In my opinion, and as a former Parts Manager, Service Manager, Fixed Ops Director and Part Owner of an Automotive Dealership throughout my career, my tenure as Parts Manager, when it comes down to preparing for year end was without a doubt the most stressful time of year.
Preparing for end of year is when we complete the process of "reconciling" the dealer's assets, and where the nightmare begins for the Office Manager, or Comptroller, Sales Manager and the Parts Manager, unlike other dealer management departments
Assets meaning the dealers inventories, including the New & Used Vehicle Inventories and the Parts Inventory. This is where it all begins when we talk about "reconciling" what we show "on the books" as far as the values of all these inventories compared to "what we actually have".
The "Ledger Balance" shown for all these inventories represents the amount of inventory that we paid for versus what we actually have either on our lot in New & Used Vehicles, or the parts we have on our shelves represented in our Dealer Management System, (D.M.S.)
Balancing what we paid for versus what we have is referred to as "reconciliation", or perhaps another term that we could use is "verification". We need to "verify" what we paid for versus what we have on our lot and on our shelves in the Parts Department.
In the Sales Department, this is pretty much an easy task because it's not to difficult to walk the lot and count our Sales Units on a regular basis to verify, or "reconcile" what we've paid for versus what we have. After the unit count is completed and we take in to consideration our "contracts in transit", or "work-in-process" in Service Manager Lingo, we can usually reconcile these inventory amounts rather easily.
In retrospect, it is not that easy in the Parts Department as the number of parts on the shelf far outnumber our sales units on the lot. The average Parts Inventory houses anywhere form 3,000 - 5,000 part numbers multiplied by the number of pieces of each part on our shelves, which can reach up to as much as 10,000 parts on the shelf or even more!
The shear number of parts "pieces" alone makes it much more difficult to "verify" or "reconcile" what we have versus what we paid for at any given time compared to the Sales Department Inventory. Whether we perform an Annual Parts Physical Inventory, or we perform an on-going "Perpetual Physical Inventory", we still have to "balance the books" at the end of each fiscal year for accounting purposes.
This is where all this "end of year" stress begins with all these transactions going on each day in the Parts Department. As a matter of fact, there are more parts transactions in the Parts Department in a single day than there are in the whole dealership in a single month!
That being said, how can we possible "verify", or "reconcile" what we actually have in the parts inventory versus what we paid for? There must be a simple answer and logically, shouldn't those numbers always match? If we bought a part for $10.00, then shouldn't the Parts Inventory reflect that same $10.00 on the shelf?
Not So Fast "Logical & Common Sense Thinkers!"....Let's Get Started And Find Out Why!
It all starts with our Accounting Practices, which include how parts are receipted and most importantly, how much we receipt those parts for. In other words, if I buy bulk oil at let's say $10.00 a gallon, which is $2.50 a quart, but I "receipt" that bulk oil at it's individual quart price of $3.00 a quart, the dilemma begins and is multiplied by potentially thousands of dollars.
In the above example, we are already creating a "reconciliation" nightmare as the "Ledger Balance", (what we paid for it) shows $2.50 a quart, but we are selling it out of our "Controlled Inventory" on the D.M.S. for $3.00 a quart which results in a "buy down" of the "Controlled Inventory Balance" of $.50 a quart multiplied by hundreds of quarts of oil sold, which can add up to hundreds of dollars of discrepancy between the two inventories just on bulk oil if not accounted for properly.
This one example alone multiplied by many other examples that I could refer to, could and will lead to discrepancies in reconciling the Parts Ledger Balance and the Parts Controlled Balance on the D.M.S. each month and each year.
This is where Accounting Skills, Communication Skills and Standard Accounting Practices are crucial between the Parts Manager and the Office Manager as these purchase and cost of sales issues must be accounted for properly on the original invoice. In the above example, these upfront bulk discounts must be accounted for as profit to balance the adjusted actual cost of each quart of oil.
This above example obviously shows a variance of these two inventories in the direction of more "Controlled Inventory" versus the "Ledger Balance Inventory". The result of the above example is a positive for the dealer because it would result in a "uplift" of dealer profit.
In other words, if my "Ledger Balance" is lower than the "Controlled Balance", it would represent a 100% profit on the difference. If the "Ledger Balance" shows let's say an accumulative balance over time of $200,000.00 in D.M.S. Parts Inventory and the "Controlled Balance" is $250,000.00, then the dealer would net an "uplifted" profit of $50,000.00 at the end of the year.
Many Parts Managers may also try to adjust their actual cost on many items when purchased in volume to achieve the highest discount, but that may also be a reconciliation nightmare as discounts vary, even on the same parts purchased at different times.
Now, let's look at another example in the other direction if we actually pay more for our parts versus what we bill them for at cost, then the end result would be a loss of corporate profit. This is not uncommon as parts are sometimes paid for in Accounting, but are not billed at the cost we paid as most parts are billed at the Manufacturer's Pricing Guide cost listed on the D.M.S.
Examples in this direction often happen when we pay more for a part, above dealer cost, but the part is sold at the manufacturer's cost. In other words, maybe a part costs $10.00 if I purchase the part from the manufacturer, but I had to chase the part for a cost of $12.00 and if not properly accounted for, the "Ledger Balance" would pay $12.00, but the part is billed out at the manufacturer's cost of $10.00, thus resulting in a net loss of $2.00, or discrepancy between the two inventories.
Going in this direction, if multiplied over and over, month after month, year after year could result in a loss of several thousands of dollars in Parts Department Profits. If the "Controlled Balance" for example was in the other direction of let's say $200,000.00 and the "Ledger Balance" Inventory was $250,000.00, the result would be a loss of $50,000.00 which could be compared to $50,000.00 going out the back door or as most dealers presume as "pilferage" or "theft".
I will say though that in most cases, it's not theft or pilferage as most often, it's accounting or receipting errors, lack of Parts Manager Training on basic Accounting Skills, or perhaps even key punch errors. Although, higher discrepancy errors in this direction that I have witnessed, theft or pilferage could definitely be a possibility.
Managing and Reconciling two inventories when we "physically" only have one Parts Inventory can be confusing and could have other ramifications in other Parts Key Performance Indicators, (K.P.I.'s). One example of how these discrepancies can impact other areas of the Parts Department's Inventory Performance, or K.P.I.'s is the "Parts Days Supply" calculation.
If we use the wrong inventory amount when calculating our Parts Inventory Days Supply, we could be sending out the wrong message to the dealer when we compile and compare all of our data compared to industry guidelines as to if we actually have too much inventory versus not enough inventory.
The industry guideline for Days Supply is 1.5 months, or a 45 "Days Supply" of parts in dollars in the parts inventory. In order to calculate the proper Days Supply of inventory that we should have on the shelf, we have to look at what history tells us.
An example would be is if we sold an average of $100,000.00 in parts sales at cost per month over the course of one year, and we multiply that amount by 1.5, (45 Days Supply), then we should have $150,000.00 in our parts inventory to equal a 45 Days Supply of parts.
So now the question is...
"Which Parts Inventory Amount Are We Supposed To Use When Calculating Days Supply?"
That answer is actually quite simple because our Ledger Balance is just a number and has no "tangibility" as opposed to the parts listed on the D.M.S., or Controlled Inventory. In other words, I can actually pick a part in my Controlled Inventory and hold it in my hand as one unit that costs $10.00.
This is what the D.M.S. Controlled Inventory represents because it's "what I have" and not what I'm perhaps "supposed to have" in dollar value listed on the Parts Ledger Balance. This is why we cannot use the Ledger Balance Parts Inventory when calculating Days Supply.
The D.M.S. "Controlled Inventory" gives me part numbers, bin locations, part quantities, cost per part and it can add up all my parts on the shelf to give me one total inventory dollar amount which is "tangible". The "Ledger Balance" Parts Inventory is the total of what we paid for in parts every month and every year.
That being said, and looking at these two inventory amounts logically, the Parts "Controlled Inventory", should be the most accurate inventory dollar amount, especially right after a physical inventory has been performed. We can't perform a physical inventory of the Parts "Ledger Balance" Inventory as we can only add up parts invoices as to what we paid for the parts.
If we show a lower amount on our Parts Ledger Balance compared to our amount in the Controlled Balance in our D.M.S., it could mean the difference of perhaps a Days Supply amount of only 30 Days Supply on the Ledger Balance, when we could actually have a 45 Days Supply of parts actually in our Controlled Balance on the D.M.S.
If the amounts are reversed, then the opposite would happen with a higher Days Supply in our D.M.S. compared to the Parts Inventory Ledger Balance. When you think about it, I could technically "buy down" my Ledger Balance to zero dollars, but still have parts on the shelf.
This brings us down to the "Million Dollar" question....
"How Can We Keep These Two Inventory Amounts Balanced?"
The answer to that question calls for two key ingredients, or processes that have to be implemented, or in place to keep the Parts Ledger Balance and the Controlled Inventory Balance on the D.M.S. as close as possible. Keeping these two inventories to a recommended 2% variance or less requires performing Monthly Parts Reconciliations along with conducting Perpetual Parts Physical throughout the year.
Conducting a Perpetual Parts Physical Inventory requires constant bin counts to verify what we have on the shelf. In other words, if I have 100 bins in my Parts Department, I would be performing "bin counts" on at least three bins per day throughout the month which would result in a complete Parts Physical Inventory each month to reconcile my physical inventory to my accounting inventory.
Performing Monthly Parts Reconciliations allows us to keep those "checks and balances" as tight as possible as accounting mistakes are much easier to trap over a 30 day period opposed to waiting until the end of the year to do a physical inventory and hope for the best when we measure that end of year count versus the inventory amount shown on the books, or Ledger Balance.
Monthly reconciliations also includes items such as Parts Work-In-Process, Outstanding Credits, Dirty Core Inventory, Parts Returns and Manufacturer Monthly Price Updates. All of which play a huge role in matching up the numbers and "dollars" between the Inventory Ledger Balance and the Inventory Controlled Balance.
Even though these two inventories carry two different meanings and definitions, the ultimate goal is to keep these two amounts as close as possible at the end of the year. Managing them to be as close as possible requires our attention each month to avoid those surprises at the end of each year.
Bottom line is that we definitely do not want those surprises at the end of the year, especially if the variances between the two parts inventories balances goes in the wrong direction. Monthly Reconciliations along with performing an on-going Perpetual Physical Inventory is the combination to avoiding these end of year nightmares and less than desired results.
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...