Wednesday, March 9, 2016

March 2016: "Who's Controlling Your Days Supply?"

As we approach the end of the first quarter,  ACG's "Smart Parts" will continue to focus on "getting it right" in 2016. In my opinion, controlling parts inventory has never been more important than it is today.

Over the past several months, I have seen more and more dealership Parts Departments getting caught up with out of control inventory amounts. Excessive inventory values, idle inventory, obsolescence and overstocked inventory are becoming "commonplace" once again.

The weird thing about these observations over the past several months is that along with all the above, there has also been a dramatic shift in some other key areas. Increases in "out of stock" situations, along with lower "First Time Off Shelf Fill Rates" and lower Gross & True Turns have also become "commonplace".

How can this be as many of these dealership Parts Departments are experiencing all this excess inventory value? How can this be if we are utilizing all the manufacturers' stock replenishment programs, if offered?

Before I answer those questions, I just want to point two "common threads" in my observations over the past several months. Most, if not all of these Parts Departments that I have visited and are now asking for help, participate in a manufacturer stock replenishment program and/or lack "proper", basic Parts Manager training.

The irony of all this is that I don't see these issues with excess inventory values any where near as much in dealership Parts Departments that do not have, or the Parts Manager doesn't participate in these manufacturer stock replenishment programs.

Relying primarily on "their own" Inventory Management System, (I.M.S.) set ups to manage their inventories, these Parts Managers tend to be more "hands on" in managing their inventory and not having to rely on the manufacturers' set ups and controls.

Let me first state, that before we start "drilling down" these issues, that I am not "bashing" these manufacturer stock replenishment programs. Like anything else we have to weigh the "pros & cons" in order to utilize these programs properly and to get the full benefits offered in these programs. 

We also have to understand that these programs DO NOT replace some of the most basic, important duties & responsibilities of a dealership Parts Manager. Being compliant, or "obedient" to these manufacturer programs should never take over duties and responsibilities such as;

  • Proper Phase-In/Phase-Out Set Ups & Controls
  • Source Ranking by Piece Sales
  • Proper Days Supply Set Ups within Each Source
  • Generating Suggested Stock Orders Consistently
  • Properly Reviewing the Manufacturer's Suggested Daily Stock Order                  

Compliance, or should I say "Obedience" to these manufacturer programs has taken over some of the most basic Parts Manager functions. This, by the way is fact and not my personal opinion which I will point out as we move along.

One of the most common questions that I receive from Parts Managers concerning these manufacturer's stock replenishment programs is....

"Dave, I special ordered this part for the first time the other day, as I don't have any history of demands, but why is the manufacturer recommending me to stock that part now?"

Hmmmm....took me a little bit to figure this one out when at first, I just figured that it was a "qualified" part and was "phased-in" by the manufacturer's set ups. I found myself digging in a little further as this question was coming up more frequently as time went on.

After checking various Inventory Management Systems, (I.M.S.), I found something in common with many initial I.M.S. computer set ups. Like in most systems, when a part initially enters into the I.M.S. systems, a "test phase" source is set up. The "low" days supply, (Best Reorder Point, BRP) is set up to "zero" and the "high" days supply, (Best Stocking Level, BSL) is set at "one"

Lo and behold, there inlies the answer to the question above as the manufacturer's stock replenishment program is just working as designed. If the set ups are as previously stated, that part, even though only selling once, went to "zero" (BRP), and now needs to be ordered to the BSL of "one".

These initial set ups can be modified in order to avoid stocking parts that have not met "in-house" phase in criteria. Minimums and Maximums can also be set up to help control these situations as well. In my opinion though, nothing should ever replace the Parts Manager's overall review of every stock order, whether in-house or otherwise.

The next question that I get asked VERY often is....

"Dave, why is it that I often have parts that sell like crazy off my shelf, but they aren't qualified parts on the stock replenishment program?...and why are they telling me to stock parts that I don't sell"?

Hmmm....once again! First of all, most manufacturer's stock replenishment programs are set up to "their" recommended set ups and controls and not your dealerships I.M.S. set ups and controls. Even though there are a few programs that allow individual dealer set ups and controls.

The scary thing is, I have seen where many Parts Managers haven't even run a suggested stock order in their own system for weeks, months or even years! In almost all the instances where I have witnessed this, I have suggested that the Parts Manager run a suggested stock order on their "in-house" and the look on their faces was priceless!

There were MANY parts on these suggested stock orders that have a very active life cycle, selling multiple times annually, but not stocked. These parts were not stocked, but had many manual special orders because these parts were not "qualified" on the manufacturers stock replenishment program.

In each case, after running the "in-house" stock order, I asked the Parts Manager if there were any parts on this stock order that they would normally have on the shelf and the answer was and is always predominately...yes! Sad thing is that if we didn't run this stock order, these parts would only be ordered as a Customer Special Order, or Emergency Purchase...time and time again.

Some Parts Managers actually said to me that if they stocked those parts that weren't "qualified", they would not be "protected". I couldn't believe what I was hearing because, as for me, I could care less if it's "protected" or not because I plan on selling lots of those parts, not returning them!

I have to wonder if many Parts Managers remember what we used to do on a daily basis BEFORE these programs were introduced. This is why I believe it's a "double edged" sword as even though there are many benefits to these programs, there is still a lot of "asset" risk to the dealer.

Couple of questions I have often pondered..."Do the benefits, or added discounts, allowances and return accrual outweigh the additional "frozen" assets on the shelf?"....and "Are we just buying parts to sit on the shelf in order to gain a little cash at the end?"

One example I witnessed recently in one dealership was, even though the dealer was going to receive a nice check for almost $7,000.00 at the end of the program, the "cost" was an additional $50,000.00 in overstocked parts inventory. 

To me, that sounds like buying extra new vehicles for the lot in order to gain factory incentives, only to throw my floor plan "out of whack" and too many days supply of vehicles overall. Just doesn't make sense to me, but the analogy works because, just like vehicles, parts are an asset, not an expense. This is often why much of this "cash flow" gets overlooked in the first place.

" does the question of  "Who's Controlling My Days Supply" have anything to do with all this?"

The answer is to who's controlling it is quite simple:...."Not You!"....if you are a Parts Manager that is letting the manufacturer do all his/her work on managing one of the dealers highest assets. 

Having the proper "Days Supply" should only be controlled by "in-house" I.M.S. Set Ups & Controls. Having the right parts on the shelf is controlled by the number of part demands, (sales & lost sales) which initially is controlled by the proper parts phase-in set ups.

After a part enters the system, by either proper sales and lost sales recording, the "Days Supply" set ups and controls take over from there until the part reaches phase-out status. Of course, the key word to all these set ups and controls is the word "proper"!

The total number of each individual part numbers on the shelf is then determined by the "low" days supply, (Best Reorder Point, BRP) and "high" days supply, (Best Stocking Level, BSL). These two parameters are simply calculated by measuring average annual piece sales. This is why I recommend a minimum of six different sources based on six different annual piece sales ranges.

For example, if a part sells an average of twelve times a year, or once a month, then the "low" days supply, (BRP) should be set guessed it!...thirty days! The "high" days supply, or BSL, is set anywhere from 50% - 150% of the "low" days supply, pending over or under stock conditions. The "low" days supply always remains a constant pending annual piece sales averages.

With all this said, it's all basic math and it's no wonder I see so many Parts Departments either under stocked on the parts they sell the most and over stocked on the parts they sell the least. Why?...because most, if not all of the parts inventory is in one or two sources with various annual piece sales averages.

Most Inventory Management Systems, (I.M.S.) offer "Source Set Ups By Piece Sales" options to control "Days Supply". These set ups are also easy to manage as daily, weekly and/or monthly updates will move these parts from source to source automatically, based on updated annual piece sales averages.

So, if you are experiencing overstocked and understocked situations AND are enrolled in a manufacturer's stock replenishment program, or even if you are not and still having these situations, it might be time to "get back to basics"! 

You can have the "best of both worlds" with the benefits offered by the manufacturer AND getting back to basics the way we used to before these programs were offered. Keeping these programs "in check" by reviewing and matching their programs to your own individual dealers actual needs is just "Smart Parts" managing!

It's Never Too Late To "Get It Right" in 2016! 

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