Wednesday, February 6, 2019

February 2019: "Who's Controlling Your Stocking Levels?"

Over the past several months, I have been extremely busy providing Parts Manager Training on D.M.S., (Dealer Management Systems) Set Ups & Controls as well as basic Parts Manager Training on how to manage these Setups & Controls.

One of the other reasons that I have been so busy is because so many dealers are switching D.M.S. Vendors which, in itself presents a need for more Parts Manager Training on these various systems. Over the past several years, I have been fortunate to learn several different D.M.S. Vendors, thus allowing me to "speak the language" of each system.

It allows me to "translate" the old D.M.S. over to the new D.M.S in regards to installing the proper set ups such as Phase-In/Phase-Out Criteria, Days Supply to include Best Reorder Points (BRP), Best Stocking Levels (BSL), Source Ranking by Piece Sales, Pricing Levels & Strategies, etc.

When it comes to setting up and controlling Stocking Levels, it all starts with the Low and High Days Supply settings, or as forementioned, the Best Reorder Points (BRP) and Best Stocking Levels (BSL) settings.

Quite simply, these Stocking Levels are, for the most part, "self-controlling" based on annual piece sales. This "self-controlling" mechanism is, or should be the Dealer Management System, (D.M.S.) capabilities in moving parts from source to source based on piece sales, resulting in different Stocking Levels.

These piece sale ranges are what determines the proper Low & High Days Supply, (BRP & BSL) and proper piece quantities that will be on the shelf of any given part, whether a part sells 12 times a year, or over 1000 times a year. Each one will carry different Days Supply and Quantities.

I just mentioned briefly that the "self-controlling" mechanism that will ultimately determine the proper Stocking Levels is the Dealer Management System, (D.M.S.). But what if I told you that this may not be the case on many part numbers in your system?

What if I was to tell you that your Stocking Levels, even though you set them up based on your inventory's performance, meaning annual piece sale ranges can be overridden by an outside source and if undetected, could result in an "overvalued" inventory consisting over stocked and obsolete parts.

Not only that, some Stocking Levels that may be controlled by the V.M.I. could also result in Lost Sales, or "stock out" situations in your store because their "group average" Stocking Level criteria on some parts just may be to low for your sales history. 

How Could This Be Possible?....Let's Find Out!...

As I mentioned in my intro that I have been travelling quite a bit this past year helping Parts Managers to transition over to new D.M.S. Vendors as well as basic Parts Manager Training on Set Ups & Controls. 

Quite honestly, most Parts Managers hardly ever look at these Set Ups & Controls because it's not something we do each day, week, month, or even years. Once they are set in our system, we seem to set them and forget them.

With that said, I was recently training in a dealership with a great Parts Manager named Tim. Tim is a perfect example of most Parts Managers that I meet today. By that I mean that most Parts Managers that I meet are very intelligent and great to work work with, but they never had the opportunity to get the proper training, or what I call the proper "sharing of information".

As Tim and I started "digging in" to his Set Ups & Controls, we basically had to do a "redo" of pretty much everything. Tim quickly picked up on everything that I was sharing with him as he implemented all his own new Set Ups & Controls as I will only "guide him" because after all...these are his new Set Ups & Controls.

Now that Tim was "getting" how all this worked, he started asking great questions and provided me with some great examples of parts that have the wrong Stocking Level Parameters, even after we implemented the new settings. As a matter of fact, the BRP's and BSL's on certain part numbers didn't even make sense.

Keep in mind that the following two examples DO NOT follow any of the Source Settings that we installed into Tim's D.M.S., however, they did follow the Stocking Criteria set up by the manufacturers Vendor Managed Inventory, (V.M.I.) set ups, thus overriding Tim's D.M.S. Stocking Levels.

The first example was a radiator part number that only sold once in the last 24 months and it had a Best Reorder Point, (BRP) of 2 and a Best Stocking Level, (BSL) of 3! This part hasn't even phased into his own system yet, BUT, the Vendor Managed Inventory, (V.M.I.) provided by the manufacturer chooses otherwise and overrides his Set Ups & Controls.

In the second example, he showed me a head bolt part number that has sold 121 times over the last year and the Best Reorder Point, (BSL) was set to a quantity of 1 and the Best Stocking Level, (BSL) quantity was set to 2! Just the opposite of our first example as we will have way too many radiators that we will have to eventually return and head bolts that he will keep running out of!

It's extremely important to remember that some manufacturer's Vendor Managed Inventories and some Dealer Management Systems that we have out there need the proper settings managed by the Parts Manager and not the manufacturer.

Settings in the Vendor Managed Inventory website have to be set to default to dealer D.M.S. settings and NOT the manufacturers because the above scenarios will happen with some of these V.M.I. Vendors. After all, they love to sell their parts, whether you sell them or not, or whether they are protected or not.

We have to be careful to not become the manufacturers second warehouse just to be "obedient", or as they say, "compliant". They may think it's okay because we can return the parts at the assigned date and time, but they don't tell you about the inventory acquisition and holding costs which can run as high as 30% or more of the inventory value each year.

So how do we even know what the proper Stocking Levels should be?

When it comes down to most of what we do as Parts Managers, it's all about the math. In other words, we don't need a "self-controlling" mechanism such as our D.M.S. to determine what our proper Stocking Levels should be, although, if set up properly, it's better to let the system do the math.

It is good to do our own math so we can see how it works and keep a better eye out for these inconsistencies, or outside influences trying to "overstock me" and in some cases, "under-stock me".
The two example I gave earlier really happened and it's up to the Parts Manager to recognize these situations and make the proper corrections going forward.

Here's an example of how you can determine your own proper Stocking Levels....

In our example, we will have a part that sells 40 times a year, and a part that sells 4,380 times a year, which means, if we do the math...

365 Days Annually Divided By 40 Piece Sales = 9 (Best Reorder Point, or Low Days Supply)

365 Days Annually Divided By 4,380 Piece Sales = 12 Per Day, or a BRP of 1 Day plus Lead Time of 3 Days (See Below on Lead Time Explanation)

Now, we know that our first part sells on average every 9 days and this becomes our Best Reorder Point. Our Best Stocking Level, (BSL) can be set at 100% of the Best Reorder Point, (BRP) which will give us a Best Stocking Level, or High Days Supply of 18 Days.

Remember though...don't confuse the BRP and BSL with quantity. The BRP and BSL only indicate the Stocking Levels of when we reorder the part and at what restocking level. The quantities are controlled by "Dynamic Days Supply" and "Average Daily Demand" along with part "Lead Times".

So, in other words, on this part that sells on average every 9 days, it also means that it sells roughly 3 times monthly, (3 Divided by 30) which gives me an "Average Daily Demand" of .010. So in other words, the Days Supply "quantity" can be different on many parts.

A Days Supply "quantity" of our second example, an oil filter can be 12 as it may sell 360 times a month, while the above part number only sells .010 times daily, or 3 times a month. Once we add in the Lead Time on Stock Replenishment of let's say 3 Days, which is one day to order, one day to receive the order and one day to restock shelves, we can now determine our shelf quantity.

So, with our "Lead Time" at 3 Days, I would need to set my BRP, or my Low Days Supply of the oil filter at 3 Days, with a BSL, High Days Supply of at least 6, or perhaps 9. The "quantity" of the 3 days adds up to 36, (3 days X 12 piece sales daily) and when stock drops to 36, it will be "reordered" up to my high days supply, which will be at least 72, (100% of Low Days Supply).

On our part that sells 40 times annually, or on average every 9 days and a "Average Daily Demand" of .010, the Best Reorder Point comes at 9 Days Supply and will reorder the part to it's Best Stocking Level of 18.

Now, where our "Lead Times" set at 3 days, the "quantity" of parts at the Best Reorder Point may be when the part is at 0 quantity, or 1 and Best Stocking Level to order up to 1 or 2, depending on annual "Weighted Demand" to give us a "Dynamic Days Supply".

The reason that our Best Reorder Point can get down to zero before reorder is because with our "Lead Time" at 3 days, we can allow the part to get down to zero as it only sells on average every 9 days, which leaves plenty of "Lead Time" to replenish to proper Stocking Levels.

This is why I love some of our new Dealer Management Systems out there because they will automatically set these "Average Daily Demands", "Dynamic Days Supply", and "Weighted Demand"  through algorithms that are irrefutable.

In closing, there are two main "takeaways" that I wanted to accomplish in this month's issue. The first being that IF you are a "Smart Parts" Manager who is utilizing the manufacturers Vendor Managed Inventory, you definitely need to make sure that your stock orders are following YOUR Stocking Levels, and not theirs.

Second and lastly, all "Smart Parts" Managers out there need to know how all this works and to be able to "do the math" ourselves so we can keep these Stocking Levels and all other Set Ups & Controls in check. Don't let outside influence from the manufacturer put you in that hole with overstocked & understocked quantities and unwanted obsolescence....

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