Monday, May 9, 2016

May 2016: "Is Your Parts Inventory Overweight?"

In our 75th edition of ACG "Smart Parts", I decided to wrap this month's topic around my analysis, comments and overviews on my visit to the NADA Convention, March 31st - April 3rd in Las Vegas, Nevada.

The timing of the convention couldn't have been better as I had already decided on this month's topic before attending and wanted to research the causes and possible solutions to what I believe is one of the biggest "epidemics" in the automotive dealers parts departments today.

We will expand more on the NADA Convention and how it plays into the root causes and solutions to this "epidemic" later in this article. The convention provided lots of information that I want to pass on to "Smart Parts" Readers.

The "epidemic" that I refer to, in my opinion is "overweight" and "overvalued" inventory in the parts department. Many parts departments are becoming "overweight" in the mid-section and is resulting in higher inventory carrying costs, (acquisition & holding), reduced dealer "cash flow" and lower inventory gross and true turns.

The "mid-section" I refer to is the sales activity in the 7 - 12 months category which often gets overlooked by parts managers and dealers alike. After all, aren't we more concerned about obsolete inventory OVER twelve months?

With today's shorter parts life spans and activity cycles, we have to get a handle on what's "coming down the pipe" far before parts in-activity hits twelve months. I'm "all in" on helping dealers with their obsolescence, but I am more concerned about "stopping the bleeding" first.

Even though many manufacturers offer "inventory protection" for obsolescence, they really don't offer any assistance in inventory "carrying costs", or sometimes referred to as acquisition and holding costs. My question is..."How much is that "inventory protection" costing the dealer in the long run?"

As I mentioned in last month's issue of "Smart Parts", the latest industry calculations on acquisition and holding costs are in excess of 25% - 30% of the total inventory value at cost! If you do the math on your own inventory, unless you are at or above industry guidelines on gross and true turns, you could be in a heap of trouble.

The biggest area of "lack of control" that I see from parts managers is that they seem to "trust" the manufacturers' daily suggested orders. They seem to believe that they "have to" accept these suggested orders because of compliance percentages, loyalty requirements and overall program utilization.

I'm totally okay with all of that and maximizing discounts, allowances and accruals, but not to the degree of  "over consumption" of spending the dealers money on parts and/or quantities we don't really need to meet demand.

Quite simply, we only need a 1.5 months supply, (45 days) of inventory value to meet demand and maintain industry guidelines on gross turns. True turns are another issue that compliments first time off shelf fill rates and stocking criteria, but we still have to "hold the line" on the total inventory value.

For example, if my average monthly parts sales at cost is $100,000 annualized, I only need to have an average inventory balance of $150,000, which equates to eight "gross turns" a year. In order to determine if your inventory is "overweight", you first have to determine your inventory's "desired weight".

The inventory "desired weight" or "value" is very easy to figure out. Basically, all you have to do is take your total average months cost of sales, (annualized) and divide by eight, which is the industry gross turn guideline. The net result from that equation should be your average months inventory value, or "desired inventory weight".

Any amounts over that are the result of obsolescence and "over stocked" inventory values, plain and simple. The truth of the matter is that if the math indicates "over valued" inventory, then we need to look at who is really benefiting from these "additional" purchases....the dealer, or the manufacturer?

Reviewing the stock orders whether in house, or combined with the manufacturers' stock replenishment programs, cannot be taken for granted. The suggested orders from the manufacturer are based on multiple dealer demands and not necessarily your own.

Sure, you may gain discounts and allowances, but is it really "tangible" if we are just padding our inventory? My "kudos" to those "Smart Parts" Managers that are realizing these benefits while having great gross and true turn numbers. That's the only way these "dollars" can be realized and tendered.

Now, for the good news!!!'s some solutions that may help those "Smart Parts" Readers that may have parts inventories that may be "overweight!" 

As I mentioned earlier, I was looking to get some answers and solutions to this "epidemic" when I visited the NADA Convention in Las Vegas. Not only did I find some of the causes to the "epidemic" (thumbs down!)...I also teamed up with many to provide solutions to the "epidemic", (thumbs up!).

Thumbs Up!....

In general, the NADA Convention had some good things to offer for "Smart Parts" Managers and Readers in the way of getting the proper tools and industry help to do a better job in managing parts inventories. I thought that the NADA Academy offered lots of training in their parts curriculum, especially in the areas of inventory and financial management.

I was also pleased to get an invite to the NADA Parts "Round Table" this upcoming September. I will be visiting with other Parts Managers, NADA Academy Instructors as well as other respected parts industry experts and I appreciate the invite from Chris Bavis and Mark Michalski from NADA.

One company in particular, Bob Palcher and Dealer Solutions, Inc, (DSI), in my opinion, is the industry standard in the inventory management process as it relates to physical inventories, bar code scanning, perpetual inventories, bin set ups, name it...they can do it!

"Parts Eye", is in my opinion THE BEST manufacturers' stock replenishment program, far outweighing any other manufacturers' program. The "Parts Eye" Program allows for the utmost in program utilization and inventory protection while controlling Days Supply and On Hand Values over 9 months. The best of both worlds...inventory "breadth" without adding "over valued" inventory.

I was also pleased to get with Mark De Lucia from DealerMine Corporation as he had some really decent obsolescence buy back programs available.

 That's a tough business as dealing with this expensive dealer asset is never easy and turning frozen assets into cash can definitely be an option for some dealers who need to lose that parts inventory excess "weight" fast.

It's obvious there is a need for more training and information out there for many parts managers. Many parts managers I meet are obviously intelligent and have the skill.

They just haven't been given the opportunity or proper training, information, guidelines and tools for success as many were "thrown" into the parts manager position.

Thumbs Down!...

Just in general before I talk about the "parts related" portion of NADA that I observed...the 99th Annual NADA Convention, although extravagant, seemed a little over the top. Many of the same products and services all just dressed up a little differently.

Don't misunderstand, I felt that NADA put on quite a "gala" event and I was proud to be part of it as well as being a part of this great industry, but I felt that there was much more "solicitation" this year as compared to past years. It was surprising the methods used to get the dealers attention to say the least.

It seems that there was a LOT of money spent to lure dealers into the booth to see the latest that these industry vendors had to offer. I know that this is not unusual, but it seemed to be more obvious and extravagant this year to me for some reason...

From a parts perspective, I was really quite shocked that there wasn't much out there other than NADA Academy, Mike Nicoles and "yours truly" that even offer parts management training out there.

Even though it's always a big topic of discussion, especially when we talk about obsolescence, first time off shelf fill rates, parts purchasing programs, etc. 

Even though there is training available from the above mentioned, parts training compared to sales and service training is very minimal at best. I believe there are a couple reasons for the drastic difference in training opportunities for parts versus sales and service training opportunities.

For one thing, there aren't a lot of us "parts trainer guys" out here that really even know parts!...I mean really know parts! The second reason I believe there aren't many is that dealers seem to have a preconceived notion that......"Parts is parts and anyone can do it!...Who needs to be trained in parts anyways!"

Until there is a problem of course...obsolete inventory, improper inventory balances from the ledger to the controlled inventory, poor CSI due to parts not in stock, poor shop productivity due to low off shelf fill rates....the list could go on and on....

It just seems that more time, money and effort is spent on "cleaning up the mess" than it is being spent on proper parts manager training to "stop the bleeding" first! In my opinion, there wouldn't be any obsolescence out there if parts managers were trained properly in the first place. 

There would be no "overweight" parts departments with "out of control" inventory amounts out there if the proper training had been offered or utilized.

 Proper training on managing and/or modifying the proper set ups and controls, especially when it comes to the manufacturers having their hand in controlling stock orders and the dealers' money. 

Having the "right part at the right time" does not require having all the parts "just in case" they might sell according to someone else's "demand" and not my own.

Most importantly, we can't be buying parts just to get a check back from the manufacturer, unless the proper gross and true turns are achieved.

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