Tuesday, February 5, 2013

"What Do We Do Now?"...Dave's Top 10 Indicators

As we all know, the success and profitability of the Parts Department relies primarily on a knowledgeable Parts Manager with the support of upper management and the dealer principal. Beyond that, the Parts Manager also has to have a plan that will lead to "desired results".

We also have to begin with focusing on key areas, or "indicators" that will impact these "desired results" and that will be the focus of our study as we "drill down" these top 10 indicators.

I also realize that some may agree or disagree on the order of these indicators, but I do believe we will all agree that as we move down to "Number One", each and every indicator effects the previous.

You may also see as we count down to number one, that many Dealers and Parts Managers seem to focus on these "Top 10 Indicators" in reverse as opposed to focusing on the "root causes" that effect our overall profitability.

So!...Are you ready?....Here We Go!

NUMBER 10: Net Profit as a % of Gross Profit (Guide: at least 25%)

Often times, we tend to look at the results on the financial statement from the "bottom up" and that is quite common. After we see the "bottom line", we start to dissect the numbers even further and if we do not see the desired results, we start looking at the expense side first, followed by the sales and gross numbers.

Next, we start "finger pointing" to certain areas, trying to justify the means, knowing all the time that we can't change what has already happened.

Our "Number 10" Indicator is a direct result of failed processes, poor expense management, improper I.M.S. Set Ups & Controls, improper guidelines, etc. "Number 10" is the "catch all" of all the indicators to follow.

NUMBER 9: Customer Pay Gross Profit as a % of Sales (Guide: 42%)

Obtaining the proper Customer Pay Gross Profit percentages is probably one of the easiest guidelines to achieve. I realize that demographics and market areas play a big role, but when you think about it, if the proper escalation matrix is in place, you can have the best of both worlds.

Remaining competitive is always important, but having the "right pricing mix" on both captive and competitive parts is easily maintained in most Dealer Management Systems (D.M.S.).

NUMBER 8: Expense Management 

Expense to Gross Percentage Guidelines vary from each manufacturer, ranging from 50% - 75% and can also be broken down by Personnel, Semi-Fixed and Fixed expenses. 

The most important guideline, or "thought process"  that I've always had was..."you can't spend what you don't have".

The Parts Manager has to also be very familiar with reading, understanding and dissecting the parts financial pages in order to properly manage the department. Understanding the numbers and how they got there is imperative for all managers, not just the parts manager.

 If we take on the mindset of what expenses we can control versus what can't control and stay within the guidelines set by the dealer and the manufacturer, we will achieve expected net profits. 

If you run your department like it was your own business...you WILL be profitable!

 NUMBER 7: Inventory Gross and True Turns (Guide: 8 Gross, 5 True)

This category is a key indicator in "Part Management 101" as the experience and knowledge of the Parts Manager comes first and foremost in managing one of the dealers' highest assets. 

The ability to "roll over" the parts inventory the proper amount of times annually is not an easy task, but contributes greatly to the overall parts profitability. 

This indicator also illustrates the "liquidity" and overall resale value of the parts inventory. It will also expose obsolete inventory as lower gross and true turns factors in all parts in inventory at cost, whether it moves or not.

NUMBER 6: Sales Activity 0 - 3 Months (Guide: 75%)

Our "Number 6" indicator ties in directly with our previous indicator on inventory gross and true turns. The parts movement activity cycle is a HUGE indicator on how well balanced the parts inventory is, especially in the 0 - 3 month category. 

In other words, three quarters of the total parts inventory value should be active in the last three months.

Once again, the experience and knowledge of the Parts Manager along with proper system management comes into play. This guideline CAN NOT be taken for granted and should be at guide or better without question.

NUMBER 5: Special Order Parts Aging (Guide: 30 Days or Less)

At "Number 5", Special Order Parts Aging probably goes down as the most "unnoticed" indicator in the countdown. It a very important indicator because it's a "return reserve killer"! 

As we all know, most manufacturers' provide a "return  reserve account" for the parts department based on stock order purchases. The intent of this this accrual account is to allow the dealer to return obsolete parts and to maintain proper inventory levels.

Most often times, this accrual account is "sucked up" by special order parts returns over 30 days and never gets utilized for the actual intent.

 It's also a huge indicator of "lack of process" on how parts get ordered in the first place without proper guidelines on special order deposits, customer follow up, etc. 

Just like in the Used Car Department, if we have a bunch of "aged units"....or in this case, "aged special ordered parts"...we've got other problems as well.

NUMBER 4: Lost Sales Reporting (Guide: 10% of Total Sales at Cost)

Defining "Lost Sales" has always been a big controversy and can be defined many different ways. First of all, I wish they would change the terminology from "Lost Sales" to "Potential Missed Opportunity". 

Posting "Lost Sales" is a "good thing" and is one of the biggest assets for a parts manager. Posting "Lost Sales" also creates a "demand" in the Inventory Management System, (I.M.S.) and allows the Parts Manager to see potential new parts to add to the regular stocking inventory. 

Posting these "Potential Missed Opportunities" are the "eyes" of future sales and should be posted whenever possible. 

When in doubt?...Post It! It can only help the Parts Manager see what's out there. Bottom line is...you can't manage what you can't see! "Number 4" in our countdown is "Number 4" for a big reason.  

NUMBER 3: Sales/Gross Per Employee (Guide: $38,000/$14,000)

One of the foundations in the Parts Department is having the right number of employees to meet the demands in all sales areas. 

From counter staff, shipper/receivers, delivery drivers and wholesale sales people...we not only have to "measure up" to these guidelines, we have to have the right person in the right seat on the Parts Bus. 

We can't accomplish any of our goals or guidelines without the right staff of people in the right positions.

NUMBER 2: Level of Service or Overall Fill Rate (Guide: 90 - 95%)

Overall, we have to provide a "service" to our customers. Our "Number 2" indicator could be debatable, but I chose this category as "Number 2" for one simple reason...if we do not provide an extremely high "Level of Service", which simply means that we provide the part(s) 90 - 95% of the time, we will lose customers. 

All would be lost if we didn't pay direct attention to customer retention and loyalty. 

The only variation in this percentage guideline would be "Lost Sales"...that is, of course, IF we report "Lost Sales" in the first place. 

If we don't post "Lost Sales", our "Level of Service" or "Fill Rate" would show on our Monthly Analysis Report close to 100%....which, of course, would not be a true.

And Here We Are!!....our "Number One" Indicator!...(Drum Roll Please!)

NUMBER 1: "First Time Off Shelf Fill Rate" (Guide: 75 - 80%)

When you stop and think about it, it all starts here. The ability to provide your technicians and ultimately, your customer the right part(s) on the  "first visit" to the counter 75% of the time. 

If we accomplish this one goal of 75 - 80% "First Time Off Shelf Fill Rate", most of the other "Top 10 Indicators" fall right into line automatically.

Not only will the most of the other indicators fall into line, we will highly impact and increase our overall service shop productivity. 

Excessive time at the parts counter; moving vehicles in and out waiting for parts; bringing vehicles back in the shop tomorrow when they could have been done today are all examples that contribute to lower shop productivity. 

With the exception of proper staffing, pricing structures and expense management, all of the other indicators would take care of themselves. 

Level of Service, Inventory Turns, Less Special Orders, Fewer Lost Sales, Higher 0 - 3 Month Sales Activity and Higher Gross Numbers are all achieved by this ONE indicator.

It's pretty amazing how one "key indicator" can impact so much overall  I am also quite sure there may be other indicators that we could add to the list of "Top 10" items. 

The most important items tend to go unnoticed but highly contribute to our "Number 10" indicator on this list which is Net Profit.

Stay tuned to "Smart Parts" each month this year as we "drill down" each and every one of our "Top 10" indicators starting with Number One: "First Time Off Shelf Fill Rates" in March. We will continue up the ladder all the way to higher Net Profits in December.  

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