Wednesday, November 18, 2015

November 2015: Controlling Parts Purchases

In part two of our three part series, we will focus on one of the most lucrative functions of all Parts Department Controls and that is purchases. The Parts Department not only controls the purchase of automotive parts, it also controls many, if not most of the monthly dealer purchases, excluding vehicle purchases of course.

With that said, it's amazing to me that there really aren't that many controls or restrictions in many dealership Parts Departments concerning these purchases. Just about anyone can write a purchase order, or pick up the phone to buy anything from automotive parts, sublet purchases to paper towels and AAA batteries.

In this month's issue of ACG's "Smart Parts", we will breakdown all of these areas of dealership purchases that are controlled by the Parts Department. We will also look at how not having the proper controls in place can heavily impact the dealers overall net profit.

First of  all, it's not at all surprising that the Parts Department gets this dubious responsibility. The security of the Parts Department makes it an obvious choice by most dealers. Shipping and receiving, the storage of parts, supplies and shop equipment as well as being the central dealership location are also major contributors.

Given these facts, I have to ask a few simple questions.....
  • Is there an "automated" purchase order system in place in the dealership?
  • Is the approved price included on the purchase order?
  • Are purchase orders reconciled each month in Accounting?
  • Are all Parts Department authorized to write purchase orders?
  • Are parts purchases accounted for properly if there is a price variance?
  • Are all purchases accounted for correctly? (asset vs. expense) 
  • Are cost analysis studies on office and shop supplies done periodically?

If you've answered "no" to any of these above questions, there just may be some opportunities out there to increase bottom line net profits for your dealer. Purchase control means that we have to have controls in place and these are just a few.

One in particular from the above mentioned questions is automated purchase orders. Most Dealer Management Systems, (D.M.S.) have this option. This allows the Accounting Department to reconcile the purchase order schedule. It still amazes me that many dealers still operate on a "hand written" purchase order system.

Often times, an approved purchase order amount ends up being different from the final amount invoiced from the vendor. This often happens with sublet purchases, especially in the area of new and used vehicle purchases.

Here's an example using the following sublet scenario:

Customer purchases a new vehicle and wants to add a set of aftermarket custom wheels. Salesperson prices out the wheels locally for $800.00 and gets a purchase order from parts and adds in the appropriate price for parts and installation into the deal.

Wheels arrive and the repair order is generated to have the wheels installed in the Service Department. Wheels are billed on the internal repair order and the Service Department installs the new wheels before the vehicle is delivered to the customer.

Salesperson delivers the vehicle without any issues and the customer drives away satisfied with their new vehicle. Everything from start to finish went as planned except for one little problem that no one really expected.

The price quoted to the salesperson for the wheels was $800.00, but the actual price when the wheels arrived was $1000.00 and that's what the Parts Department billed out the repair order. These was no "approved" amount written on the purchase order, so the Parts Department billed the invoice amount of $1000.00.

The salesperson only had $800.00 plus the installation included in the deal so that was the amount added for the customer. The vendor stuck to their price of $1000.00 because the wheels that were sold were actually $200.00 more due to the customer changing their mind as to which wheels they actually wanted.

There were no adjustments made to the deal, so the customer didn't pay the additional $200.00.

End result?...$200.00 backed out of the deal and a loss of that same amount on the bottom line. The purchase order and "we owe" were hand written without an authorized amount so the Parts Department didn't know any different but to bill the amount invoiced on the internal repair order.

Lack of having the proper purchase controls in the Parts Department continues in the area of purchasing office supplies, shop supplies, uniforms, dealer cleaning supplies, equipment or even vending machine supplies. All of which require periodic price comparisons to insure the dealers' money is spent wisely without sacrificing quality or safety.

Price comparisons should be conducted at least once a year, if not more just to keep your preferred vendors "honest" as well. It's not unusual that even your most trusted vendor will increase prices from time to time and often times not intentionally. Sometimes even the vendors gets caught from their manufacturers' and pass the cost down to the dealer.

This is where the "Smart Parts" Manager who is conducting these pricing surveys from time to time will catch these errors and act to correct them. Some of the most common "lack of purchase control" areas that may be impacting the dealers' bottom line may include;

  • Increased office supply charges from print overruns from printing companies not requested.
  • Additional uniform charges and surcharges from missing or garments or shop rags.
  • Unsupervised vendors in the Parts Department writing their own order.
  • Unauthorized dealer personnel requesting or writing their own purchase orders.
  • Lack of cost or price reconciliation on purchase orders.

The last area of purchase control that we haven't discussed yet is actually the primary function of the Parts Department is the "purchase" and sale of automotive parts. The "lost profit" areas in this category are actually different than sublet or dealer supplies purchase controls.

Lost profits resulting from a "lack of controls" in purchasing parts often times go unnoticed or undetected. When dealing with an asset, as opposed to a direct expense, lost profits get are hidden in inventory accounts, or "asset" accounts. Even though the sublet account is treated like in "asset" account, the parts inventory account has a much bigger and "active" balance.

Parts purchasing can be quite an "art" in addition to having the proper purchase controls in place. If the "Smart Parts" Manager has a clean, active moving parts inventory of 90% or better every six months, purchase control just turned into purchase power.

Controlling parts inventory amounts with controlled obsolescence allows the "Smart Parts" Manager to make wise purchase decisions maximizing earned purchase discounts. Taking advantage of the manufacturers' promotional discounts can make quite an impact on the dealers' bottom line.

In addition to that, if the "Smart Parts" Manager has a "First Time Off Shelf File Rate" of at least 85% or better, there are fewer Emergency Purchases at a higher cost. Another benefit is higher shop productivity with less "down time" waiting for parts.

The added costs from not having a controlled, active inventory and lower "First Time Off Shelf Fill Rates" can be astronomical. Some of these added costs and "profit killers" may include;

  • Lost Service Productivity and Labor Profits 
  • Added Personnel Costs Chasing Down Parts
  • Missed Discounts Opportunities on Parts Purchases from the Manufacturer
  • Parts Inventory Variances: Controlled vs. Accounting
  • Lost Customer Retention, Poor Customer Satisfaction, (C.S.I.)

As you can see from all of the above examples and scenarios, "Controlling Parts Purchases" or, to put it a little differently, the "Control of Dealer Purchases" in the Parts Department impacts all dealer departments and can subsequently impact all dealer departments' net profit. 

Controlling Parts Purchases goes far beyond the tag line of this issue of "Smart Parts". We have to take a closer look at how we conduct our business in general. If we are to succeed and be profitable, we have to invest wisely and control what we spend. If controlled properly, higher returns on investment are inevitable.

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTMThe 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 Vist our Website at