Tuesday, June 4, 2019

June 2019: "Show Me How To Fix It!" - Part One: Lost Sales

In my opinion, finding a problem and fixing a problem are two different things. Anyone can tell you that you have a problem, but I'm more interested in ways to fixing the problem. In this computerized age that we live in, we have tons of reports available to us, but it's what we DO with all this information that is most important.

Over the next five months, starting with this issue of ACG "Smart Parts", we will concentrate on five Key Performance Indicators, (KPI's) in Parts Inventory Management that shape just how well our parts inventory is performing compared to industry guidelines.

We will start with Lost Sales, followed in consecutive months with Phase-In/Phase-Out Criteria, Stocking Levels, Gross & True Turns and lastly, and most important...First Time Off Shelf Fill Rates. Each of which, we will lay out a business plan to fix these KPI's and get them to industry guidelines.

A couple of years ago, I was invited to attend a conference with other parts industry analysts to have a "round table" meeting to discuss the "state of our industry" concerning parts in general as it pertains to today's automotive dealership.

One of the first topics of discussion was the reporting of parts "Lost Sales" and its overall effect in the daily operations and stocking levels of the parts department. We first discussed the true meaning of Lost Sales, and of course, the actual definition of a "Lost Sale".

With approximately fifteen to twenty attending this conference, just how many definitions do you think we had from those attending?....Exactly!....about fifteen to twenty! This was a great start to the conference and the debates began!

That being said, therein lies the first problem to less than desired results in many dealership parts departments today achieving industry guidelines of approximately 5% - 10% reported Lost Sales at cost compared to total parts sales at cost.

So, if all of us that attended have a difference of opinion, how do we expect our dealers' parts managers to achieve these industry guidelines?...What is the true definition of a Lost Sale?...and perhaps most important...Why is it important to report Lost Sales to begin with?...

So many questions, but now....Let's Fix It!....

Much like any problem or situation, before we can fix anything, we have to identify the root cause and develop a plan with an end goal in mind, along with a timeline to completion, or expected result. This is especially true when it comes down to Lost Sales Reporting and its definition.

When I was asked what my definition of a Lost Sale at this conference, my answer was much like any answer I give as a consultant as I tend to answer a question with another question. My answer to the question, (in the form of another question) was...

"What is the industry guideline"?

The answer given to me was 5% - 10% of total sales at cost, meaning that if my total cost of sales was $100,000.00 on any given month, then I should be reporting at least $5000.00 to $10,000.00 in Lost Sales at cost. 

At this time, I did answer the question as to my definition of a Lost Sale with...

"I guess then if you are a parts manager reporting Lost Sales at 5% - 10%, you have the right definition, if you are not...then you don't have the right definition"...

That being said...let's lay out our "Three Step" plan to "fixing" Lost Sales Reporting...

Step One: Belief System

In my opinion, fixing Lost Sales Reporting starts with the parts manager "believing" in what reporting Lost Sales can do for them. First of all, a Lost Sale is considered a "parts demand" or "hit" in the Dealer Management System, (D.M.S.). Demands to the D.M.S. are only recorded with either a Sale, or a Lost Sale.

Reporting "parts demand" into the D.M.S. is the only way parts are phased-in to the system and to eventually be considered a stocking item or part. Once the parts are phased-in, then the Stocking Level Parameters take over until the parts phase-out from inactivity or a given period of time.

It is in this first step where most don't even achieve industry guidelines on Lost Sales Reporting because they don't truly believe how important it is. This is why I don't like the term "Lost Sale" as I would replace the term with "Potential Missed Opportunity".

That interpretation alone, in my opinion, is a game changer. The term Lost Sale to me just seems to have a negative tone to a practice that is a positive one. Posting Lost Sales is not a bad thing, it's a good thing.

Do I want to take a chance by missing a potential "part demand" in my system"? Even if I record a Lost Sale up front when the customer or technician inquires about a non-stocked part, should I report a Lost Sale?

What if that customer or technician eventually orders the part and we sell it, aren't we now getting two demands on the same part? One from the Lost Sale and one from the actual sale of the part...will that not give me a "false" demand of two instead of one?

Let me respond with my own "What If?"....What if we don't post a Lost Sale up front because the customer or technician is ordering the part?....What if the customer never comes back, or the part is never installed?

Now I have a part that I ordered sitting on the shelf with NO demands posted even though there was a "need" or "demand" for that part. But, if I did post a Lost Sale and I sell that part to someone else, I would now have two demands on that part. One more demand that could lead to stocking that part in the future.

Here's the key.....It Doesn't Matter!

Step Two: YOUR Definition as a Parts Manager

If our "Belief System" has been resolved, we can now take the next step in "fixing" Lost Sales Reporting. Keep in mind that if we don't "believe" in what we do, then don't expect anyone else to believe it, especially our parts employees.

This "state of mind" has help 95% of all my clients achieve industry guidelines on Lost Sales Reporting within one to three months. Each of which were well below industry guidelines, or didn't even report Lost Sales at all in the beginning. 

Choosing the right definition as a parts manager, in my opinion is basically "simplifying" the definition in the first place. Too many parts managers that I have met that have less than desired results in this category have way too many restrictions on Lost Sales Reporting.

In most Dealer Management Systems, (D.M.S.), Lost Sales Reporting is recorded by demand within a given month, even though you can set limits on total demands. So, in other words, it doesn't matter if I record one Lost Sale, or ten Lost Sales on a given part number, the system is only calculating the demand that month.

If the part has demand within a given month along with demand in a two or three other given months out of let's say six or seven months, then the part will phase-in to the system. Even if the part does phase-in, it's not going to "jump on the shelf". The parts manager still has to decide if he or she wants to accept these parts as stocking parts.

The most important thing to remember is that we can't manage what we can't see in front of us and I don't know of any parts manager can manage thousands of part numbers in our system without seeing it right in front of us.

So, when it comes down to simplifying the definition for your parts employees is...when in doubt?...post the Lost Sale. DO NOT restrict your employees from posting, or making them decide if they should post a Lost Sale on this ball joint for a 1986 Ford F150. Chances are, there won't be any more demands on that part ever again.

And...if we ever did post a Lost Sale on that ball joint AND we posted a sale on the same part, as a parts manager, I'm not going to accept it as a stocking item when I look at my phase-in report. I've actually accepted many "weird" parts and let them phase-in and realized many future sales on those parts and let them phase-out after their life cycle was completed.

Step Three: Resources For Lost Sales Reporting

"So, where do I find these "Potential Missed Opportunities?"...are there more out there that we could be reporting? Are we only reporting Lost Sales when we simply check a part number and we don't have it? Can we have a Lost Sale AND an Emergency Purchase at the same time?..."

Many Lost Sales go "unreported" because we simply don't look for all the areas of "Potential Missed Opportunities". Here are just a few areas where we can enter Lost Sales to build our system "demands" for potential future stocking parts...

  • Aftermarket parts that we purchase that are within our carline. The part may be billed out as the aftermarket part number, but we should post a Lost Sale on the manufacturers part number.
  • Parts on service estimates that go "unsold", or the customer declines to have the work performed at a later date. Let's say a customer has an estimate that involves ten different repairs or services, but only chooses to have five of the repairs or services performed. If the other five that the customer declines involves parts that are not stocked, Lost Sales should be posted on the non selected items. After all, there was a "need" or "demand" for those parts even though the customer declined them. 
  • Emergency Purchases are also another "resource" for posting Lost Sales. You actually can have an Emergency Purchase and a Lost Sale on the same transaction. Here's why...what happens to all those parts we chase that end up just sitting on the floor and not installed, only to be sent back to the vendor or dealer where it was originally purchased.
We have to be careful though because I'm not insinuating that we post Lost Sales and/or Emergency Purchases on all parts that we Special Order. I'm only recommending we post Lost Sales and an Emergency Purchases on parts we have to chase, excluding Collision Parts unless you are a dealer that is actively pursuing wholesale sales.

Common sense is the best way to simplify the posting of Lost Sales to industry guidelines. If a category of a part is a normal stocking part, then I should post Lost Sales on those types of parts. If I stock ball joints for certain vehicles, then I should be posting Lost Sales on ball joints that I don't stock.

Here's another note, if you are a dealer that utilizes a Vendor Managed Inventory Program from the manufacturer, (V.M.I.), posting Lost Sales in your own D.M.S. is the only way to increase your demand in YOUR inventory. 

Relying on the manufacturer that tabulates demand on groups of dealers will only give you group information that may not meet your own demand. It can also lead to overstocking of parts that you don't sell and understocking of parts that you do sell.

If 95% of the parts managers that I have worked with, (39 of 41) can get their Lost Sales Reporting at, or above guide, then there is no reason, or excuse for not reporting Lost Sales. After all, it is an industry standard and not just an option.

"The benefits from posting Lost Sales far outweigh the efforts of changing habits within our department...we just have to believe it".

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