Tuesday, August 7, 2018

August 2018: "What Are The Costs Or Benefits To Loyalty?"

Purchasing parts from the manufacturer today is quite a bit different than it was years ago. Back in the day, we just had parts order options such as stock orders, supplemental stock orders, emergency orders and perhaps critical orders that we placed and received overnight.

Each order carried its own cost or benefit whether it was receiving the best discounts and most return reserve accrual from placing a stock order to higher costs from placing emergency or critical orders to receive the parts as fast as possible.

Today, we see these basic parts order functions expanded into programs where many manufacturers are controlling the dealers parts purchases through Vendor Managed Inventories, (V.M.I.'s) and in some cases, tying in the Service and Sales Departments for overall dealer incentives and program qualifications.

To me, many of these parts programs being offered by the manufacturer are beginning to emulate many of the dealers up front vehicle sales incentive programs that may even include "cash back" to the dealer if compliant to their respective programs.

Discounts, allowances and return reserve accruals are also available to the dealer, once again, if compliant to achieve maximum program benefits. Sounds great if all this comes together for the dealer, but in many cases, the reality of higher costs outweighs the benefits.

Let me explain.....

The first key word that we need to pay attention to is "compliance".....

Let's look at the definition of "compliance" as stated by dictionary.com;

"The act of conforming, acquiescing, or yielding, a tendency to yield readily to others, especially in a weak and subservient way, conformity and accordance..."

So, to me, when it comes to being "compliant" to these programs, the first question I have to ask is... 

"Who's In Control Here?"...

I would have probably thought that these programs would lean more towards program "qualifications", or perhaps even program "enrollment", instead of "compliance".

 It also leads me to believe that we don't have a choice, but to comply. It also seems to imply that if we don't comply, there will be costs and consequences.

As I mentioned in the beginning, it was much simpler back in the day as the Parts Manager had control of the dealers "purchase power" and the discounts, allowances, return reserves and any added costs were controlled by the Parts Manager.

Today, with many manufacturers offering V.M.I.'s, the Parts Manager has lost much of this control, or chooses to give up their control, thus leading to the dealers "purchasing power" being forfeited over to the manufacturers.

The end result in many dealers parts departments that I have worked with is an over inflated inventory with obsolescence in excess 25% or more.

Recently, I was interviewed by Fixed Ops Business on an article that is due out in November of this year and the subject matter focuses on "problem K.P.I's", (Key Performance Indicators) in dealership Parts Departments today.

Not to give too much away on the upcoming article, but I believe that parts obsolescence is one of the biggest "problem K.P.I's" that many Parts Managers deal with today.

One of the biggest contributors to parts obsolescence, in my opinion, is the fact that many Parts Managers "overextend" themselves into many of these programs offered by manufacturers just to be compliant.

So, who really benefits from these programs and who really gets impacted by the negative effects from these programs?

First of all, before we answer these questions, the news isn't all bad as there are significant benefits to being "loyal". Keep in mind that the following is just a sampling of my own research from dealers I have personally worked as well as a sampling of dealer 20 groups that I have also worked with.

Who Benefits?

For the most part, high volume dealers that have parts purchases in excess of $3,000,000.00 annually receive the biggest benefits from these "loyalty' programs offered by the manufacturer. Higher parts demands enables these dealers to achieve the biggest volume discounts by reaching higher discount percentage "tier levels"

Along with the higher demands, also enables these dealers to have a "broader inventory" with more part numbers that qualify for program benefits. Their inventory also tends to have higher gross and true turns annually so inventory is usually protected and obsolescence less likely to occur. 

Plus, with the strong "purchase power", accruing parts return reserves are much higher, thus allowing these dealer Parts Managers to keep up and return parts that may slip in that "over 12 months, no sales" category before the become obsolete.

These high volume dealers also tend to have strong wholesale sales which also allows the Parts Manager to keep their "loyalty" percentages strong as most of these wholesale parts are purchased from the manufacturer as opposed to purchasing parts from aftermarket vendors.

In the end, these high volume dealer Parts Managers can pretty much capitalize on all the benefits from these programs achieving the most in discounts, allowances, return reserves and overall dealer "cash back" from the manufacturer.

They are also a big player in the overall dealer programs that may tie in the Service and Sales Departments. So now we have "compliance" playing a role in all of the dealers operations and in all departments.

Who Does It Cost?

Well, I guess the opposite would be correct with dealers that have less than $3,000,000.00 in annual parts purchases. Especially, even those smaller dealers who don't  achieve that amount in annual parts purchases. Outside purchases are much more common from other dealers and aftermarket vendors as emergency purchases are much more frequent.

With so many part numbers out there in order to even qualify for some of these programs, it's becomes that much tougher to meet program requirements for "compliance". Because of this pressure to meet qualifications, oftentimes Parts Managers will purchase "qualified" parts just to meet compliance levels, even if these parts have little or no sales history.

These smaller dealer Parts Managers also tend to "walk away" from their own Dealer Management Systems, (D.M.S.) when it comes to creating their own stock orders, relying solely on the manufacturers' Vendor Managed Inventories, (V.M.I.). When this happens, the risks of overstocking the parts inventory and inflating obsolescence goes much higher.

In some cases that I have personally witnessed, Parts Managers are and have been pressured by their manufacturer to purchase more parts just to reach compliance levels just to gain a small discount. I have seen one case in particular where the Parts Manager would have to purchase $10,000.00 more in parts just to gain an additional discount of $2,500.00.

Sad thing is, these parts had very little or no sales history in this store, so you can imagine many of these parts will end up becoming obsolete and hopefully protected. The other sad truth of this example is that the discount isn't "real money" as discounts aren't realized until the parts sell, even though it is reflected on the financial as 100% gross profit.

On the brighter side of all this, there are manufacturer programs out there that benefit ALL dealers as some Vendor Managed Inventory, (V.M.I.) companies are better than some others. Some even encourage and credit the dealer for NOT overstocking or carrying obsolete parts inventory as well as shorter terms of months before parts can be returned to the manufacturer at no cost to the dealer.

I guess what it all comes down to is managing the parts inventory and the dealers' second highest asset without getting caught up in all the hype that the manufacturers' try to sell the dealer.

Getting the best return on the dollar is always most important without all the added expense and risks that overstocking and obsolescence can bring. In the end, I believe these programs should benefit the dealer and not be a second parts warehouse for the manufacturer.

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 dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com