As we get closer and closer to our top indicator, our number seven indicator is probably one of the most important indicator in determining just how "healthy" the parts inventory is. Inventory Gross & True Turns have two distinctive meanings, even though their formulas of calculation may be somewhat similar.
Ironically, many Parts Managers don't even know the difference between Gross & True Turns or even how they are calculated. In this issue, we will not only review the proper definitions of Gross & True Turns, we will also review their individual meaning in determining just how "healthy" the parts inventory is.
First, let's review the definitions;
GROSS TURNS (N.A.D.A Guide: 8 Turns Per Year)
Total Sales (at Cost) for the Last Twelve Months, Divided By, Average Inventory Investment for the Last Twelve Months.
TRUE TURNS (N.A.D.A Guide: 5 Turns Per Year)
Total Order Receipts for the Last Twelve Months, Divided By, Average Inventory Investment for the Last Twelve Months.
Many of the Dealer Management Systems, (D.M.S.) automatically calculate Gross & True Turns on the Parts Monthly Analysis Report. Although, it is extremely important for Parts Managers to know their individual meaning and how to calculate their own Gross & True Turn.
First, let's look at Inventory Gross Turns;
The biggest difference between the two is that "Gross Turns" focuses on parts sales at cost. Unlike the True Turn calculation, Gross Turns only calculates and focuses on the sale of parts at cost on an annual basis.
Technically, we could maintain a guide level of 8 Gross Turns Per Year without even stocking a single part. All inventory purchases, whether in stock or not, are measured in the Gross Turn calculation, including outside purchases.
To explain further, Gross Turns measures my total sales at cost which really represents my inventory marketability. In other words, with a guide of 8 turns per year, that means I should have a 45 days supply, whether on the shelf, or available to meet the sales demand.
As in new and used vehicle sales, a 45 days supply has been a standard in meeting market demands. This 45 days supply also equates to our Gross Turn Guide of 8 Turns Per Year. "Turning" the inventory every 45 days equates to 8 gross turns per year. There are also potential concerns for Gross Turns that may be too high or too low.
If my Gross Turn is too high, (Over 8 Turns Per Year, Less Than 45 Days Supply), it could indicate that I don't have enough inventory available to meet the demands of my market. This may result in chasing more parts at a higher cost, lost sales and lost productivity, just name a few.
In vehicle sales, a high Gross Turn or Low Days Supply could lead to more than desired "vehicle locates", lower gross or even lost vehicle sales. In either example, Gross Turns determines my marketability and just how much inventory VALUE needed and available to meet customer demands.
Now, let's look at Inventory True Turns;
Now that we know how to determine our marketability and just how much we can spend on inventory, it's time to measure our inventory investment. The True Turn calculation will help us determine how much of that "market potential" should be on the shelf to meet immediate demand.
True Turns also determines the overall "health" of the parts inventory. An "active" inventory should have 75% of sales at cost within the last three months, as we reviewed last month with our Number Six Indicator. Stocking the right parts, the FIRST time increases sales and gross potential as well overall service shop productivity.
Just as in the front end of our business, it is always easier to meet sales demands if the vehicle is on the lot. Having the most popular makes and models available always leads to higher vehicle sales and gross as well as higher vehicle turnover. It's no different in the parts department.
Obsolete parts inventory, just like older aged units, freezes assets and reduces the amount of cash available to acquire the proper inventory in order to meet market demands. Measuring the Parts Inventory True Turns is the Number One measurement in protecting the overall investment.
Lastly, the Parts Manager's understanding of Gross & True Turns, by definition or meaning can easily be determined by reviewing the Dealer Management System's, (D.M.S) Parts Monthly Analysis Report. Unlike the Sales and Service Departments, Parts is "Black & White"...it either is, or it isn't with no grey areas.
Utilizing these measurement terms wisely can maximize market share as well as maintaining a "healthy" parts inventory investment. How "healthy" is your parts inventory?
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 email@example.com Vist our Website at www.smartpartstraining.com