This year has definitely been different from any other year we have experienced due to the Covid-19 Pandemic, which has impacted everyone of us in all aspects of our lives. It has also impacted our industry, like many other industries in so many ways.
Back in February of 2016, our ACG "Smart Parts" feature article was titled, "Reconciling The Parts Inventory". That feature focused on the benefits of performing a Parts Monthly Inventory Reconciliation versus just one Annual Parts Inventory Reconciliation.
We are bringing this topic back for another "go around", but with a different focus on the same topic. This year, more than ever, we have been overwhelmed with dealers contacting us for help with their Parts Inventory Reconciliation.
General Ledger amounts are soaring at a much higher rate than ever compared to the Controlled Inventory amounts revealed on our D.M.S. Reports, or even after physical inventories are taken. This 180 degree swing in these two inventory amounts is sending many dealers into panic mode.
In retrospect, could you imagine if our New & Used Vehicle Inventories experienced the same scenario? In other words, you may have 250 New & Used Vehicles sitting on the lot, but the Financial shows that there are 300 New & Used Vehicles in Inventory.
This comparison is exactly what many dealers are experiencing with their parts inventory.
For years, many dealers have experienced a parts inventory "pick up" at the end of year, after the physical inventory was performed. This is the reason, most dealers do not want to perform a monthly parts reconciliation because they like that 100% net profit bonus at the end of the year.
What they don't realize is, even though they like that bonus, how do they know if that bonus should be even greater? In other words, let's say that their end of year "pick up" bonus is $35,000.00 after the physical inventory is completed. What if that bonus could have been $50,000.00 or greater by performing a monthly parts reconciliation?
Maybe it could be greater, and just maybe I could write down more of my obsolescence and take a "pick up" at the end of the year, thus reducing my inventory acquisition & holding costs. These are areas that, in my opinion, should be the concerns for the dealer.
Waiting until the end of the fiscal year allows for a whole year of variances to occur. If the Parts Manager knows that they are building up this little "kitty" during the year, it allows for a little "buffer zone" to adjust the parts inventory throughout the year.
Without making any accusations, it just leaves too much out there to the realm of possibility, or to question. How would I know if parts are going out the back door?...how would I know that my "pick up" is accurate?...could it be more or less?...should I scrap some obsolete parts. etc.?"
By managing the parts inventory monthly as opposed to annually, the parts inventory discrepancies can be seen and adjusted monthly. It's also much easier to find these potential discrepancies over the last thirty days as opposed to trying to track them down at the end of the year which will include the last twelve months.
This is exactly why Office Managers, Dealers and Accountants prefer to make that one entry at the end of the year and hopefully, it's a positive adjustment in the dealer's favor. If not?....then this is when everyone comes unglued and this is the reason this year is so much different.
"So, What Has Caused This 180 Degree Shift And Panic Among Many Dealers This Year During the Covid-19 Pandemic?"
The one thing that I believe we can all agree on is that the Covid-19 Pandemic has definitely taken us all out of our Comfort Zones. This cannot be more evident and true than for the Parts Manager. First of all, most Parts Managers are regimented to doing the same things, the same way, over and over again throughout each day.
As opposed to Service Managers and Sales Managers, each day is different as customer concerns and sales needs in both departments are different and unique. In the Parts Department however, each day brings on the same processes and procedures, even though some days may be busier than others.
The results of what we have experienced and are still experiencing from the Covid-19 Pandemic are the shifts and changes from what we are normally used to in the Parts Department. Some, or perhaps many of these shifts and changes to every day operations has left a huge, negative impact on our parts inventory reconciliation.
Let's take a look at how some of these shifts and changes in our normal operations have impacted the parts inventory....
This category is first and foremost as one of the causes and affects that Covid-19 has had directly on the variances in the Ledger Balance Inventory Value versus the Controlled Inventory Value in the Dealer Management System.
Parts delays, back orders, parts coming in from different vendors at a different cost, parts not even being receipted, but sold on repair orders, cost adjustments not being accounted for, Manufacturers Parts & Accessories Statement not matching what was receipted into the D.M.S. are just a few of causes in this category alone.
In the last three months, over 16 dealers that I have been working with have had discrepancies from what was receipted into the D.M.S. versus Manufacturer's P & A Parts Statement that the Accounting Department will pay for and add to the Parts Accounting Ledger Balance.
Even though we normally experience parts purchases that may be carried over from month to month, these amounts that I'm seeing are staggering. Some manufacturers are worse than others, but dealers are actually paying for parts they haven't even received yet.
With some plants being closed throughout the shut down, parts managers have had to do anything they could to service their customers whether stock replenishment, or special orders. Using different vendors, or even other dealers for a source, this has led to many accounting nightmares and unfortunately, most have gone unnoticed or accounted for properly.
Negative On Hand & Outstanding Orders:
This is another category that has led to an extreme amount of variances between the Parts Ledger Balance Amounts versus the Parts Controlled Inventory Balance in the D.M.S. during this pandemic. I have seen "Negative On Hand" amounts in the D.M.S. skyrocket in many dealerships which means a couple things.
Number One, parts were being sold and not even receipted, thus reducing the D.M.S. Controlled Inventory Balance, even though the Ledger Balance Amount will go up. Number Two, in most Dealer Management Systems, Negative On Hand Balances, left uncorrected, can impact Normal Stocking Levels in a negative way.
Outstanding Orders are also a heavy player in these inventory variances as many of these Outstanding Orders are false and most likely were received, put not properly receipted and/or relieved from the original Outstanding Order(s). Once again, reducing D.M.S. Controlled Inventory Value Amounts.
Left unrelieved properly, the D.M.S. and the manufacturers Vendor Managed Inventory Suggested Stock Orders will not be accurate as those parts left "outstanding" will not be included. This alone will result in Parts Manager's chasing even more parts to fill the shelves at a higher, unaccounted for price, not reported, recorded or adjusted in the Parts Ledger Balance Inventory.
Parts Receipted Into The Wrong Inventory:
This category is another key player into these variances that we are experiencing between Accounting Ledger Balance Inventories and the Parts D.M.S. Controlled Inventories. The parts main inventory, tire inventory and the gas, oil & grease inventory have often been confused, even before Covid-19. It just got worse with Covid-19 than ever before.
With most manufacturers, tires, gas, oil & grease purchases can be receipted into the wrong inventories, and actually be sold into different inventories. An example of this is an invoice for tires can be receipted, in Accounting into the parts main inventory, but sold from the tire inventory, or vice versa.
This will cause a discrepancy in both inventories and if only reconciled at the end of the year, these discrepancy amounts can add up in all three inventories throughout the course of a year. Monthly Parts Reconciliation can trap these discrepancies much easier each month.
In the gas, oil & grease inventory alone, there should be a monthly, and/or annual "pick up" as oil is normally sold at a higher cost per quart than the actual "true" cost paid per quart. If reported monthly, the additional profit should be recorded as "Discounts & Allowances", resulting in more monthly parts gross profit as opposed to just reducing, or "buying down" the Parts Ledger Balance Inventory.
Manufacturer's P & A Statement/Outstanding Credits:
I mentioned earlier that I have witnessed many dealer parts statements from the manufacturer did not reflect what was actually receipted into the D.M.S. and that there may be some month to month rollovers, but I have witnessed much more.
Parts return credits, core returns and delays from the ability to send back parts to the manufacturer during the Covid-19 Pandemic have all really created a mess when it comes to Parts Inventory Reconciliation. Most often times these "relieved", Outstanding Credits are going unreported.
Even though parts and/or dirty cores are being returned and deleted from the D.M.S. Controlled Inventory, the "Outstanding Credits" are not being accounted for in the Parts Inventory Ledger Balance, even though the Parts Manager has taken them out of the D.M.S. Controlled Inventory.
Here's the worst one that I have witnessed...the manufacturer's P & A Purchase Statement may also include "promo" material such as Sales and/or Service Advertising Banners, Brochures, Accessory Displays, Gift Items, etc. that were being posted into the Parts Ledger Balance Amount.
If we are not looking at our Parts Purchase Statement from the manufacturer each month and waiting to reconcile at the end of the fiscal year, there in itself can be a huge problem. The Parts Manager should also be "matching up" every parts invoice from the manufacturer to every packing slip from the manufacturer to insure that we are only paying for what we receive.
At the end of the day, month or year...it all comes down to "balancing" the books and the Parts Accounting Ledger Balance Inventory as this is what we need to reconcile to. No matter if we reconcile monthly or annually, the adjustments have to be made to match that Parts Ledger Balance.
It would only make sense to do this process at the end of each month in order to protect ourselves from these end of year surprises, especially when we are expecting all this "blue sky", only to discover that it ends up in the other direction.
At that point, it's just too late and we will just have to pass down the blame to guess who?...That's Right!...the Parts Manager when all the while, so many others may be involved in the discrepancy. This is why we need to do the process as intended and save everyone from all that end of year aggravation with our Accountants.
Covid-19 has definitely been a wake up call for all of us and as we always do...we learn from these experiences and the lesson here is undeniable and if we don't act on it, then I guess history just may repeat itself in the future...
If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...