Tuesday, March 6, 2012

What's Your Parts Inventory "Rate of Change?"

"What in the world are you talking about?....Parts Inventory Rate of Change"? Believe it or not, that's usually the response I receive when I ask most parts managers that question. Change has been the topic in my first two E-Newsletters of 2012 and I want to finish it off this month by not only talking about change, but also how we measure the "Rate of Change". 

Many parts managers and dealers do not realize that there is a guideline to how much and how quickly our parts inventory should change throughout the course of a year. In this issue of "Smart Parts", we will not only discuss why "Rate of Change" is important, we will also show our "Smart Parts" Readers how to calculate their own Parts Inventory "Rate of Change".

Let's start off by looking at some basics...the average automotive dealership carries anywhere from 7,500 to 15,000 different part numbers with a total number of parts upwards another ten times these figures. Secondly, there are more transactions in the parts department in a single day than there are in the whole dealership in a single month! 

That being said, how "vulnerable" is your parts inventory to mistakes, accounting errors, pilferage, frozen assets and lost sales just to name a few. Here's a couple more questions to ask yourself as the dealer....Is my parts inventory keeping up with my sales demand?...or, How much "blue sky" is there in my second highest business asset?

To be quite honest, most dealer owners don't even pay much attention to their parts inventories as much as they should. I'm quite sure they pay a lot of attention to the New & Used Car Inventories, so why should the parts inventory be any different? 

Change is constant in the parts department and we should keep a "watchful eye" on how much that asset is changing on a monthly basis. This is why the "Rate of Change" is a pertinent indicator as well as important tool to measure the change in parts inventory.

 I have always thought of it this way, if  I had to "sell off" my parts inventory, what would it really be worth, how much CASH could I really get for it?...and even more important, does the inventory value on my financial statement reflect my Dealer Management System (D.M.S) inventory value?

Now that we have struck a chord, so to speak, let's explore how we calculate and measure the parts inventory "Rate of Change" and what guidelines we should use. We will also explore what these numbers reveal and how we can keep our parts inventory "Rate of Change" manageable as well as how to avoid those parts inventory discrepancies when physical inventory time rolls around. 

Here's the formula:

Total Number of Plus & Minus Adjustments X 12 months, divided by the Total Part Numbers in the System (D.M.S) 

Source: D.M.S. Parts Monthly Analysis Report 
Industry Guide: 5% or Less

So what does it mean if the parts inventory "Rate of Change" is higher than 5%? It simply means that there are more than an acceptable amount of "manual changes" to the parts inventory by parts department personnel that may effect the total inventory value. Here are a few examples:
  • Inventory Count Corrections (overages/shortages)
  • Manual Orders/Receipts/Returns
  • Part Number Changes (supersessions)
  • Posting Errors
  • Poor Housekeeping Practices
  • No Parts Employee Posting Restriction Policy 
The "Rate of Change" calculation can and should be performed monthly once the Parts Monthly Analysis Report has been run by the Dealer Management System (D.M.S.). As you can see from the examples above, a lack of control in any of these areas can and will lead to asset liability concerns as well as other financial implications. 

Most importantly, a high "Rate of Change" may indicate a lack of proper management, asset security and a less than desirable return on investment. The "Rate of Change" calculation is one of the best ways for dealers and parts managers to "police" the parts inventory investment as well as maintaining a low discrepancy percentage when it comes time to perform the physical inventory.

Change is on going and inevitable, especially in our parts departments, we just need to manage and control this constant change in order to maximize the investment and profits. So?....What's Your Parts Inventory "Rate of Change"?   

  Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM.  Dave can be reached at Cell 786-521-1720 or E-mail at dsp0417@aol.com Vist our Website at www.smartpartstraining.com

1 comment: