Thursday, February 8, 2018

February 2018: Vendor Managed Inventories: "Compliance Or Obedience?"

Picture if you will, or imagine if you will, being a parts manager twenty or so years ago and not having a Vendor Managed Inventory, (V.M.I.) controlled by the manufacturer. As a matter of fact, there are still many manufacturers that do not offer Vendor Managed Inventories.

Whether the manufacturer offers a Vendor Managed Inventory or not, pretty much all the manufacturers are getting their hands into controlling, to some degree, the dealers parts inventory.

 Additional discounts, return accruals, or even penalties for not reaching compliance and loyalty levels can impact how a parts manager "manages" their parts inventory.

But, what is really happening here?...what is so different today versus twenty or so years ago when the manufacturers didn't have their hands in controlling our dealers parts inventories? How have these V.M.I.'s and manufacturers changed our culture, or way of thinking as parts managers?

Before I answer those questions, I do know what it has cost in many dealerships that I have visited over the past several years since these V.M.I.'s first came on board. Many parts managers have abandon their own Dealer Management System, (D.M.S.) when it comes to utilizing and generating their own stock orders.

Many don't even know there own basic setups, or even how to go in and see what they currently are, let alone know how they even work, or modify any of these basic setups.

Not to be misunderstood, it's really not the parts managers fault as it's just become the new way of managing our parts departments with the manufacturers pretty much running the show.

Basic setups such as Phase-In/Phase-Out, Low and High Days Supply, or Best Reorder Points, (BRP), or Best Stocking Levels, (B.S.L.). Other basic parts department responsibilities such reporting Lost Sales and Emergency Purchases have literally gone out the window.

So, when I ask why?...I often get answers such as..."because our manufacturer's Vendor Managed Inventory, (V.M.I.) provides all that for us".....and that's where the problems begin. It's also the main reason I get called in by the dealer to come in and fix it.

I mentioned earlier that I believe the whole parts manager culture and way of thinking has changed in many dealers as I have witnessed. It seems that in these situations, the parts manager really feels more of an obligation to the manufacturer than they do their own dealers.

They seem to feel more "loyal" and "obedient" to their Factory Rep than the one signing their paycheck, but again...not their fault as this is the new norm.

As I write each month on various topics, I often refer to many things as "opinion versus fact" and I want to make sure I separate the two appropriately each month. With that said, the following trends are "facts" that I have witnessed in many dealerships that rely solely on their Vendor Managed Inventory, provided by their manufacturer.

All have these same issues, no matter who the manufacturer is;
  • Overstocked Inventory Levels Beyond Sales Demand Within a 12 Month Period
  • Parts In Stock That Have Not Met Dealer Phase In Requirements
  • Lost Sales and Emergency Purchases Not Reported To Minimum Guidelines
  • Low "First Time Off Shelf Fill Rates", (less than 40%)
  • Higher "Stock Out" Situations
  • Excessive Obsolete Inventory Levels Beyond V.M.I. Protection Guidelines 
The only Vendor Managed Inventory, (V.M.I.) System out there that I have not experienced these trends as much is PartsEye, which is provided to several import manufacturers. I would also add that PartsEye is one of the few V.M.I.'s that actually penalize the parts manager for overstocking inventory levels beyond nine months and fifty days supply.

Toyota also has a similar program that actually helps the parts manager keep their inventory levels within guide and with fewer limitations and restrictions on parts returns. Parts managers also have more control of their inventories with plenty of incentives offered by their manufacturer.

This is probably why I rarely run into an Toyota dealership, or any import dealer utilizing PartsEye with an obsolescence problem, or overstocking situations. Many of them above NADA Guide on Gross and True Turn Calculations and very "liquid" inventory amounts and no frozen parts assets.

Most of the dealerships that I have been called into and had to "reinvent the wheel" so to speak were and still are General Motors and Chrysler dealerships that utilize their Retail Inventory Management, (RIM for GM) and Automatic Replenishment Ordering, (ARO for Chrysler) V.M.I. Programs.

Both programs have similar basic setups regarding parts phase-in as each use algorithms on a higher dealer group level while trying to maintain individual dealers stocking levels.

The only problem is that many parts managers accept parts on their V.M.I. orders, even if they have not not phase-in requirements for their own, individual dealers Dealer Management System, (D.M.S.).

In other words, it's very possible for a parts manager to accept a suggested part in RIM, or ARO that may have only sold once over the past twelve to twenty four months! If not caught and "deselected", the parts manager just bought a part that will sit on the shelf until it reaches it's qualified return date.

On the other hand, there are many parts that are not RIM or ARO qualified that dealers DO sell on a frequent basis, but are not stocked because they are not qualified and will not be protected. Personally, I have never been one to buy parts to protect them, as I would much rather buy parts to sell them, regardless of the "protection"....that's why we have phase-out parameters.

Two cases in point, first one being Chevrolet Cruzes, and apparently, they have turbo issues and are being replaced at a pretty good clip. As a matter of fact, in my last three Parts Installations in Chevrolet stores, these Cruze Turbos sold anywhere from 17 to 30 times over the past 12 months.

In each of these stores, each one had to be special ordered as this turbo is not a RIM qualified part.

In my opinion, this is where the culture has changed over the past twenty or so years, or, this is where parts managers today have not been given the proper information or training that they need. Regardless of this turbo being protected or qualified, it should be on the shelf, ready for sale.

Just think of the lost shop productivity that this causes. Back before RIM, most parts managers would have that turbo on the shelf without a doubt.

Case in point number two, Dodge Ram Diesels have a very popular breather that sits on top of the engine. My last two Chrysler dealer Parts Installations showed sales history on this breather as well, one with 24 sales over the last 12 months, the other dealer with 30 over the last 12 months.

Do you think we should stock this breather? Both of these dealers did not stock, or had "stock out" issues on this breather because it is not an ARO qualified part.

The other sad thing about this is that I have been told by several parts managers out there that their manufacturer discourages them or, in some cases said they can't run their own stock orders on their respective D.M.S systems.

Also adding and stressing that whatever parts they purchase outside of their V.M.I. guidelines are not protected and will go against their compliance and loyalty guidelines.

These, are to me, scare tactics being passed down by, unfortunately people that may not have any parts management experience, other than what is taught them by their manufacturer.

If true, than how are other dealers that have no V.M.I.'s provided by their manufacturer getting their stock replenished? My guess would be their own Dealer Management Systems, (D.M.S.) 

Let's tackle that one right now as here is a list of Dealer Management Systems, (D.M.S) that I am familiar with and very verse in that do have the capabilities of creating system generated stock orders based on individual dealers' parts demands with proper phase-in/phase-out parameters and proper days supply;
  • Adams
  • AutoMate
  • AutoSoft
  • CDK, (formally ADP)
  • Dealertrack
  • Reynolds & Reynolds
  • Quorum
As a matter of fact, Dealertrack and Quorum offer automated parts sourcing based on annual piece sales for individual ranking utilizing algorithms to rank each part individually, versus utilizing ABC Source Ranking for annual piece sales ranges, which is just awesome. 

There are still many manufacturers that do not provide a V.M.I. Program option and it would just make sense that all of these Dealer Management Systems have to offer a system generated stock order program to replenishment parts to their proper stocking levels as well as proper phase-in/phase-out guidelines that qualify parts for normal stocking status in the first place.

It just seems that this new culture has changed many parts managers' priorities as they are more concerned about meeting compliance and loyalty levels to achieve discounts and accruals that even at their highest achievement levels only provide half of the incentives that we used to have twenty or thirty years ago and without all these restrictions and program guidelines.

Even though it appears that I am "bashing" certain Vendor Managed Inventory Programs, I'm actually just trying to let Smart Parts Managers know that their V.M.I. Program is not their only option. I actually like lots of what these programs have to offer, but they have to be utilized in conjunction with the individual dealers D.M.S. options.

Vendor Managed Inventory Systems not only offer incentives, they also offer information on parts demand in certain markets. They also provide key information for parts managers on possibly stocking parts that they may not have in the past with the protection that if they do not sell, they can be returned to the manufacturer.

In addition, some of these V.M.I. Programs are tied into overall dealer programs leading to many more dealer incentives on each new unit sold in the front end. Definitely worth taking advantage of if the dealership qualifies on all levels of sales, service and overall customer satisfaction.

The problem is, many dealers have become stocking warehouses for these manufacturers as they may feel, with the benefit of protection, the risk is lower. Although, what most parts managers do not realize is that there are holding and acquisition costs. 

There are also lost gross profits not being realized from parts that may sell five to eight times a year in that same shelf space where the part currently occupying that same space doesn't sell at all. Once you add in the lost service shop productivity, there are lots of missed opportunities.

Like many things in life, there needs to be a balance, especially in this situation where there is more than one single option in maximizing the dealers overall sales, profitability and inventory investment. When just utilizing the manufacturers' V.M.I. Program, and not including the dealer's Dealer Management System, (D.M.S.), we are not getting what could be the "best of both worlds".

Final words...I believe Smart Parts Managers should take advantage of every option, system and information out there in order to get the best benefits from all their sources. Don't settle for just what the manufacturer wants....after all, last I knew...the manufacturer doesn't pay the parts manager...the dealer does...

With that said....are you a parts manager that's being "compliant" and "loyal"to the manufacturer, or are you just being "obedient?"...

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