Wednesday, September 4, 2019

September 2019: "Show Me How To Fix It!" - Part Four: Parts Gross & True Turns

When we start talking about "Parts Gross & True Turns", we are actually referring to Parts "Definition of Terms", which is Habit Number Two in ACG Smart Parts "Eight Habits of Highly Successful Parts Managers".

Having the proper "Definition of Terms" is vital when we are measuring the Parts Departments Inventory Performance. We already know that Sales & Profitability ultimately determines the success of the Parts Department much like it does with all the other departments within the automotive dealership, but the Parts Department also has to perform as the dealers number two asset.

Monitoring and measuring the Parts Departments "Gross & True Turns" is almost like measuring the dealers Parts Financial Net Profit Analysis. Similar to the dealers New & Used Vehicle Inventory, managing the Parts Inventory could be a "make it or break it" category that could determine the ultimate success or demise of the dealership.

In all actuality, the only two people in the dealership that can determine if the dealer "sinks or swims" are the Used Vehicle Manager and the Parts Manager. Mis-management in one or both departments could mean the end of business for the owner.

Measuring "Parts Gross & True Turns" incorporates the definition itself, proper calculation and managing these terms to their potential. We also need to know what drives these "Definition of Terms" and of course, how to manage them in the right direction.

Let start out with the proper definition of both these terms and why each one is important. I will also provide a "Layman's Term" in regards of each one of these definitions, both Gross & True Turns...

First....let's start with "Parts Annual Gross Turns"....

"Total Sales At Cost For The Last Twelve Months - Divided By - Average Inventory Investment For The Last Twelve Months"

Sounds pretty simple right?....Let me give you the "Layman's Term" of how we can actually define the "Gross Terms" calculation. The example I will use is if I had an average monthly Parts Inventory Value of $100,000.00 along with average parts sales at cost of $100,000.00 over the last twelve months.

Here's what we would end up with for annual Parts Gross Turns;

Average Monthly Parts Sales at Cost = $100,000.00 X 12 Months = $1,200,000.00 - Divided By - Average Parts Inventory of $100, 000.00 = 12 "Gross Turns" Annually.

Here's the key thing to remember in this equation...the above calculation refers to average "parts sales at cost" monthly, then annualized for a total of $1,200,000.00. The equation DOES NOT say if these parts sales at cost are actually from my own inventory.

In theory, I could actually sell $100,000.00 in part sales at cost without even selling one single dollar at cost from my own inventory. I could actually have $100,000.00 in "dead inventory" and had to buy all those parts that I sold at cost from outside sources.

So, Why is Measuring "Gross Turns" So Important?

Measuring "Parts Gross Turns" is extremely important because it gives us our marketability number as far as just how much I should carry in "Inventory Dollars" to support my market area. The current industry guideline for Parts Annual Gross Turns is "8 Gross Turns". So, how did they come up with that number?....

If we use the above example that resulted in 12 Annual "Gross Turns", and then apply the industry standard, or guideline of 8 Gross Turns, we will come up with the following results;

Annual Sales At Cost = $1,200,000.00 - Divided By - 8, (Industry Guideline) = $150,000.00.

In this example, this would mean that my "Desired Inventory Value" should be $150,000.00, whether the inventory "value" was junk or not. It would also represent that my "Months Supply" of parts at cost would be 45 Days, or a 1.5 Months Supply, ($1,200,000.00 - Divided By 8 Gross Turns)....again, industry guidelines, much like the New Vehicle Inventory.

So, if we use the above example again where we experienced an annual "Gross Turn" of 12, our Parts Inventory would be "under-stocked" in value by $50,000.00, because the actual "Gross Turns" were too high at 12 "Gross Turns" annually.

If "Gross Turns" are too high, again, much like the example used above, the end result could be Lost Sales from lack of inventory and perhaps higher costs due to chasing parts at a higher cost and Lost Service Productivity. Again...much like losing sales and gross in the front end Sales Department for not having the right vehicle on the lot at the right time.

This is why some dealers don't get it because they focus more on "Parts Annual Gross Turns" and they seem to like it when their Parts Department experiences higher "Gross Turns", when it actuality, they are losing sales and gross. This is where they should shift their focus on to "Parts Annual True Turns". That being said?...

Let's Move On To "Parts Annual TRUE Turns"...

For simplicity reasons....we will be using the same above example in our "Parts Annual True Turn" calculations, but with just a little twist. But, before we get to that, let's look at the actual "Parts Annual True Turn" definition....

"Total Stock Order Receipts For The Last Twelve Months - Divided By - Sales At Cost For The Last Twelve Months - Divided By - Average Inventory Investment For The Last Twelve Months".

If you figured that one on your own, you are a better person than I am. Calculating "Annual Parts TRUE Turn" depends highly on proper ordering and receipting on parts that are actually ordered and receipted as "Stock Order Purchases. 

In other words, we must not fool ourselves by ordering and receipting parts that may be actually "Non-Stock" parts, or "Special Orders" parts, just because we added those parts to our "Daily Stock Order". If we did do that, we would be falsely counting those parts in the "Parts True Turn" calculation.

We have to ensure that "Non-Stock" and "Special Order" parts are separated from what we truly order to replenish parts for re-stocking purposes that have met all "phase-in" criteria for "Normal Stocking Parts".

Now that we have covered that part, let's look at the same above example that will have a little twist, but will give us our actual "Parts True Turn" number. Also, keep in mind that the industry standard, or guideline on "Parts Annual True Turn" is 5.

"Total Parts Stock Order Receipts For The Last 12 Months = $600,000.00 - Divided By - Total Sales At Cost For The Last 12 Months = $1,200,000.00 - Divided By - Average Monthly Inventory Investment For The Last 12 Months - $100,000.00 = 6 "Parts Annual True Turns".

In other words, again, in "Layman's Terms", the only thing that changed from the "Gross Turns" calculation is that $50,000.00 of $100,000.00 in the Total Sales at Cost each month on average were from actual parts that were considered "Normal Stocking Parts", and not just "total" Sales at Cost, which as I mentioned, could technically come from outside sources.

So now that we see that the above example resulted in 6 annual "Parts True Turns", once again, we are running out of stocking parts much to quickly as the industry standard, or guideline is 5 "Parts Annual True Turns". Once again, resulting in lost gross and expense from outside purchases and potential Lost Sales.

"So, How Do The Previous Parts Of This Series Play A Part In Parts Gross & True Turns?"

First of all, before we clue you into how the first three parts of the series actually play into the actual "Parts Annual Gross & True Turns", let's first say that parts Sales & Gross Profit determines the success of the Parts Department. After all, we are in business to make a profit, first and foremost.

Beyond that though, it's actual "parts demand" that will determine just what we have on the shelf and most important, what we have on the shelf on a "First Time" basis. Having the "Right Part At The Right Time" determines how efficient the Parts Department will perform.

So Now...Let's Look At Part One In The Series, ("Lost Sales") Plays A Part in "Parts Gross & True Turns"....

We determined earlier that the only way a part enters our DMS is the recording of "parts demands", with the exceptions only given to "manual orders" where the Parts Manager orders parts for stock without measuring "demands" that are provided by posting Sales and Lost Sales. 

Keep in mind that we do not have parts for only two reasons...we either never stocked the part in the first place, or we simply ran out. Parts demands only come from two areas....Sales and Lost Sales, which create the "parts demand". 

Another note, if we are not reporting Lost Sales at industry standards, or guidelines, we are missing lots of opportunity on reported demands into the DMS, which leads us to Part Two's contribution in the series, which is "Parts Phase-In & Phase-Out Criteria".

Now...Let's Look At How Parts "Phase-In & Phase-Out Criteria" Plays Into "Parts Annual Gross & True Turns"...

Tracking "parts demands" is how parts "qualify" to enter our "House Of Inventory" in the first place. Once the "Phase-In Criteria" is met, which means the total number of demands, and/or demands in a month that a part achieves, (Sales & Lost Sales) over a given period of time, allows the part to meet the Parts Manager's Stocking Criteria.

Parts "Phase-In" in itself can be a huge determining factor on what parts need to be considered for "Normal Stocking Status". Choosing the right criteria is most important in determining what parts eventually hit the shelves.

Another thing to keep in mind that even if a part meets "Phase-In" criteria, it doesn't mean that these parts simply "jump on the shelves". The Parts Manager has the ultimate decision whether to stock the part(s) or not. This is why I prefer a more aggressive "Phase-In" criteria which allows me to "see" the parts for potential "Normal Stocking Criteria". After all...I can't manage what I can't see...

Once the Parts Manager decides to allow parts to "Phase-In"...the job of parts "Phase-In" is complete. Now that these parts are allowed to "Phase-In" by the Parts Manager, it's now up to the "Parts Stocking Levels" to take over until parts meet parts "Phase-Out" criteria...

"So, How Do The Parts "Stocking Levels" Play A Part In Parts "Annual Gross & True Turns?"

The combination of these three KPI's...Lost Sales, Parts Phase-In/Phase-Out and Stocking Criteria are key ingredients to "Fixing" our "Parts Annual Gross & True Turns". The "Parts Annual Gross & True Turns" are actually result areas that measures just how well we utilize "Parts Lost Sales Reporting, "Parts Phase-In/Phase-Out Criteria and "Stocking Levels".

The last of which is our parts "Stocking Levels". Choosing the right Best Reorder Points, (BRP, or Low Days Supply) and Best Stocking Levels, (BSL, or High Days Supply) determines the proper amount of parts inventory that we have on the shelf so we don't run out, or have too much.

Doing the math is key into determining these criteria points of the low points and the high points. Quite simply, and as an example, if a part sells 12 times a year, it is due to sell once every 30 days on average. Thus, the Best Reorder Point, (BRP, Low Days Supply) is set at 30 days.

One key thing to remember is that "Days Supply", (BRP & BSL) does not mean quantity. It just determines when to reorder and what the best stocking level should be. Quantity is determined by average annual piece sales, whether "weighted" annually, or measured by percentage over a number of days or months.

Fixing "Parts Annual Gross & True Turns" requires the "Smart Parts" Manager to know, understand, measure, modify and yes...finally "Fix" what it takes to get "Desired Results". 

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...