Wednesday, November 9, 2016

Vendor Managed Inventories: Could The Manufacturers Really Be "Missing The Boat?"

As I do in many of my articles, I start out by referring to how things were "back in the day" and once again, I find it very apropos to start that way again in this month's issue of ACG "Smart Parts" when referring to how we get our stock replenished today versus years ago.

The one thing I do know is that "back in the day", we only received what we ordered, with very little intervention, or interference from the manufacturer. We may may not have had all the ways track parts history, trends or demands that we do today, but it was much simpler back then. Although, I will say that having the right mix of parts on the shelf was very difficult.

In many ways, Vendor Managed Inventories, (V.M.I.'s) were and are a welcome sight as we now have a way to somehow get a "consensus" as to what we should stock and what we shouldn't stock based on all this demand being recorded by the manufacturer. We can even earn added discounts by keeping within program "compliance" as well as spending less time creating and sending our stock orders.

Vendor Managed Inventories, (V.M.I.'s) also gave the dealer an added sense of security by "protecting" these purchases of qualified parts over a period of time. So how can we go wrong?....less effort, inventory protection, added discounts, allowances and much more!

As I mentioned in the introduction, I have written on this topic several times and have answered many of the common questions that Parts Managers have concerning Vendor Managed Inventories, (V.M.I.'s), but I haven't really "dug deep" into the "why" and "how" these programs work in the first place.

The first question is how a particular part becomes "qualified" to be a part included in a particular V.M.I. Program. That seemed to be a pretty simple one as just like most other parts in our own Dealer Management Systems, (D.M.S.), criteria must be attained in order to be a "qualified" part. The only difference is that a "collective" of demands have to be met by a number of dealerships in order for parts to qualify for the most part, but not all.

Knowing this going in, that answered the question to me as how parts are "phased-in" to any particular V.M.I. Program, but it didn't answer the question as to which dealers are to stock certain parts and which ones weren't. On top of that, what would be the determining factors to the Best Stocking Levels, (B.S.L.) and Best Reorder Points, (B.R.P.)?

This was where the research came in as I found that many Parts Managers were receiving Recommended and Suggested Stock Orders on parts that may only have one "hit" or "demand" in the last seven or eight months. 

How could this be that any V.M.I. Program should suggest stocking parts that have not even met my own phase-in, phase-out criteria? How could they possibly even know what my Best Stocking Level, (B.S.L.) and my Best Reorder Point, (B.R.P.) be on a part that doesn't really even qualify or even have enough history to know the answers to any of these questions?

Now, at this point, I'm really getting intrigued and inquisitive as to the "hows" and the "whys" these parts are ending up on more shelves than ever before. I do know that the pressure being put on Parts Managers in this case study by the manufacturers to meet and exceed "compliance" levels was very apparent. It almost seemed like they didn't even care whether or not the dealers' inventory levels on this "asset" were skyrocketing and actually adding to the dealers obsolescence numbers.

Even though these V.M.I. Inventories are protected and all can be sent back after a period of time at no additional cost, (not counting acquisition and holding costs, of course) we have to ask ourselves one important question....

"Why would I even buy parts to "test them" over a period of time, just to send them back at a later date?...I thought we were supposed to buy parts to sell them at a high rate of turn?"

Hmmm....interesting question, especially when I thought, as a Parts Manager, that I was supposed to be trying to have the right mix of parts with a high "First Time Off Shelf Fill Rate" and high True Turn numbers.

Not to be misunderstood, I do realize that these Vendor Managed Inventories DO help Parts Managers with those parts that are good or fast movers, but I am only referring to what's missing and that's why I believe the manufacturers' could be "Missing The Boat".

Let Me Explain...

During my research, I started to take down some notes as to the similarities in all these ten stores and I noticed a few things;

  • All had excess inventory amounts in the 7 - 12 Months, "No Sales" Activity Area.
  • All had inventory amounts in the over 12 Months, "No Sales" Activity in excess of 25%
  • All had "Non Stocked" inventory amounts in excess of 50% of their total inventory
  • All had at least 30% of these "Non Stock" were added parts from their V.M.I. Program.
  • All of these added V.M.I. "Non Stock" Parts had a B.S.L. and a B.R.P. of ZERO!
  • All of these Parts Managers DO NOT generate D.M.S. Stock Orders on a regular basis.
  • All of these Parts Managers make little, if any adjustments to their V.M.I. Stock Orders.

With all of this information, it's no wonder how so many Parts Managers got to the point of "over valued" inventories, lower gross and true turn numbers, lower First Time Off Shelf Fill Rates and even lower Service Shop Productivity.

Here's What's Missing...

The one thing that was consistent in all these parts departments was when I asked them to run a D.M.S. Stock Order, they either forgot how, or they hadn't run one for a LONG time. Once we created the "in-house" D.M.S. Stock Order, lo and behold....look at all those great part numbers that we need on the shelf!

Why aren't they already on the shelf you might ask?....well!...these parts that are selling at a high rate in this particular store are not qualified, V.M.I. parts! So, rather than stock them and have no protection, let's just special order them when we need them, thus tying up the shop once again to wait for a part to arrive overnight that we should have had on the shelf in the first place.

The other thing that was missing that I hadn't figured out to this point was..."How can a part be suggested on my V.M.I. order and come into my inventory with a 0/0 B.S.L. and B.R.P.? In most D.M.S. Systems, this isn't possible unless these 0/0 B.S.L. & B.R.P. parts are actually forced in by the Parts Manager.

So, how does this happen?...

I recently figured out, or at least in my opinion, that parts that are on a particular V.M.I. suggested order that may have only one demand in my D.M.S. System, may actually have several, "qualified" demands in the V.M.I. Group as a whole. Even though the part hasn't met my criteria, it has met the group criteria and if I don't catch it before it gets ordered? guessed it!...I have now bought that part to sit on my shelf until it's reached it's qualified return period.

Even though there is no technical B.S.L. or B.R.P. in my system for these parts, they are forced in as a B.R.P. of zero and B.S.L. of one by the group criteria. Overall B.S.L. and B.R.P. is determined by either the V.M.I. criteria as a group for the B.S.L. and B.R.P., or the my own Dealer Management System's, (D.M.S.), whichever is greater.

So, if you are not watching or paying attention these V.M.I. Suggested Orders, it won't take long for it to get out of hand and overload you with lots of inventory as well as acquisition and holding costs that will skyrocket.

If the manufacturer really wanted to maximize on their parts sales, they would encourage Parts Managers to use both programs to get the best stock order efficiency from their V.M.I. and the dealers' D.M.S. Systems. 

In the last few months, I have actually created and generated over twenty D.M.S. Stock Orders for Parts Managers that had a wealth of part numbers that they all said they would normally stock. Only because they had stopped running their own stock orders on their own systems caused these great "stock out" situations. In fact, I found that many of these D.M.S. stock orders had many more suggested order lines than the V.M.I. suggested order had!

One other item I noticed in my research was that Parts Managers were actually "running out" of V.M.I. Parts! Once I explained to them that just because the V.M.I. Suggested Order has your fast moving part listed, it's very possible that the Best Reorder Point, (B.R.P.) may need to be adjusted as the V.M.I. Program for the most part, is only picking up your "Default" Source Settings on Low and High Days Supply and not your Source Ranking by Piece Sales Settings.

I believe that the manufacturers are missing out on additional sales as they are now steering Parts Managers away from their normal duties and responsibilities when it comes to basic parts ordering procedures. In order to have the right mix of parts, we have to use all of our tools in our tool boxes, both vendor managed and in-house programs.

In my opinion, there is no substitute for plane old, good Parts Manager skills, reporting Lost Sales, Emergency Purchases, doing Bin Checks periodically, running "in-house" Stock Orders, etc. I guess you could say that we had it pretty good "back in the day" and just maybe, it wouldn't hurt if we carried some of those "good practices" on into today's Parts Manager's day!

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