Tuesday, October 9, 2012

"Parts Inventory: Active, Idle or Obsolete?"

The final quarter of 2012 is upon us and as I mentioned in the introduction, many Parts Managers are getting ready to perform their end of year Parts Physical Inventories. In my opinion, he "Physical Inventory Process" goes well beyond just counting part numbers and quantities.

In most cases, it's an overall evaluation of how well we have managed our dealers' number two asset, second only to the Used Vehicle Inventory.

A recent article by the Management Study Guide (M.S.G.) states that "Inventory Management is a very important function that determines the health of the supply chain as well as impacting the financial health of the balance sheet"...

As a former Parts Manager, this is a pretty overwhelming statement that draws my attention to just what factors may determine my overall "financial health" of my parts inventory. In order to determine this, I would first need to define and identify the "breakdown" of my inventory value and potential "Return On Investment".

Next, I would need to separate and categorize my inventory into three basic areas which are determined by movement in order to maximize the "Return On Investment" and "Inventory True Turns".

These three areas are categorized as "Active, Idle & Obsolete" and if I were to ask ten parts managers to define each of these three categorized areas, I would most likely get ten different definitions.With that said, we need to turn to some basic facts and industry guidelines in order to define these areas.

For many years, I have referred to guidelines set by Mike Nichols, the National Automotive Dealers Association (NADA) and individual manufacturers' to set the standard on these areas. The interesting thing is that not much has changed over the past several years except for "Parts Activity Cycles".

Approximately thirty years ago, the "Parts Activity Cycle" for an "active part" was anywhere from twelve to eighteen months as many parts fit many models for several years, thus extending the "active life cycle" of a part much further than today.

Today, with so many manufacturers and so many models available, the average "active life cycle" of many parts has been reduced to six months or even less!

With all this in mind, let's define these three category areas:

"Active Parts" should have movement within six months or less. Mike Nichols and NADA both agree that 98% of the parts inventory should have "active movement" in the 0 - 6 month category. To define it a little further, 75% should have "active movement" in the 0 - 3 month category and 23% "active movement" in the 4 - 6 month category.
  • FIRST FACT: If a part has not sold within this six month time frame, there is a 49% chance of NO FUTURE SALES.
First of all, in my opinion, Idle Inventory" is a "non-category"! No disrespect to any that use this term, but this is where I believe "common sense" has to come into play as I explain further. I believe that ALL parts inventory is idle, with the exception of some special orders that do not experience any "shelf time", thus, no holding costs are attributed, even though acquisition costs may be higher. Others believe that "Idle Inventory" may be parts with an "activity cycle" over six months and beyond. Mike Nichols and NADA also agree that parts with an "active movement" cycle of 7 - 12 months should represent only 2% of the total inventory annual "activity cycle".
  • SECOND FACT: If a part has not sold between nine and twelve months, there is a 75% chance of NO FUTURE SALES.
Bottom line is...if the part doesn't sell within the above parameters?....it's basically obsolete! It doesn't get any simpler than that! The Mike Nichols and NADA guideline on parts with an "activity cycle" over twelve months should represent 0% of the total inventory annual "activity cycle".
  • THIRD FACT: Inventory with an "activity cycle" over twelve months has a 98% chance of NO FUTURE SALES! 
Of these three categorized areas, I believe that "Idle Inventory" is most confused by parts managers. Many manufacturers and consultants still use this term and to me, I believe they still use this term because it leaves much to their discretion.

This discretion allows them to determine what is actually "active" or "obsolete" based on manufacturers data, not the dealers. Many manufacturers offer "Stock Replenishment Programs" where they maintain control of what dealer parts managers have on their shelves, not regarding the individual dealers Dealer Management Systems, (DMS) stocking criteria.

ALL inventory is idle for a period of time as even an "active part" can be "Idle" for three months before it sells, but may still remain "Active" because it has sold in the 0 - 3 month category.

If a part has not sold for twelve months?...it's "Obsolete" with close to no chance of selling...plain and simple, regardless of what definition you use for "Idle Inventory"!

In conclusion, I'm QUITE sure that the dealer is more concerned about what's selling and what's NOT selling in order to gain the highest "Return On Investment" as well as maintaining proper annual Gross and True Turn numbers.

I'm also QUITE sure that the dealer will not be pointing the finger at the manufacturer, or anyone else if the inventory and stocking criteria hasn't met the expectation. Each parts manager has to take ownership for their individual dealers parts inventory investment.

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com