, or "Do's" are more than feasible, they are realistic.

Here We Go!

Number 10: Managing Special Order Parts

We all know that Special Order Parts are are part of what we do. However, we can manage them in a way that they can be minimized and controlled much better than perhaps they are right now. Let's take a look at the "Do's" and "Don't" on Special Order Parts.

Do Not:

Do not take Special Order Parts lightly by not having specific guidelines on how Special Order Parts are ordered, receipted, and shelved in tghe first place. If the Special Order Policy has loose, or have no guidelines where anyone can order Special Order Parts, the results will be obvious as Special Order Parts Aging will just continue to climb and freeze up assets.

Do not order "extra" Special Order Parts for technicians "just in case" they may need them. Do not have an attitude where if the part doesn't sell, we can just put in on the shelf in hopes that someone else will come along and buy those parts.

Do:

Do set guidelines for Special Order Parts to include, deposits or prepayments required when applicable, "future" Service Appointments should be set before the part is ordered, and only authorized Parts Personnel and Management can order Special Order Parts...technicians do not order parts!

Do have another key component to the process by having a "Special Order Parts Policy" that has consequences. Handling and return fees need to be applied to all Special Order Parts over 30 Days, including other dealer departments that authorized the Special Order Parts initially.

Number Nine: Proper Ordering, Receipting and Accounting Practices

Proper ordering, receipting and accountability of parts cannot be taken lightly. We can't just "assume" that the Parts Personnel responsible for these tasks are doing it correctly. Managing a Suggested Stock Order, receipting and posting correctly to the correct order numbers and order types is crucial.

Do Not:

Do not let these practices go unsupervised if not actually done by the Parts Manager. Do not let parts be given out to technicians prior to the full or partial receipt of the parts into inventory as often happens in many dealership Parts Departments.

Do not let any packing slips, receipts or invoices go unchecked or verified before any paperwork is turned into the Accounting Office with the proper Account numbers applied and signed by the Parts Manager.

Do:

Do conduct proper parts personnel training on Ordering, Receipting and Accounting Practices if not done by the Parts Manager. If the Parts Manager is not training properly, then the dealer should provide the proper training in all aspects of ordering, receipting, posting and most importantly...basic, standard Accounting Training.

Do have a secure area to properly check in, receipt and post all parts with proper security to insure non authorized personnel have the freedom to walk in and out of the Parts Department. Do have a proper filing system to file all order slips, packing slips, receipts and invoices for proper parts reconciliation into Accounting.

Number Eight: Managing Stocking Levels

Managing Parts Stocking Levels is an on-going task each day, week, month and year. Unfortunately, many Parts Managers have the "set it and forget it" attitude. Last month we mentioned that the recent supply chain shortage has increased "stock out" situations in many dealerships this past year.

That being said, we need to manage our Stocking Levels more frequently to decrease these "stock out" situations. The problem is that many Parts Managers don't even know how to manage their own Stocking Levels on the Dealer Management Systems, (D.M.S.), or their Vendor Managed Inventory, (V.M.I.) from the manufacturer.

Do Not:

Do not take Stocking Levels for granted as parts is a "moving target" and Stocking Levels can change day in and day out. Do not have the "set it and forget it" attitude and think that they will always level out as they are constantly moving from season to season and supply chain issues.

Stocking Levels can be adjusted as needed based on these supply chain issues and seasonal trends. Especially in these times where we need to actually "overstock" on our fastest moving parts while trimming down Best Stocking Levels on parts that have reached 8 to 9 months with no sales movement and on their way out, falling into the obsolescence category.

Do:

We do need to manage our Stocking Levels more frequently, whether in our own D.M.S. and/or the Manufacturers Vendor Managed Inventory, (V.M.I.). Many Parts Managers also may not know that we can provide weekly, updated Stocking Level changes to the manufacturer so "they" can stay up to date on "our" current Stocking Levels.

We do also have to keep an eye on our Phase-In and Phase-Out Criteria in order to see what parts may be meeting the necessary criteria to possibly "Phase-In" even earlier. On the "Phase-Out" side, we also need to stay focused on those parts that have less activity over 8 months.

Number Seven: "Manage" The Obsolescence

The key word here is to "manage" the obsolescence as parts will drop down into the obsolescence category each year at a rate of at least 2% - 3% minimum. The questions isn't that we will have obsolescence, it's more a question as to what we do with it.

Parts that don't sell quite simply "freezes up" the dealers assets and ties up cash that could be spent on parts that are fast moving and can "turn" much more frequently on a annual basis. Keeping the dealers cash moving is as important as turning the New & Used Vehicle Inventories.

Do Not:

Do not take obsolescence lightly either by just collecting obsolete parts each year and adding to the overall parts inventory. Do not collect over aged, (30 days or more) Special Order Parts, (refer to our Number 10) and just adding them to inventory.

Do not set your Phase-Out Parameters at 12 months and beyond as parts that reach that point have a 98% chance of never selling again. Even if you are utilizing the Manufacturer's Vendor Managed Inventory, (V.M.I.) that may require us to keep these parts for 12 months or more, we still need to set our own D.M.S. Phase-Out Parameters at no more than 8 months.

Do:

Do set your Phase-Out Parameters at no more than 8 months as these parts, once reaching that point of 8 months with no sales will at least alert the Parts Manager that these parts have reached pretty much their high peak in sales. Once they reach that point and perhaps do sell, they won't be reordered again unless they meet Phase-In Criteria all over again.

Do have an overall "Obsolescence Prevention" Plan in place with a combination of outside vendors in which to "sell off" the obsolescence, even if at $.50 cents on the dollar or even a little less. Also, we do need to have an "in-house" Parts Scrapping Program. If you need more information on setting up an "in-house" Parts Scrapping Program, please contact me.

Number Six: On-Going Pricing Strategies

The key word in our Number 6 is "on-going" as we all have experienced price changes over the last couple of years. Whether due to supply chain issues, increased demand and cost, or even recent economic changes in the market.

Setting up and maintaining a consistent pricing strategy is also one of those categories that we can't have a "set it and forget it" attitude. Parts pricing, like any other commodity requires constant attention to what the market can bear. 

I'm quite sure that when we visit the grocery store, or perhaps the hardware store we are seeing constant price changes, but why is it that we keep our same pricing strategies for the most part, never even giving it a second look from time to time?

Do Not:

Once again...do not have a "set it and forget it" attitude when it comes down to parts pricing. Costs are always changing and we do not want to miss opportunities while keeping competitive with our parts prices. We often conduct competitive price surveys on our Service Pricing Menus, but when have we shopped around for pricing on our "captive parts"?

We also do not want to keep our eyes off of industry guidelines of parts retained gross profit or even a little higher. We do not want to just accept what we achieve on parts retained gross profit at a lower percentage, and just settling for what we get for the part. Customers will always pay a fair price if we give them the service they desire.

Do:

We do need to adjust our pricing strategies whether our matrix or our "flat price" parts on a consistent basis which I recommend once a quarter at least. So many Parts Departments that I've visited haven't even reviewed or adjusted their pricing strategies for months or even years. It almost seems like it's a chore no one wants to tackle on a consistent basis.

We also do need to adjust "down" our prices from time to time to remain competitive and not lose customers. It's a "fine line" that we have walk always in order to achieve our goal which is at least 40% overall parts retained gross profit in all sales categories.

Number Five: Parts Monthly Reconciliation

We've talked about this quite often in past articles where we need to make sure that our Parts Controlled Inventory balances to the Accounting Ledger Balance Inventory to 2% or less. The only way we can do this is to perform a Parts Inventory Reconciliation each month.

In many dealerships, this reconciliation function is only performed on a annual basis after the Parts Physical Inventory is performed. Times are definitely different today as dealer profits rely on every profit category including Asset Management.

Do Not:

Do not rely on the dealers "Balance Sheet" and carry over amounts each year such as LIFO methods, (last in, first out) to "balance out" v ariances between the Parts Inventory Controlled Balance and the Parts Ledger Balance Inventories. I'm sure we do not do the same exercise with the New and Used Vehicle Inventories, especially when the New Vehicle Inventory Floor Plan comes into play.

Do not trust the Dealer Management System, (D.M.S.) totally when conducting end of month Parts Analysis Reports. It has to make sense month to month on what we actually see on these reports, especially when we consider proper ordering, receipting and posting practices. (refer to our Number 9.)

Do:

Do implement a Monthly Parts Reconciliation each and every month to "capture" any posting mistakes, whether in the Parts Department, or the Accounting Department. It's much easier to trap any posting mistakes over the last thirty days as opposed to a whole year with an Annual Parts Reconciliation.

Do provide the proper Parts Manager training required in Basic Standard Accounting. As I mentioned last month, the Parts Manager and the Office Manager need to be on the same page and speak the same language when it comes down to account numbers and parts sources in all inventories.

Do implement a Parts "Perpetual Inventory Count" System where parts are constantly being "bin checked" each month in order to reduce variances between the Parts Controlled Inventory, (D.M.S.) and the Accounting Ledger Balance Inventory each month. Studies have shown that when we implement a "Perpetual Inventory Count" System, variances end up at 2% or less each month.

Number Four: Posting Emergency Purchases "Correctly"

Emergency Purchases has always seemed to be the "Lost & Forgotten" category as it's often not used correctly or even utilized at all. When  in all actuality, it's one of the most important tools in the Parts Managers Tool Box.

Emergency Purchases, when utilized correctly can alert the Parts Manager on "stock out" situations on parts that are normally stocked. These "stock out" situations, in my opinion are the most embarrassing situations that a Parts Manager can experience.

If we have to chase a part that we would normally stock, we are losing money in both Parts and Service for time lost that we can't get back. Posting Emergency Purchases "properly" can reduce those "stock out" situations and increase profits.

Do not:

Do not post Emergency Purchases on aftermarket parts as those purchases should be posted as "other" purchases", or "In & Out", (I.O.'s). After all, we are trying to make the proper Stocking Level adjustments on those parts we would normally stock as opposed to those aftermarket parts we chose not to stock.

On the other hand, if we do chose to stock aftermarket parts for whatever reason, then we should apply the same principles of posting Emergency Purchases of Normal Stocking Parts from the manufacturer. Emergency Purchases allow us to research and find out why we ran out and adjust the Stocking Levels accordingly.

Do:

We do need to separate these purchases from all others as the information will be valuable and making the correct and proper modifications in our Stocking Levels. By posting these Emergency Purchases accurately, we can measure these purchases versus normal purchases, which the guideline is 10% or less.

Number Three: Lost Sales Reporting

Well "Smart Parts" Readers!...we knew that this topic was going to come into play sooner or later and it falls into our Number Three slot. Reporting Lost Sales goes without saying as the D.M.S. only records parts transactions in two ways. One is Sales of course, and the other is Lost Sales Recording.

Lost Sales plays an integral part in seeing what parts could be eligible for Normal Stocking Status. If we don't report Lost Sales, we are missing a big part of that picture. We need to know what is out there and reporting Lost Sales is nothing more than a "good thing".

The more we have demands on a part, the more likely that we will be able to see what's out there in potentially stocking more "breadth" in our Parts Inventory. In my opinion, we can never report too many Lost Sales on Non-Stocking Parts as we "can't manage what we can't see".

Do not: 

Do not "over think" what a Lost Sale is and what is not a Lost Sale as these parts will not just "jump on the shelf" as they will still have to meet Phase-In Criteria to "potentially" meet the Parts Manager's approval to consider a Normal Stocking Part.

Do not restrict your Parts Counter Staff from the actual definition of a Lost Sale. Posting a Lost Sale should be simple and require no real thought process. If an inquiry is made on a non-stock part that we do not stock and it isn't going to be ordered or chased down, it's a Lost Sale.

Do not restrict your Parts Counter Staff for "double posting" a "potential" Lost Sale. Even if there is a "double posting" of a Lost Sale, it still has to meet Phase-In requirements for demand in separate months, regardless of how many times it was posted in a single month. We can also control our "total demand" in most Dealer Management Systems today.

Do:

Do enable Lost Sales posting without any restrictions because the bottom line is...we can't manage what we can't see. I would much rather see too many Lost Sales posted and make my own decisions as the Parts Manager on demands posted.

Do encourage Lost Sales Reporting with all Parts Staff Members, letting them know that you need their help with as many Lost Sales they can find so we can better stock our Parts Inventory with more "breadth" and less time spent on the phone chasing parts.

Do keep an active Lost Sales Record on the parts counter to make it as easy as possible for the Parts Counter Staff to write down and/or record Lost Sales. It's busy enough for Parts Counter Staff to keep up with all their daily transactions and the last thing we want them to do is to take extra steps in order to post Lost Sales.

Number Two: Parts Training

As I have mentioned several times, the Parts Department is the least trained staff in all the dealership next to Administrative Staff, but the the difference is that Parts people are in Sales! Would we ever consider not training our Front End Sales Staff?

The average "back counter" Parts Person generates as much gross profit as a Front End Salesperson does when selling 10 - 15 New and Used Vehicles. Shouldn't Parts Training be more of a priority than it is and shouldn't Parts Training be a requirement before and after we hire them?

Do not:

Do not make Parts Training an option and let's require them to take the necessary training and certifications necessary to perform their duties and responsibilities, especially when they have access to the dealers second highest asset.

Do not disregard the Parts Staff when it comes down to suggestions, opinions and recommendations when it comes down to making the Parts Department more profitable or more successful. They are part of the team and they need to be heard.

Do:

We do need to encourage them to take part in all aspects of training and certifications available to them and required by them. We also do need to give them a "career path" on what's available to them in the future, whether growing into the Parts Manager position, or other positions that may come available in the dealership.

We do need to hold them accountable for what they are in control of and to achieve the overall goals of the dealership. Let them know what their job description is and have annual reviews to their perspective goals and potential achievement levels.

Number ONE!: Parts Pay Plans & Incentives

Some may disagree with our Number One choice for "Do's" and Do Not's" for 2022, but I will say that most of us just want to succeed and have a passion for what we do. That being said, and being that we are in a Sales Position, money can be a driving force.

For some reason, the Parts Department Staff in many dealerships today is also the least incentivized of all Sales Positions. Much like training, many dealers just don't consider the Parts Counter position as a Sales Position.

News Flash!...they are Sales People and they can be motivated and driven to increase sales and gross profits in the Parts Department. As I mentioned in our Number Two, the average "back counter" person can generate as much gross profit as a Front End Salesperson that sells between 10 - 15 vehicles each month.

Question is..."Do we consider them as Salespeople and are we willing to treat them the same way?"

Do not:

Do not underestimate the value of your Parts Staff, especially the Front & Back Counter Parts "Sales" People. In many dealerships today, As mentioned, the Parts Counter Staff is the least "incentivized" Sales Staff in the dealership. Although, even if the dealer does offer an incentive for their Parts Sales People, the incentive percentage is much lower than other dealership Sales Staff in Front End Sales or their Service Advisors.

Do not make your Parts Department Sales Incentives so low that they are treated more as a "bonus" and not a considerable amount of their total compensation package. If they treat their "bonus" as a "bonus", they may never have the desire to achieve it.

Do:

Do give them achievable goals that are realistic, measurable, and most importantly...time focused. Give them incentives that will benefit the dealer and the employee so everybody wins. Do give them daily, weekly, monthly and annual goals and update them constantly on their progress.

Do include incentives that "crossover" to other departments such as the Service Department, Collision Center and the Sales Department on Accessory Sales. Drive them to the overall goal for all Sales Departments to the point where if they achieve their goals, everybody wins.

Do train them to achieve their goals and coach them to desired results and personal achievement. Keep in mind always that they are Sales People and play a huge role in other department's goals. The faster they get the part, the faster we achieve our sales and gross profit goals, especially in the Service Department.

Bottom line is this...in 2022, the Fixed Operations will continue to be the driving force to overall dealership profitability and success. We need to DO what we should be doing and DO NOT accept the status quo going forward.

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...



Tuesday, December 7, 2021

December 2021: Moving On To 2022: "The Top 5 Parts Focal Points"

One thing for sure is that we have definitely weathered a storm these last couple of years and hopefully, we are winding down and settling in to what appears to be the "New Norm" going into 2022. The past always seems teach us new lessons on what we need to do going forward.

With many economists and industry indicators making bold predictions in 2022, the one thing that seems to be a constant is that 2022 will be a continuation of 2021 in our industry. That being said, we can only look forward and make one of two decisions.

Number one, we can either continue "going with the flow" and react to each day, week or month ahead, or, number two...we can make some bold decisions and plan ahead to making 2022 our Best Year Ever. What we've experienced in the past seems to always impact what we do going forward, so making the right decision from these two choices, in my opinion will determine our results.

In the Parts Department, we have definitely been impacted by all that's happened these last couple of years. Rising costs of doing business, employee shortages, supply chain issues, increased customer demand and protecting the dealers investment just to name a few.

We have learned to adapt and survive much like everyone else during a pandemic that continues to haunt us going into yet another year. But, beyond all these issues that we have had to deal with in the past, the most important question still remains unanswered....

"Are We Going To Continue Doing What We've Done The Last Couple Of Years, OR...Are We Going To Be More Proactive Going Forward?"

This one simple question has prompted me to take the "proactive" approach looking ahead into 2022 and do some research on what we need to be focusing on as "Smart Parts" Managers. Also, I felt that we need to "think outside the box" even more than we ever have.

In my opinion, we can't just keep doing the same things, over and over and expecting different results as we all know that's the definition of insanity. That being said, what can we do differently and what should we be focused on in the year ahead?

Our "Top 5 Parts Focal Points" for 2022 are, in my opinion, what "Smart Parts" Managers need to not only focus on in 2022, they need to expand their minds and "Think Outside The Box" and go beyond just the "status quo" industry guidelines, training and parts policies and procedures.

We will list these "Top 5 Parts Focal Points" for 2022 in order from top down along with an added "Think Outside The Box" section for each focal point that will be listed. As we move on down to our number one parts focal point for 2022, I would challenge all "Smart Parts" Managers to answer this one question...

Should We Just Accept The "Status Quo" And Just Keep Doing What We Are Doing?...OR!..Do We Move On And Not Only "Think Outside The Box"...And To Get "Out Of The Box!

Here We Go!

Number Five: Parts Accounting Training

One of the most overlooked part of the of the daily routines in the parts department is posting and receipting parts. Sounds pretty simple, but this tedious task has to be one of the most important tasks that the Parts Manager must perform "accurately" each day, week, month and year.

Even though most Parts Managers go through this process each and every day, the real question is..."Are we actually posting and receipting parts accurately?" What I'm referring to is...do these numbers "match" in the Accounting Office?

As we mentioned in last month's issue of ACG "Smart Parts", when we focused on comparing the two parts inventories, both the Accounting Ledger Balance Inventory and the Parts Controlled Inventory in the D.M.S., reconciling these two inventories each month and each year begins with "accurate" ordering, receipting and posting parts each and every day.

We seem to take for granted that this daily function, if not "reconciled" properly could lead to thousands and thousands of lost dealer profit by the end of each year. This is why our Number Five Top Focal Point is Accounting & Receipting Practices.

These past two years have turned parts inventories "upside down" for many dealers because of inaccurate posting and receipting in both the Accounting Ledger Inventory and the Parts Controlled Inventory. Manufacturer parts shortages, new parts vendors, parts cost variances from dealer cost to actual cost, improper accounting on cost adjustments are just a few factors.

This "upside down" shift, in my experience and opinion, has caused the biggest Parts Reconciliation nightmare between the Accounting Ledger Balance Inventory and the D.M.S. Controlled Inventory than ever before. In many dealerships, it has been a huge loss of parts gross profit that we can not afford in these times.

So!...what do we do about it?

"Think Outside The Box"!

Many parts managers do not have enough training in basic Dealership Accounting and needs to be a top focal point going forward in 2022. Unfortunately, many dealers do not consider parts training of any kind is that important. In my opinion, the Parts Manager and the Office Manager should have one of the most important relationships in the dealership.

Recommendation: Provide Parts Manager Training in Basic Accounting Skills. This training is available from the D.M.S. Vendor and/or Dealer 20 Groups if enrolled. This relationship will only grow if the Office Manager and the Parts Manager speak the same language.

Number Four: D.M.S. Utilization

Many may not know, but in most Dealer Management Systems, (D.M.S.), the "Utilization Factor" is less than 30%. In other words, no matter what system we have, it is only "utilized" to it's potential at a 30% rate at best.

This D.M.S. Utilization Factor is especially true in the Parts Department. Countless times, I have worked with Parts Managers and each time I show them something that their system can provide, the response I usually receive is..."I didn't know that!"

D.M.S. capabilities such as, "Specific" Reporting, Cost & Piece Sales Rankings, Movement Analysis, Source "Batch" Moves, Receipting & Posting Options, Dirty Core Reports, and even a better way to track and Post Lost Sales just to name a few.

Most often when I mention some of these capabilities, not only did the Parts Manager not know that the D.M.S. could go above and beyond their expectations, they also tell me that often times their D.M.S. vendor just tells them that the system "can't do that".

Unfortunately, many of the Call Centers, when called on specific issues whether in Accounting, Sales, F & I, Parts or Service, often times don't have an answer and seem to always revert to..."No, the system can't do that" and move on to the next call.

After working with, and being fluently verse in over 10 Dealer Management Systems, (D.M.S.), I can assure you that these systems pretty much have the same capabilities, especially in Parts. Problem is, many Parts Managers don't know what they are missing out on and most importantly, what to demand out of their D.M.S.

So!...what do we do about it?

"Think Outside The Box"!

Recommendation: First and foremost, we have to use common sense and not just take "No" for an answer and research further. Ask other Parts Managers that utilize the same D.M.S. if they may know the answer, or if they had ever run into this situation before.

Also, call into the Call Center again and ask for a Supervisor to assist as many "initial" Call Center Agents may only know the basics in the D.M.S. concerning Parts. It's much like when we switch to a new D.M.S., the Installers don't even know what the proper Parts Set Ups & Controls should be.

I can also attest to that one as I have had to "fix" so many D.M.S. Set Ups & Controls that were set up to "Defaults" that didn't even follow basic math. They basically make the D.M.S. "functional" on the Installation and we have to do the rest.

Lastly, in order to "trust" the D.M.S., we have to "know" the D.M.S. in order to get out what we put into it. This is also the reason many Parts Managers don't trust their D.M.S., especially when creating a System Generated Stock Order as the results don't make sense and prints off several pages of "recommended" parts we wouldn't even stock.

Want to learn more about your D.M.S.?......

Call Me...

Number Three: Managing Stocking Levels - Supply Chain Issues

Every "Smart Parts" Manager is well aware of the Supply Chain issues that we've had to face over these past couple years, but my question is...

Are We Being "Proactive" or "Reactive" To This Supply Chain Issue?

In other words, have we just reacted to whatever the "flavor of the week" is when we can't find the simplest of parts to restock our shelves, or are we taking steps to prevent from happening in the first place? If I was to guess...I would say that many Parts Managers react to the situation and deal with each situation as it happens.

What if I was to tell you that these situations can be managed "proactively" through your own D.M.S. and Manufacturer's Vendor Managed Inventory, (V.M.I.)? This is done by increasing the Stocking Levels, or Days Supply and Best Stocking Level, (B.S.L.).

Once these Set Ups in the D.M.S. are increased by a few extra days, the Manufacturer's V.M.I. will pick up these modifications in the D.M.S., if updated as recommended by the V.M.I. Source. The "trick" is doing the proper math on the proper Annual Piece Sale Ranges and increasing the Best Stocking Level, or High Days Supply.

So!...what do we do about it?

"Think Outside The Box"!

We need to manage our Stocking Levels more often as these settings as they are not a "set it and forget it" deal. Supply Chain Issues are real, but we always seem to find a vendor to fill our needs and that's what we have to manage in our Stocking Levels.

Once we find the vendor who has the parts, or perhaps the manufacturer starts releasing back orders, we need to "stock up!"...but NOT by guessing. We need to manage these changes through the D.M.S., which will also update the Manufacturer's Stocking Levels for you dealership.

For example: If a part sells on average 100 times annually, then that part is due to sell, on average, every 3.65 Days, (365 days a year divided by 100 annual piece sales). That makes the Best Reorder Point, (B.R.P.) to be at 4 Days. The Best Stocking Level, (BSL) is usually set at at least 100% to 150% of the B.R.P.

That being said, and if we use the 100% factor, then the Best Stocking Level, (B.S.L.) in the above example would be 8. But...if we just added a few extra days to that Best Stocking Level, we would have more "Safety Stock" to help with Supply Chain issues.

THE most important thing to remember when Managing Stocking Levels is the the Low Days Supply, or Best Reorder Point does not mean quantity, it just means that's the reorder point. We never change the reorder point, we only increase the Best Stocking Level, or High Days Supply.

In the above example, the reorder point is at 4, whether we sell 10 of those parts a day, or 20 of that part a day, the reorder point would be when the parts gets down to a total of 40 or 80 it will reorder to 40 or 80 or even higher. If we change the reorder point to a higher number, we would actually run out of that part.

Number Two: Protect The Parts Inventory Investment!

Protecting the dealers investment, or asset, has always been a top priority for the "Smart Parts" Manager, but it's even more important today than ever before. As we mentioned in our "Number 5 Parts Top Focal Points" for 2022, keeping the Ledger Balance Inventory and Controlled Inventory Balance as close as possible.

Protecting the dealers investment means that we have to keep our eyes focused on total inventory amounts, keeping obsolescence controlled and not "over buying" parts inventory. Just because the Parts Inventory is an asset, it doesn't mean that it doesn't represent "cash flow".

In the past, and in many dealerships, carrying obsolescence was normal, even if we carried a substantial amount, we just considered parts obsolescence as just a "cost of doing business". Especially in these times, we cannot afford to tie up the dealers cash in parts that most likely will never sell again.

If we are going to tie up more of the dealers "cash flow", it should be invested in fast moving parts that we don't want to run out of, especially with all the supply chain issues. Controlling the obsolescence means utilizing all options from the manufacturer and vendors that will "buy up" this obsolescence.

Whether we get 50 cents on the dollar or lower, it is still the right thing to do as any cash we receive back and re-invested in parts inventory that turns 8, 10, 12 times a year or higher is still a "win-win" situation. Once again, the proper Set Ups & Controls in the D.M.S. are critical.

So!...what do we do about it?

"Think Outside The Box"!

In order to protect the dealer's investment, we need to modify our Parts Set Ups & Controls once again and reduce our Parts Phase-Out Parameters. In many dealerships today, the Phase-Out Parameters are set at 12 months, which is too late.

Once a part reaches that 12 month, no sales threshold, there is only a 2% chance that those parts will ever sell again. We need to be "alerted" much sooner when we have a better chance of selling those parts that are dropping down before they hit 12 months.

If we reduce our Parts Phase-Out Parameter to perhaps 7 or 8 months, we would have at least a 35% chance or better to sell those parts. Once sold, they would not be reordered as they would "phase-out" and not be suggested on the next Stock Order.

This especially critical if we use the Manufacturer's Vendor Managed Inventory, (V.M.I.) as one of their main selling points is that they will "protect" the dealers parts inventory. Problem is...they may be protecting those parts that didn't sell a year ago, meanwhile, we have purchased another 11 months of parts inventory that may not sell.

Don't Become The Manufacturer's Second Warehouse!

Number One: Parts Gross Profit!

If you haven't figured out by now what our "Number One Parts Focal Point" for 2022, don't be surprised. Even though it's an obvious choice as we all know that we are all in business to make money and to survive, especially in these times.

Although, you may be surprised when we get to our "Think Outside The Box" recommendations as to what we need to be focused on in the coming year. Keep in mind that the Parts Department is the most profitable dealership department by percentage.

We have also lived by our industry guidelines for years and we have also been satisfied when we reach industry guide levels in both parts gross retention and "net to gross" percentages. For years, achieving a Customer Pay parts gross retention percentage of 40% - 42% was the accepted goal.

Same goes for Wholesale at approximately 23% and parts sold on Internal at the retail gross percentage of 4-%-42%. On our "Bottom Line", our "net to gross" percentages, pending on the manufacturer and allocated expenses, would also come in anywhere from 25% t0 40%.

We Need To Do More!

News Flash!...prices are going up everywhere!...Have you seen the price we are paying at the pump?...How about your grocery bill?...Have you priced out a Used Vehicle lately?...

So!...what do we do about it?

"Think Outside The Box"!

Just think for a moment...what if we changed our expectations on the parts gross profit guidelines on the one and only parts gross profit margin that we have total control on, which is customer pay? Warranty and Internal gross margins are pretty much set by the manufacturer and the dealer.

What if we increased our parts gross expectation from the normal 40%-42% to let's say 50% on Customer Pay Parts Sales and Internal Parts Sales? How would that not only change our thought process when creating pricing strategies and the overall "Bottom Line"?

Think about it for a moment, other than Competitive Parts, if I was to sell a part that cost $10.00 and sold it at $16.70 for a 40% profit margin, why couldn't I sell that part for $20.00 for a 50% gross profit margin? After all, it's only a net difference of $3.30!....Hmmmm

Let's go one step further and multiply this out to a monthly and annual gross profit difference with an average Parts Department that sells approximately $50,000.00 in Customer Pay Part Sales, (at cost). How much would that impact be going from 40%-42% to 50%?...

Let's Find Out!

The net result of selling those parts at cost for $50,000.00 would result in a total sales number of $83,500.00 at a 40% gross retention for a gross profit dollar amount of $33,500.00. If we sold those same parts at cost at a 50% gross profit margin, we would end up with a gross profit dollar value of $50,000.00

That's a increase of $16,500.00 per month and $198,000.00 annually, over and above the normal, "accepted" gross profit margin of 40%! One thing for sure in the Parts Department is that we may not have total control of where our sales come from, but we do have total control of our Customer Pay Parts Gross Profit!

Something to think about....

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...
























Thursday, November 11, 2021

November 2021: Ledger Balance vs. Controlled Balance Inventory: "What's The Difference?"

In my opinion, and as a former Parts Manager, Service Manager, Fixed Ops Director and Part Owner of an Automotive Dealership throughout my career, my tenure as Parts Manager, when it comes down to preparing for year end was without a doubt the most stressful time of year.

Preparing for end of year is when we complete the process of "reconciling" the dealer's assets, and where the nightmare begins for the Office Manager, or Comptroller, Sales Manager and the Parts Manager, unlike other dealer management departments

Assets meaning the dealers inventories, including the New & Used Vehicle Inventories and the Parts Inventory. This is where it all begins when we talk about "reconciling" what we show "on the books" as far as the values of all these inventories compared to "what we actually have".

The "Ledger Balance" shown for all these inventories represents the amount of inventory that we paid for versus what we actually have either on our lot in New & Used Vehicles, or the parts we have on our shelves represented in our Dealer Management System, (D.M.S.)

Balancing what we paid for versus what we have is referred to as "reconciliation", or perhaps another term that we could use is "verification". We need to "verify" what we paid for versus what we have on our lot and on our shelves in the Parts Department.

In the Sales Department, this is pretty much an easy task because it's not to difficult to walk the lot and count our Sales Units on a regular basis to verify, or "reconcile" what we've paid for versus what we have. After the unit count is completed and we take in to consideration our "contracts in transit", or "work-in-process" in Service Manager Lingo, we can usually reconcile these inventory amounts rather easily.

In retrospect, it is not that easy in the Parts Department as the number of parts on the shelf far outnumber our sales units on the lot. The average Parts Inventory houses anywhere form 3,000 - 5,000 part numbers multiplied by the number of pieces of each part on our shelves, which can reach up to as much as 10,000 parts on the shelf or even more!

The shear number of parts "pieces" alone makes it much more difficult to "verify" or "reconcile" what we have versus what we paid for at any given time compared to the Sales Department Inventory. Whether we perform an Annual Parts Physical Inventory, or we perform an on-going "Perpetual Physical Inventory", we still have to "balance the books" at the end of each fiscal year for accounting purposes.

This is where all this "end of year" stress begins with all these transactions going on each day in the Parts Department. As a matter of fact, there are more parts transactions in the Parts Department in a single day than there are in the whole dealership in a single month!

That being said, how can we possible "verify", or "reconcile" what we actually have in the parts inventory versus what we paid for? There must be a simple answer and logically, shouldn't those numbers always match? If we bought a part for $10.00, then shouldn't the Parts Inventory reflect that same $10.00 on the shelf?

Not So Fast "Logical & Common Sense Thinkers!"....Let's Get Started And Find Out Why!

It all starts with our Accounting Practices, which include how parts are receipted and most importantly, how much we receipt those parts for. In other words, if I buy bulk oil at let's say $10.00 a gallon, which is $2.50 a quart, but I "receipt" that bulk oil at it's individual quart price of $3.00 a quart, the dilemma begins and is multiplied by potentially thousands of dollars.

In the above example, we are already creating a "reconciliation" nightmare as the "Ledger Balance", (what we paid for it) shows $2.50 a quart, but we are selling it out of our "Controlled Inventory" on the D.M.S. for $3.00 a quart which results in a "buy down" of the "Controlled Inventory Balance" of $.50 a quart multiplied by hundreds of quarts of oil sold, which can add up to hundreds of dollars of discrepancy between the two inventories just on bulk oil if not accounted for properly.

This one example alone multiplied by many other examples that I could refer to, could and will lead to discrepancies in reconciling the Parts Ledger Balance and the Parts Controlled Balance on the D.M.S. each month and each year. 

This is where Accounting Skills, Communication Skills and Standard Accounting Practices are crucial between the Parts Manager and the Office Manager as these purchase and cost of sales issues must be accounted for properly on the original invoice. In the above example, these upfront bulk discounts must be accounted for as profit to balance the adjusted actual cost of each quart of oil.

This above example obviously shows a variance of these two inventories in the direction of more "Controlled Inventory" versus the "Ledger Balance Inventory". The result of the above example is a positive for the dealer because it would result in a "uplift" of dealer profit.

In other words, if my "Ledger Balance" is lower than the "Controlled Balance", it would represent a 100% profit on the difference. If the "Ledger Balance" shows let's say an accumulative balance over time of $200,000.00 in D.M.S. Parts Inventory and the "Controlled Balance" is $250,000.00, then the dealer would net an "uplifted" profit of $50,000.00 at the end of the year.

Many Parts Managers may also try to adjust their actual cost on many items when purchased in volume to achieve the highest discount, but that may also be a reconciliation nightmare as discounts vary, even on the same parts purchased at different times.

Now, let's look at another example in the other direction if we actually pay more for our parts versus what we bill them for at cost, then the end result would be a loss of corporate profit. This is not uncommon as parts are sometimes paid for in Accounting, but are not billed at the cost we paid as most parts are billed at the Manufacturer's Pricing Guide cost listed on the D.M.S.

Examples in this direction often happen when we pay more for a part, above dealer cost, but the part is sold at the manufacturer's cost. In other words, maybe a part costs $10.00 if I purchase the part from the manufacturer, but I had to chase the part for a cost of $12.00 and if not properly accounted for, the "Ledger Balance" would pay $12.00, but the part is billed out at the manufacturer's cost of $10.00, thus resulting in a net loss of $2.00, or discrepancy between the two inventories.

Going in this direction, if multiplied over and over, month after month, year after year could result in a loss of several thousands of dollars in Parts Department Profits. If the "Controlled Balance" for example was in the other direction of let's say $200,000.00 and the "Ledger Balance" Inventory was $250,000.00, the result would be a loss of $50,000.00 which could be compared to $50,000.00 going out the back door or as most dealers presume as "pilferage" or "theft".

I will say though that in most cases, it's not theft or pilferage as most often, it's accounting or receipting errors, lack of Parts Manager Training on basic Accounting Skills, or perhaps even key punch errors. Although, higher discrepancy errors in this direction that I have witnessed, theft or pilferage could definitely be a possibility.

Managing and Reconciling two inventories when we "physically" only have one Parts Inventory can be confusing and could have other ramifications in other Parts Key Performance Indicators, (K.P.I.'s). One example of how these discrepancies can impact other areas of the Parts Department's Inventory Performance, or K.P.I.'s is the "Parts Days Supply" calculation.

If we use the wrong inventory amount when calculating our Parts Inventory Days Supply, we could be sending out the wrong message to the dealer when we compile and compare all of our data compared to industry guidelines as to if we actually have too much inventory versus not enough inventory.

The industry guideline for Days Supply is 1.5 months, or a 45 "Days Supply" of parts in dollars in the parts inventory. In order to calculate the proper Days Supply of inventory that we should have on the shelf, we have to look at what history tells us.

An example would be is if we sold an average of $100,000.00 in parts sales at cost per month over the course of one year, and we multiply that amount by 1.5, (45 Days Supply), then we should have $150,000.00 in our parts inventory to equal a 45 Days Supply of parts.

So now the question is...

"Which Parts Inventory Amount Are We Supposed To Use When Calculating Days Supply?"

That answer is actually quite simple because our Ledger Balance is just a number and has no "tangibility" as opposed to the parts listed on the D.M.S., or Controlled Inventory. In other words, I can actually pick a part in my Controlled Inventory and hold it in my hand as one unit that costs $10.00.

This is what the D.M.S. Controlled Inventory represents because it's "what I have" and not what I'm perhaps "supposed to have" in dollar value listed on the Parts Ledger Balance. This is why we cannot use the Ledger Balance Parts Inventory when calculating Days Supply.

The D.M.S. "Controlled Inventory" gives me part numbers, bin locations, part quantities, cost per part and it can add up all my parts on the shelf to give me one total inventory dollar amount which is "tangible". The "Ledger Balance" Parts Inventory is the total of what we paid for in parts every month and every year.

That being said, and looking at these two inventory amounts logically, the Parts "Controlled Inventory", should be the most accurate inventory dollar amount, especially right after a physical inventory has been performed. We can't perform a physical inventory of the Parts "Ledger Balance" Inventory as we can only add up parts invoices as to what we paid for the parts.

If we show a lower amount on our Parts Ledger Balance compared to our amount in the Controlled Balance in our D.M.S., it could mean the difference of perhaps a Days Supply amount of only 30 Days Supply on the Ledger Balance, when we could actually have a 45 Days Supply of parts actually in our Controlled Balance on the D.M.S.

If the amounts are reversed, then the opposite would happen with a higher Days Supply in our D.M.S. compared to the Parts Inventory Ledger Balance. When you think about it, I could technically "buy down" my Ledger Balance to zero dollars, but still have parts on the shelf.

This brings us down to the "Million Dollar" question....

"How Can We Keep These Two Inventory Amounts Balanced?"

The answer to that question calls for two key ingredients, or processes that have to be implemented, or in place to keep the Parts Ledger Balance and the Controlled Inventory Balance on the D.M.S. as close as possible. Keeping these two inventories to a recommended 2% variance or less requires performing Monthly Parts Reconciliations along with conducting Perpetual Parts Physical throughout the year.

Conducting a Perpetual Parts Physical Inventory requires constant bin counts to verify what we have on the shelf. In other words, if I have 100 bins in my Parts Department, I would be performing "bin counts" on at least three bins per day throughout the month which would result in a complete Parts Physical Inventory each month to reconcile my physical inventory to my accounting inventory.

Performing Monthly Parts Reconciliations allows us to keep those "checks and balances" as tight as possible as accounting mistakes are much easier to trap over a 30 day period opposed to waiting until the end of the year to do a physical inventory and hope for the best when we measure that end of year count versus the inventory amount shown on the books, or Ledger Balance.

Monthly reconciliations also includes items such as Parts Work-In-Process, Outstanding Credits, Dirty Core Inventory, Parts Returns and Manufacturer Monthly Price Updates. All of which play a huge role in matching up the numbers and "dollars" between the Inventory Ledger Balance and the Inventory Controlled Balance.

Even though these two inventories carry two different meanings and definitions, the ultimate goal is to keep these two amounts as close as possible at the end of the year. Managing them to be as close as possible requires our attention each month to avoid those surprises at the end of each year. 

Bottom line is that we definitely do not want those surprises at the end of the year, especially if the variances between the two parts inventories balances goes in the wrong direction. Monthly Reconciliations along with performing an on-going Perpetual Physical Inventory is the combination to avoiding these end of year nightmares and less than desired results.

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...




















Tuesday, October 5, 2021

October 2021: Parts Department Training: "Is Your Staff Fully Trained?"

In most automotive dealerships today, and unfortunately, the Parts Department is the last department on the list when it comes down to training priorities. At best, Parts Department Staff may be required to complete certification status with various manufacturers, but these certifications are not a substitute for basic training requirements.

Working in the Parts Department also requires a certain personality that is detail oriented along with a logical thought process in order to manage and process all the information and transactions that occur each day in the Parts Department.

Recruiting and hiring the right Parts Department Staff and much like in any other dealership department, requires the same routine background checks, employment history and experience. The difference though in hiring Parts Department Staff is that there are a lot of other factors that have to be considered in the hiring process.

First and foremost, all Parts Department Employees have to be trustworthy and responsible in protecting and maintaining the dealers parts inventory. These two characteristics can not be trained and have to be a prerequisite for all Parts Department Employees.

Once we pass through the recruiting and hiring milestone, positioning and training become the next two priorities. Obviously, when hiring Parts Counter Staff, experience and work history usually dictates the parts counter positions with entry level parts employees filling the shipping, receiving, stock person and delivery driver positions.

All these positions require proper training, even at the entry levels as all parts department employees are responsible for protecting, maintaining and securing the parts inventory. Training on OSHA Requirements, (Occupational Safety & Health Administration) is important for all dealership employees, especially in the Parts Department.

On that same subject, all employees, including parts employees need to be trained and familiar with the Dealers Material, Safety and Data Sheets, (MSDS) and it's full contents including locations of Eye Wash and Medical Stations.  

Along with basic "housekeeping" practices, all the above apply to all parts employees and as well as all dealership employees. Taking pride in our work place environment seems to have slipped away over the past several years and needs to be a common practice again.

Once "basic training" for all parts employees is completed, individual training on all Parts Job Descriptions is the next requirement. Without a Job Description, training for any position would have no accountability or purpose.

Let's Get Down to Parts Department Training in all the Specific Categories...

Entry Level: Shipping/Receiving/Stock Person/Driver

As you can see from all the different Parts "Entry Levels" above, most of our parts employees got their start in the Parts Department in one of these areas. As they progress in these roles, they often end up in parts counter positions or even management.

Training is still just as important in these entry level categories and we will start with the Parts Driver. The parts driver, believe it or not is the "face" of the dealership when on the road delivering parts. This means that the parts driver should be trained and skilled in verbal communication.

A friendly smile, handshake and a warm greeting should be the norm on every stop on the route while delivering and/or picking up parts. The parts driver should be recognizable in dealership attire and be well versed in current wholesale promotions and special offers.

Our next entry level parts position that requires specific training is the Shipping & Receiving Clerk. Shipping & Receiving parts is an extremely important position. It requires a degree of "reconciliation" and "accounting" experience from order numbers to packing slips right on down to the parts invoices.

This is where I was referring to parts staff having the right Personality Profile that is detailed, organized and logical thinking. Reconciling all these parts and paperwork has to be accurate in order to reconcile the Controlled Parts Inventory, (DMS) and the Accounting Ledger Balance Inventory.

Inaccurate and improper posting of parts can also lead to an inaccurate Off Shelf Fill Rate and most important, the First Time Off Shelf Fill Rate as parts have to be receipted in the proper stocking categories of Normal Stocking Parts and Non-Stock Parts such as Special Orders.

This could ultimately lead to inaccurate inventory investment numbers, gross and true turn rates and overall obsolescence. Who would have thought that all this training on proper posting and receipting could lead to so much in the end? As the old saying goes..."Garbage In, Garbage Out!"

Insuring the right bin locations for parts is also a skill that requires training in bin management and computer skills to continuously update the current stocking position of all parts and in proper order, space availability with the part number facing forward for proper identification.

Bin positioning is also very important as fast moving parts need to be shelved closer to the front counter for efficient dispatching of parts to technicians. Slower moving parts can be binned according to size, or individual part group identification as needed.

The Shipping/Receiver, or Stock Person has a key role into what eventually happens out front with the Front and Back Counter Staff and Parts Manager. You might even say that they are the "set up" people that make it happen from behind the scenes and their position should never be taken lightly.

Front & Back Counter Staff:

When I was growing up in the parts business, the "Parts Counter" was the elite position, both in the dealership and the aftermarket. This is where you wanted to be and hopefully some day, grow into the Parts Manager Position. In most dealerships today, most Parts Manager "grew" into their management position by their tenure on the Parts Counter.

That being said, training is of the utmost importance in being a successful Parts Counter Person. The unique skills required encompass many personality traits from being a salesperson, cashier, research analyst and yes...even a psychiatrist when it comes down to listening to technicians every day.

The Parts Counter Person is also a "diagnostician" in many cases as technicians often ask the Parts Counter Person what they need to fix a vehicle and like most Parts Counter Persons, they always offer their advice based on experience in looking up parts.

This "shifting" degree of personality traits starts with an analytical mind that can shift from customer to customer, technician to technician and stay on a logical point while communicating with all types of personalities. There is no training that can change who we are, but adapting to different environments is a task by itself.

The Parts Counter Person must also be trained in Accounting to some degree where "checks and balances" are an every day occurrence and must always be accurate. The Parts Counter Person also has to be trusted in all Pricing Strategies & Policies implemented by the dealer.

The Parts Counter Person also MUST have good "phone skills", which unfortunately is not trained enough in many automotive dealerships today. The standard "Parts Hold" response is still the number one response on in-coming calls to the Parts Department. In my opinion, parts phone skills training is the number one training topic.

With so many transactions throughout each day in the Parts Department, it's a wonder that more mistakes don't happen as each part has to be billed individually for the most part and every part has to be accounted for on the shelf with an average 4.000 to 5,000 part numbers in the average inventory. 

Lastly, the Parts Counter Person must be trained on basic salesmanship in "relative" selling on related parts that the customer may be inquiring about. In other words, selling a set of brake pads could also include a bottle of brake fluid needed to bleed the brakes.

The Assistant Parts Manager:

The Assistant Parts Manager position is not a position in all Parts Departments, but if it is, it's the "catch all" of all other Parts Department positions. The Assistant Parts Manager has to fill all roles in the Parts Department efficiently and to the expectations of the Parts Manager position.

Training in this position requires Parts Management Training as well as Parts Staff Training, which can be a "juggling act". In my opinion, the most important training attribute of any "Assistant Manager" position is Communications Training.

The Assistant Parts Manager, or any Assistant Manager for that matter, is the "binding thread" between management and subordinates. Meaning that they are the "in-between" person and often times get caught up between the two.

That being said, the Assistant Parts Manager has to be uniquely skilled and knowledgeable in all aspects of the Parts Department Operations, plus that added level of communications training that binds the department as one department.

This is one position that needs to include experience, past work history, the right personality and work ethic that can lead others, just like the Parts Manager. Training for the Assistant Parts Manager should be no different from the Parts Manager.

Dealer Management System, (DMS) training is a must on all the "proper" Set Ups & Controls, including Phase-In/Phase-Out Criteria, Stocking Levels, Obsolescence Control, Pricing Policies and Account Management all applies to the Assistant Parts Manager. 

Training never stops, as one of my clients has said to me several times, and the Parts Department is no different. Parts Department Training needs to move up the ladder in priority in the dealerships training agenda for obvious reasons...

 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...

 

 

 






 

 

 


 

 

 


Wednesday, September 8, 2021

September 2021: Breaking News: The Current State Of Our Industry

It's been a while since I focused our ACG "Smart Parts" topic on the "State Of Our Industry" as I normally do at the end and beginning of each year. Even though it's only our September issue, so much has and is happening that I just couldn't wait until the end of the year.

Another reason for not waiting to the end of the year is, in my opinion, things are happening so fast in 2021, especially if we compare what's happening now versus just over 18 months ago when this whole Pandemic started. 

But!...it's not just the Pandemic that's causing what we are seeing today versus just a year and a half ago, even though it may have just been the "catalyst" of what we are seeing now and more importantly, what's to come.

Who would have ever thought that dealers would be making more "Front & Back" Gross Profit on New and Used Vehicles than ever before? Especially when we have the microchip shortage that has impacted dealers new vehicle inventory, which we will also cover further down in this article.

Who would have also thought that the Dealers Fixed Operations would rebound from Covid-19 at record levels in many dealerships? How could all this happen after such a serious health crisis that we are still dealing with even today with the Delta Variant?

The answer to these and many other questions that we will be exploring in this issue of ACG "Smart Parts" has to do with much more than the average person might think. Even though the "cause and affect" on these topics we discuss are not unfamiliar, it's the immensity of these topics that has had such a huge impact.

We have all heard the terms of Global Domestic Product, (GDP), The Economy, Covid-19, Global Issues, Unemployment Rates, Inflation, Industry Guidelines and Results, and most familiar and right down to earth for us "Smart Parts" Manager...Back Orders!

That being said, and if we have all heard these terminologies before...then why are they impacting us so much more than ever before in our history?...and not just in our industry as all retail markets are being affected right down to going to the grocery store and filling up our tanks.

"Could This Be The Perfect Storm, or...Could It Perhaps Be The New Normal?" 

Let's Read On To Find Out!...

As mentioned, we will be exploring all of these "cause and affect" areas that are impacting what we are seeing and experiencing today. Each category will have a detailed correlation to our Parts Industry and our whole Auto Industry in general. 

We will also include industry information through the first half of this year from NADA and their Chief Economic Advisor, Patrick Manzi. This information from the first two quarters of 2021 will lead us into all the other "cause and affect" areas that shape where we are today.

The following information provided by NADA and Patrick Manzi and readily available in full detail at:

nada.org/nada-Q2-2021-auto-sales-analysis

Time to Kick Things Off with our September Issue of ACG "Smart Parts"!...

Breaking News: The Current State Of Our Industry

NADA Auto Sales Analysis - June 2021:

As mentioned , we will start with some statistics from our friends at NADA and Patrick Manzi, Chief  Economics Advisor. Also keep in mind as we review these results that the current and on-going concern on the microchip shortage continues to play a role in the current new vehicle inventories in our dealerships today.

We won't get into the global and/or political aspects of this microchip shortage, rather we will look at the overall impact and the "trickle down" affect on how this has impacted our Parts Department Operations today.

Through June of 2021, 76.9% of New Vehicle Sales came from Light Truck, SUV's and Crossover Vehicles which is not a surprise. Of which, 17.6% of that percentage came from Light Truck, which is down from 20.0% from 2020.

This is pretty much due to "Lost Production" according to Auto Forecast Solutions from the drop in microchip inventories. As of June 2021, new vehicle production was down 4.6 million units from 2020, of which, new light truck production was down 1.5 million, with projections to be down to 1.8 million by the end of this year.

This all equates to a very common term for "Smart Parts" Managers which is overall Days Supply. As in the Parts Department, a 45 Days Supply of parts in dollar value is the current NADA Guideline. The same goes for new vehicle inventory, but with this microchip shortage, new vehicle inventories have dropped down to just 25 Days Supply.

Actually, the normal new vehicle inventory Days Supply would be approximately 60 Days Supply at 2.6 million in new Lt. Truck Inventory, but with projections going down to approximately 1.4 million in new Lt. Truck Inventory, the Days Supply will drop even lower than a 25 Days Supply.

New vehicle production is expected to rise in 2022, but even with this rise back to somewhat normal, fleet inventories such as rentals, commercial and government vehicle production orders will be filled before dealer inventories get filled.

High demand and low dealer inventories have also caused the average price of a new vehicle to rise to a record average of $40,206.00. This has also raised the new vehicle average monthly payment from $576.00 per month to $598.00 per month as more and more new vehicles are being sold at MSRP or higher.

With higher trade in allowances and lower, sustained interest rates, or at least until a projected 2023 timeframe, demand keeps pushing the price upwards, for both new and used vehicles. Even though manufacturer incentives are declining, dealers are realizing that less on the lot is actually more when it comes down to profit.

Could this be the "New Norm" going forward for dealers?...especially with the Floor Plan Expense Savings that dealers are experiencing now?....Only time will tell!...

The Economy:

The economy always has an affect on our industry, but in my opinion, not as much as it has to this point in 2021. Again, putting politics and world economics aside, the rise in inflation has been the highest in a such a short period of time than I have experienced in my lifetime.

Let's look at the month to month inflation rate since December 2020, which had us at an inflation rate of 1.6%. All percentages below provided by www.usinflationcalculator.com...

  • January 2021: 1.6%
  • February 2021: 1.7%
  • March 2021: 2.6%
  • April 2021: 4.2% (biggest jump!)
  • May 2021: 5.0%
  • June 2021: 5.4%
  • July 2021: 5.4%
With these numbers on the rise, it's not a surprise to see the new vehicle sales numbers as they are, especially with higher demand and less inventory as people are driving again. More people driving again also means a higher demand on parts and service.

Dealership Service and Parts Departments are bouncing back like never before and setting new records. This is especially ironic with the health crisis that we are still going through for the last 18 months. Demand on parts has never been higher and at a time when supply chains are being stressed more than ever. 

We will explore more on those last couple of comments even further in this issue!...

Employment: "Let's Get Back To Work!"

This is a big issue as everyone one of us have felt the blow of trying to hire the right people, or even in some cases, a "body" to fill the void of the overstressed and higher demand work environment. It's never really been easy to find the right person for the right job, but it's never been more difficult than it is now.

Unemployment numbers and percentages are falling, but still to this day, 14.7 Million Americans continue to receive some form of unemployment and/or pandemic compensation. The good news is that this number is down 54% from a year ago. Currently, 70% of the jobs in our industry lost due to Covid-19 are back and have been filled on a national level.

On the dealer level, employment has improved to nearly 1.1 million, but it's still hard to find the right individuals to fill this growing demand, especially in the area of Fixed Operations. On top of that, even if we do find the right individuals, the compensation expense for our employees is rising at an astronomical rate.

Global Economy & Events:

On a global scale, the United States still remains strong as the number one leader in Global Domestic Product, (GDP), even though long term projections having the United States dropping in their percentage share of the GDP market.

As of mid-year 2021, here are the Top 5 GDP countries around the globe with GDP listed as well in the trillions...
  • United States: 25.3 Trillion
  • China: 20.6 Trillion
  • Japan: 5.6 Trillion
  • Germany: 4.9 Trillion
  • India: 4.9 Trillion
As you can see, there is quite a gap after the number two GDP country which is China, which is our biggest competition and unfortunately, holds much of our debt. This global economy is going to go more and more "global" in the years to come as we already see with the current microchip situation.

So, how does all the above affect the Parts Department?...

Supply Chains - Vendors:

I saved the best for last as after all...ACG "Smart Parts" is supposed to be about Parts! The overall affect of what we have drilled down above boils down to parts shortages. Shortages that have never been experienced before in our country since the Depression.

So, what's causing all this in the first place?...

First of all, the microchip issue is different from the overall issue of parts shortages with almost all the manufacturers across the country. The parts shortages go much further than the microchip shortage that's affecting new vehicle inventories and sales.

The parts shortages are due to a wide variety of issues and reasons that started with the pandemic, with the exception of General Motors who suffered through a strike right before the pandemic hit in early 2020. The result for General Motors was a "double whammy" with the strike and then the pandemic.

We often mention the phrase "trickle down" in our issues and none is more true than the "trickle down" we have experienced with parts shortages. The parts shortage overall is impacting automotive dealers as well as the parts aftermarket as many vendors provide parts for both markets and are just branded with different logos.

The first thing we have to determine on the "cause and affect" of this parts shortage is..."Who's making these parts and where do they come from?"...

This is our first clue as you may have noticed that most of these parts shortages have mostly affected the domestic branded vehicles such as GM, Ford and FCA, (Chrysler, Dodge, Jeep & Ram) with minimal affects on imports from a replacement parts manufacturing standpoint. 

Of course with the pandemic, there were warehousing and distribution issues with any commodity or product getting to it's final destination, right down to toilet paper, but we are looking into this even further.

Many of the replacement parts for domestic vehicles come from not only the United States, but other countries such as Mexico, Taiwan, Canada and others that have to deal with plant shutdowns, reductions in employees and even transportation issues as the result of the on going affects of Covid-19.

We also have to look at what these replacement parts are made of, which for the most part are petroleum based. For example, we are still feeling the affects of the winter/spring ice storm that hit Texas and shut down plants for months.

Petroleum products in these factories that were shut down in Texas include plastics, foam for car seats, modules, trim, filters and many other replacement parts that include petroleum as a main byproduct were affected by the storm shutdown.

Replacement parts manufactured in Mexico and other countries also had to deal with and are still dealing with Covid-19 restrictions for travel and commodities crossing borders which includes many other products including appliances, clothing, food, etc.

Along with truck driver shortages, cost of fuel rising, and lack of workers in the work force, it's no wonder that we are feeling the blow in the Parts Department with trying to provide, in some cases, normal stocking parts such as oil filters.

Adapting to change has never been more critical than now for "Smart Parts" Managers. Relying on the manufacturer to replenish our shelves with the simplest of parts such as filters, oil and other fast moving parts on their Vendor Managed Inventories, (V.M.I.) and overnight dedicated deliveries can not be trusted.

Now is the time to stock up and add a few more Days Supply, or "safety stock" to avoid future back orders and "out of stock" situations. We need to rely more on our own D.M.S., (Dealer Management Systems) with the right set ups to track our own demand on the most common parts which will in turn be the difference maker.

We also need to look at our current Pricing Policies and start thinking about modifications in that area as well. As mentioned earlier, prices are going up in every aspect of our economy, so why don't we do the same? Have we made the same adjustments or modifications to our parts prices, especially our price matrix to keep up with higher costs and inflation?

In my opinion, everything is going up in cost as illustrated due to higher demand and lower inventory levels which leads to new opportunities and new challenges. We have to meet these challenges head on in order to adapt to change and move to the next level.

"The State Of Our Industry remains strong, but the next "Breaking News" is just around the corner and we have to do what we always do....and that is...whatever we have to do be successful "Smart Parts" Managers!"


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...




 














 
















 






Wednesday, August 4, 2021

August 2021: Parts Sales Activity: "What Does It Really Mean?"

Measuring the "Performance" of the Parts Inventory can only be detailed and illustrated by the Dealer Management System's, (D.M.S.) Parts Monthly Management Reports. Depending on which D.M.S., these reports have many titles and may or may not contain the same information, or in some systems, not enough information.

In addition, with some Dealer Management Systems, the end of month parts analysis information may be on more, or perhaps several end of month parts reports. The important thing is to know what we are looking for and what we are measuring in the area of "Parts Inventory Performance".

The other important aspect of measuring what we see on these reports is accuracy. What we see on these reports may not be accurate as it depends on how information is entered into the D.M.S. that dictates the outcome on these reports. As the old saying goes...garbage in, garbage out.

Other than what we see as far as sales and gross profit information on the dealer financial, there are several Key Performance Indicators, (K.P.I.'s) that need to be measured and tracked on these end of month parts management reports. 

The true "Performance" of the parts inventory asset cannot be seen on any financial page and can only be measured by an accurate, detailed Parts Monthly Analysis Report, Inventory Management Report, Benchmark & Trends Report, or whatever name the D.M.S. labels it as.

Industry Guidelines actually dictate what these Key Performance Indicators, (K.P.I.'s) are, telling us what we should be looking for on these Monthly Analysis Reports. Even though there is a "ton" of information on some of these reports, the most important are as follows;

  • Overall Off Shelf Fill Rates, or Level of Service
  • Cost of Sales Analysis, (normal stock parts vs. non-stock parts)
  • Inventory Analysis, (normal stock vs. non-stock)
  • Lost Sales & Emergency Purchases Reports
  • Stock Order Performance
  • Inventory Adjustments, (plus/minus)
  • Annual Parts Gross & True Turns
  • Parts Sales Activity
You may notice that there is no mention in the above list about "First" Time Off Shelf Fill Rates as the Dealer Management System does not calculate First Time Off Shelf Fill Rates and has to be calculated manually, even though some systems will calculate "Same Day" Off Shelf Fill Rates.

Last but not least on our above list, and the topic of this issue is "Parts Sales Activity" which, in my opinion, is the most misunderstood Key Performance Indicator in the above list. The key word to keep in mind as we move forward is that word "activity".

Before we get into "breaking down" Parts Sales Activity, let's take a look at the industry guidelines for Parts Sales Activity. Almost immediately, you may see some confusion between the industry guidelines and what the D.M.S. actually calculates in this category.

Let's start off with the industry guidelines from NADA, which by the way just changed in 2021. Prior to this update in 2021, the previous NADA Guidelines for Parts Sales Activity reflected a much closer match to most Dealer Management Systems.

Here are the new NADA Guidelines for Parts Sales Activity, as well as prior to 2021...

Up to 2020:

0 - 3 Months Sales Activity: 75%
4 - 6 Months Sales Activity: 23%
7 - 12 Months Sales Activity: 2%
Over 12 Months Sales Activity: 0%

New NADA Guidelines for 2021:

0 - 6 Months Sales Activity: 85%
7 - 12 Months Sales Activity: 10% - 15%
Over 12 Months Sales Activity: 5% or Less

This is where the confusion begins as in most Dealer Management Systems break down Parts Sales Activity in different ways. Some systems break down Parts Sales Activity by the guidelines listed above up to 2020, and yet some other systems will break Parts Sales Activity as follows;

0 - 3 Months Sales Activity
4 - 6 Months Sales Activity
7 - 9 Months Sales Activity
10 - 12 Months Sales Activity
13 - 23 Months Sales Activity
Over 24 Months Sales Activity

There are also some Dealer Management Systems out there that actually break down Parts Sales Activity by individual months and confuse Parts Sales Activity with Parts Aging Analysis.  Even though the two are similar, they are actually two different categories.

Even though we all can do the math on our D.M.S. to add up to the previous and current NADA Guidelines, the problem, or confusion starts with the definition of "Activity". Parts Sales Activity often gets confused with "Parts Aging Analysis" and "Parts Movement Analysis".

All three categories are usually broken down by the same above guidelines, which already confuses things because even though all three may look the same, they are completely different, especially the "Part Movement Analysis".

So, which one of these Dealer Management System Reports are we supposed to use?...and which one is the "true" Parts Sales Activity Report that NADA is looking for in the current or previous guidelines?..no wonder we are all confused!

Let's Begin and End all this Confusion on Parts Sales Activity and "What Does It Really Mean?"

Let's start by breaking down all of these categories that can be labelled as Parts Sales Activity. Keep in mind, we will be reviewing "Activity" as mentioned earlier because when we talk about sales activity, it doesn't mean that we have the part currently on the shelf

For example, I could have a very popular oil filter that is active in the 0 - 3 Month Parts Activity Cycle, but I am currently out of stock. I could also have a Special Order part that I ordered yesterday and sold today, which leaves me a zero quantity, but will also be considered an active part in the 0 -3 Month Parts Sales Activity Cycle.

So, before we break down all these different terminologies mentioned above, I wanted to clarify and simplify what "Activity" really means before start looking at which reports are accurate in various Dealer Management Reports that we mentioned previously.

Let's break down the various reports we mentioned....

Parts Aging Analysis:

Just by the title of this report, we should already see the difference of what we are looking for in "activity" versus how long a part has been on the shelf. Even though this report can be broken down the same as the actual Parts Sales Activity Report, it represents two different categories.

Although, there is a "crossover" here as the Parts Aging Analysis does list those parts on the shelf by date of last sale, so by definition, the last time a part sold does indicate age and last "activity". Thus meaning, some parts could be on both reports, if there is quantity on the shelf.

In the case of one D.M.S., (Dealertrack) where the only place we can get any Parts Sales Activity is on their "Parts Aging Analysis" Report. This report can be used for Parts Sales Activity, but it needs to include "zero on hand" sales by months to include all Parts Sales Activity.

All other Dealer Management Systems, with the above exception in Dealertrack, the Parts Sales Activity Report should be used and not the Parts Aging Analysis Report.  We need to stay focused here on "Activity" and not age of a part in stock, if the part is on the shelf or not, or whether it's a stocking part or a non-stock part.

If we stay focused on the above line in bold print, we will better understand what we are looking for...let's move on to the next category...

Parts Movement Analysis:

The Parts Movement Analysis does have some similarities to the Parts Sales Activity category, but with a few different "twists". In Dealer Management Systems that use this terminology, they usually break it down in parts with sales movement in the various month cycles as well as no sales movement in the various month cycles.

The one that matches the Parts Sales Cycle the closest is the parts that do sell in the various months cycles, but only on those parts that have quantity on the shelf. Those parts that are at a zero quantity are often left out as this movement category tracks current inventory amounts.

The other movement category, parts with no sales movement over a course of various months covers those parts that have quantities on the shelf and no quantities on the shelf. Those active parts that have no quantity on the shelf are just being tracked for history purposes.

In the case of those Dealer Management Systems that offer a "Parts Movement Analysis" versus a Parts Sales Activity Analysis, I would use the Parts Movement Analysis Report with sales activity of those parts with inventory amounts by date of last sale.

Last, but surely not least, let's look at the Parts Sales Activity Report and "What Does It Really Mean?"

 Parts Sales Activity:

As I mentioned early on, the best way to understand Parts Sales Activity is to focus on the word activity. Parts are "positioned" in a particular month category based on the date of last sale and can move up based on current sales activity or move down based on inactivity.

In other words, if a part does not have any sales activity for over 12 months, the dollar amount of the last sale at cost will be in the "Over 12 Months" Parts Sales Activity. If this particular part does have a sale today, it will increase the dollar amount at cost of that part in that category of "Over 12 Months" Parts Sales Activity on the end of month analysis report.

The following month, and when the D.M.S. performs "month end" calculations on the Parts Monthly Management Report, the above part is "moved" or "placed" into the "0 - 3 Month" Parts Sales Activity and decreases the dollar value of that parts sale from the "Over 12 Months" Parts Sales Activity and increases the dollar value act cost in the "0 - 3 Month" Parts Sales Activity category.

So, in essence, selling a part in the "Over 12 Months" Parts Sales Activity category and seeing the dollar value at cost rise in that category is a good thing. On the other hand, seeing a rise in that "Over 12 Months" category can also mean that parts in "7 - 12 Months" Parts Sales Activity are falling down into the "Over 12 Months" Parts Sales Activity, which is not a good thing.

Basically, one reason for a rise in any of the month categories means that a sale at cost has happened and the system is just calculating the cost of that sale and increasing the total sales activity at cost in that category, even if the sale results in bringing a particular part to a zero quantity. 

The other reason for a rise in dollar value at cost in any month category would be parts with date of last sale falling out of the current month range. In other words, a part with date of last sale was in the "7 - 12" Month" Parts Sales Activity just hit 13 Months and is now placed into the "Over 12 Months" Parts Sales Activity category.

This is why often times the total Parts Sales Activity at cost does not match the total parts inventory at cost. As mentioned in the previous example with the air filter, it's "activity", and not an indication of what we may have on the shelf.

All the confusion comes down to separating "activity" from "inactivity", as Parts Sales Activity only gives us a timeline of when the last date of sale happened. Even though that date may be over 12 months, it's still just an indicator of date of last sale.

This is why we should not use the Parts Sales Activity Analysis to measure our obsolescence because part of the rise in the "Over 12 Months" Parts Sales Activity could actually be parts that we are "buying down" from our obsolescence, which is a good thing. 

Again, it's "sales activity" at cost and the D.M.S. is going to record that sale of that part at cost from the month category that it is currently in, which in this case we are referring to the "Over  12 Month" Parts Sales Activity category. The following month, the D.M.S. will move that part back into the "0 - 3 Month" Parts Sales Activity category as mentioned earlier.

So, now that we know that an increase of Parts Sales Activity "Over 12 Months" can be a good thing and a bad thing, we cannot be using this category to calculate our true parts, on hand obsolescence. Different D.M.S. reports need to be used for obsolescence which all of them have to create reports on parts inactivity, or no sales over 12 months.

Parts Sales Activity is one of the Key Performance Indicators, (K.P.I.'s) on most Dealer Management Systems and a very important category when measuring where most of our sales come from. As the current and previous NADA Guidelines indicate, most of our sales activity should be in the 0 - 6 Month Sales Activity Cycle.

The reason is simple as all parts will become obsolete and the most opportune time to sell parts is in that six month sales window before the percentages, or chances for selling those parts diminish at a very rapid pace. 

Lastly, having an "Active" Parts Inventory that meets or exceeds the industry guidelines leads to higher Inventory Gross & True Turns, higher Sales & Gross profits, higher Service Productivity, and higher "First Time" Off Shelf Fill Rates. 

"How Important Is Understanding Parts Sales Activity?..."

I think we all know the answer to that one!

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...