Tuesday, December 7, 2021

December 2021: Moving On To 2022: "The Top 5 Parts Focal Points"

One thing for sure is that we have definitely weathered a storm these last couple of years and hopefully, we are winding down and settling in to what appears to be the "New Norm" going into 2022. The past always seems teach us new lessons on what we need to do going forward.

With many economists and industry indicators making bold predictions in 2022, the one thing that seems to be a constant is that 2022 will be a continuation of 2021 in our industry. That being said, we can only look forward and make one of two decisions.

Number one, we can either continue "going with the flow" and react to each day, week or month ahead, or, number two...we can make some bold decisions and plan ahead to making 2022 our Best Year Ever. What we've experienced in the past seems to always impact what we do going forward, so making the right decision from these two choices, in my opinion will determine our results.

In the Parts Department, we have definitely been impacted by all that's happened these last couple of years. Rising costs of doing business, employee shortages, supply chain issues, increased customer demand and protecting the dealers investment just to name a few.

We have learned to adapt and survive much like everyone else during a pandemic that continues to haunt us going into yet another year. But, beyond all these issues that we have had to deal with in the past, the most important question still remains unanswered....

"Are We Going To Continue Doing What We've Done The Last Couple Of Years, OR...Are We Going To Be More Proactive Going Forward?"

This one simple question has prompted me to take the "proactive" approach looking ahead into 2022 and do some research on what we need to be focusing on as "Smart Parts" Managers. Also, I felt that we need to "think outside the box" even more than we ever have.

In my opinion, we can't just keep doing the same things, over and over and expecting different results as we all know that's the definition of insanity. That being said, what can we do differently and what should we be focused on in the year ahead?

Our "Top 5 Parts Focal Points" for 2022 are, in my opinion, what "Smart Parts" Managers need to not only focus on in 2022, they need to expand their minds and "Think Outside The Box" and go beyond just the "status quo" industry guidelines, training and parts policies and procedures.

We will list these "Top 5 Parts Focal Points" for 2022 in order from top down along with an added "Think Outside The Box" section for each focal point that will be listed. As we move on down to our number one parts focal point for 2022, I would challenge all "Smart Parts" Managers to answer this one question...

Should We Just Accept The "Status Quo" And Just Keep Doing What We Are Doing?...OR!..Do We Move On And Not Only "Think Outside The Box"...And To Get "Out Of The Box!

Here We Go!

Number Five: Parts Accounting Training

One of the most overlooked part of the of the daily routines in the parts department is posting and receipting parts. Sounds pretty simple, but this tedious task has to be one of the most important tasks that the Parts Manager must perform "accurately" each day, week, month and year.

Even though most Parts Managers go through this process each and every day, the real question is..."Are we actually posting and receipting parts accurately?" What I'm referring to is...do these numbers "match" in the Accounting Office?

As we mentioned in last month's issue of ACG "Smart Parts", when we focused on comparing the two parts inventories, both the Accounting Ledger Balance Inventory and the Parts Controlled Inventory in the D.M.S., reconciling these two inventories each month and each year begins with "accurate" ordering, receipting and posting parts each and every day.

We seem to take for granted that this daily function, if not "reconciled" properly could lead to thousands and thousands of lost dealer profit by the end of each year. This is why our Number Five Top Focal Point is Accounting & Receipting Practices.

These past two years have turned parts inventories "upside down" for many dealers because of inaccurate posting and receipting in both the Accounting Ledger Inventory and the Parts Controlled Inventory. Manufacturer parts shortages, new parts vendors, parts cost variances from dealer cost to actual cost, improper accounting on cost adjustments are just a few factors.

This "upside down" shift, in my experience and opinion, has caused the biggest Parts Reconciliation nightmare between the Accounting Ledger Balance Inventory and the D.M.S. Controlled Inventory than ever before. In many dealerships, it has been a huge loss of parts gross profit that we can not afford in these times.

So!...what do we do about it?

"Think Outside The Box"!

Many parts managers do not have enough training in basic Dealership Accounting and needs to be a top focal point going forward in 2022. Unfortunately, many dealers do not consider parts training of any kind is that important. In my opinion, the Parts Manager and the Office Manager should have one of the most important relationships in the dealership.

Recommendation: Provide Parts Manager Training in Basic Accounting Skills. This training is available from the D.M.S. Vendor and/or Dealer 20 Groups if enrolled. This relationship will only grow if the Office Manager and the Parts Manager speak the same language.

Number Four: D.M.S. Utilization

Many may not know, but in most Dealer Management Systems, (D.M.S.), the "Utilization Factor" is less than 30%. In other words, no matter what system we have, it is only "utilized" to it's potential at a 30% rate at best.

This D.M.S. Utilization Factor is especially true in the Parts Department. Countless times, I have worked with Parts Managers and each time I show them something that their system can provide, the response I usually receive is..."I didn't know that!"

D.M.S. capabilities such as, "Specific" Reporting, Cost & Piece Sales Rankings, Movement Analysis, Source "Batch" Moves, Receipting & Posting Options, Dirty Core Reports, and even a better way to track and Post Lost Sales just to name a few.

Most often when I mention some of these capabilities, not only did the Parts Manager not know that the D.M.S. could go above and beyond their expectations, they also tell me that often times their D.M.S. vendor just tells them that the system "can't do that".

Unfortunately, many of the Call Centers, when called on specific issues whether in Accounting, Sales, F & I, Parts or Service, often times don't have an answer and seem to always revert to..."No, the system can't do that" and move on to the next call.

After working with, and being fluently verse in over 10 Dealer Management Systems, (D.M.S.), I can assure you that these systems pretty much have the same capabilities, especially in Parts. Problem is, many Parts Managers don't know what they are missing out on and most importantly, what to demand out of their D.M.S.

So!...what do we do about it?

"Think Outside The Box"!

Recommendation: First and foremost, we have to use common sense and not just take "No" for an answer and research further. Ask other Parts Managers that utilize the same D.M.S. if they may know the answer, or if they had ever run into this situation before.

Also, call into the Call Center again and ask for a Supervisor to assist as many "initial" Call Center Agents may only know the basics in the D.M.S. concerning Parts. It's much like when we switch to a new D.M.S., the Installers don't even know what the proper Parts Set Ups & Controls should be.

I can also attest to that one as I have had to "fix" so many D.M.S. Set Ups & Controls that were set up to "Defaults" that didn't even follow basic math. They basically make the D.M.S. "functional" on the Installation and we have to do the rest.

Lastly, in order to "trust" the D.M.S., we have to "know" the D.M.S. in order to get out what we put into it. This is also the reason many Parts Managers don't trust their D.M.S., especially when creating a System Generated Stock Order as the results don't make sense and prints off several pages of "recommended" parts we wouldn't even stock.

Want to learn more about your D.M.S.?......

Call Me...

Number Three: Managing Stocking Levels - Supply Chain Issues

Every "Smart Parts" Manager is well aware of the Supply Chain issues that we've had to face over these past couple years, but my question is...

Are We Being "Proactive" or "Reactive" To This Supply Chain Issue?

In other words, have we just reacted to whatever the "flavor of the week" is when we can't find the simplest of parts to restock our shelves, or are we taking steps to prevent from happening in the first place? If I was to guess...I would say that many Parts Managers react to the situation and deal with each situation as it happens.

What if I was to tell you that these situations can be managed "proactively" through your own D.M.S. and Manufacturer's Vendor Managed Inventory, (V.M.I.)? This is done by increasing the Stocking Levels, or Days Supply and Best Stocking Level, (B.S.L.).

Once these Set Ups in the D.M.S. are increased by a few extra days, the Manufacturer's V.M.I. will pick up these modifications in the D.M.S., if updated as recommended by the V.M.I. Source. The "trick" is doing the proper math on the proper Annual Piece Sale Ranges and increasing the Best Stocking Level, or High Days Supply.

So!...what do we do about it?

"Think Outside The Box"!

We need to manage our Stocking Levels more often as these settings as they are not a "set it and forget it" deal. Supply Chain Issues are real, but we always seem to find a vendor to fill our needs and that's what we have to manage in our Stocking Levels.

Once we find the vendor who has the parts, or perhaps the manufacturer starts releasing back orders, we need to "stock up!"...but NOT by guessing. We need to manage these changes through the D.M.S., which will also update the Manufacturer's Stocking Levels for you dealership.

For example: If a part sells on average 100 times annually, then that part is due to sell, on average, every 3.65 Days, (365 days a year divided by 100 annual piece sales). That makes the Best Reorder Point, (B.R.P.) to be at 4 Days. The Best Stocking Level, (BSL) is usually set at at least 100% to 150% of the B.R.P.

That being said, and if we use the 100% factor, then the Best Stocking Level, (B.S.L.) in the above example would be 8. But...if we just added a few extra days to that Best Stocking Level, we would have more "Safety Stock" to help with Supply Chain issues.

THE most important thing to remember when Managing Stocking Levels is the the Low Days Supply, or Best Reorder Point does not mean quantity, it just means that's the reorder point. We never change the reorder point, we only increase the Best Stocking Level, or High Days Supply.

In the above example, the reorder point is at 4, whether we sell 10 of those parts a day, or 20 of that part a day, the reorder point would be when the parts gets down to a total of 40 or 80 it will reorder to 40 or 80 or even higher. If we change the reorder point to a higher number, we would actually run out of that part.

Number Two: Protect The Parts Inventory Investment!

Protecting the dealers investment, or asset, has always been a top priority for the "Smart Parts" Manager, but it's even more important today than ever before. As we mentioned in our "Number 5 Parts Top Focal Points" for 2022, keeping the Ledger Balance Inventory and Controlled Inventory Balance as close as possible.

Protecting the dealers investment means that we have to keep our eyes focused on total inventory amounts, keeping obsolescence controlled and not "over buying" parts inventory. Just because the Parts Inventory is an asset, it doesn't mean that it doesn't represent "cash flow".

In the past, and in many dealerships, carrying obsolescence was normal, even if we carried a substantial amount, we just considered parts obsolescence as just a "cost of doing business". Especially in these times, we cannot afford to tie up the dealers cash in parts that most likely will never sell again.

If we are going to tie up more of the dealers "cash flow", it should be invested in fast moving parts that we don't want to run out of, especially with all the supply chain issues. Controlling the obsolescence means utilizing all options from the manufacturer and vendors that will "buy up" this obsolescence.

Whether we get 50 cents on the dollar or lower, it is still the right thing to do as any cash we receive back and re-invested in parts inventory that turns 8, 10, 12 times a year or higher is still a "win-win" situation. Once again, the proper Set Ups & Controls in the D.M.S. are critical.

So!...what do we do about it?

"Think Outside The Box"!

In order to protect the dealer's investment, we need to modify our Parts Set Ups & Controls once again and reduce our Parts Phase-Out Parameters. In many dealerships today, the Phase-Out Parameters are set at 12 months, which is too late.

Once a part reaches that 12 month, no sales threshold, there is only a 2% chance that those parts will ever sell again. We need to be "alerted" much sooner when we have a better chance of selling those parts that are dropping down before they hit 12 months.

If we reduce our Parts Phase-Out Parameter to perhaps 7 or 8 months, we would have at least a 35% chance or better to sell those parts. Once sold, they would not be reordered as they would "phase-out" and not be suggested on the next Stock Order.

This especially critical if we use the Manufacturer's Vendor Managed Inventory, (V.M.I.) as one of their main selling points is that they will "protect" the dealers parts inventory. Problem is...they may be protecting those parts that didn't sell a year ago, meanwhile, we have purchased another 11 months of parts inventory that may not sell.

Don't Become The Manufacturer's Second Warehouse!

Number One: Parts Gross Profit!

If you haven't figured out by now what our "Number One Parts Focal Point" for 2022, don't be surprised. Even though it's an obvious choice as we all know that we are all in business to make money and to survive, especially in these times.

Although, you may be surprised when we get to our "Think Outside The Box" recommendations as to what we need to be focused on in the coming year. Keep in mind that the Parts Department is the most profitable dealership department by percentage.

We have also lived by our industry guidelines for years and we have also been satisfied when we reach industry guide levels in both parts gross retention and "net to gross" percentages. For years, achieving a Customer Pay parts gross retention percentage of 40% - 42% was the accepted goal.

Same goes for Wholesale at approximately 23% and parts sold on Internal at the retail gross percentage of 4-%-42%. On our "Bottom Line", our "net to gross" percentages, pending on the manufacturer and allocated expenses, would also come in anywhere from 25% t0 40%.

We Need To Do More!

News Flash!...prices are going up everywhere!...Have you seen the price we are paying at the pump?...How about your grocery bill?...Have you priced out a Used Vehicle lately?...

So!...what do we do about it?

"Think Outside The Box"!

Just think for a moment...what if we changed our expectations on the parts gross profit guidelines on the one and only parts gross profit margin that we have total control on, which is customer pay? Warranty and Internal gross margins are pretty much set by the manufacturer and the dealer.

What if we increased our parts gross expectation from the normal 40%-42% to let's say 50% on Customer Pay Parts Sales and Internal Parts Sales? How would that not only change our thought process when creating pricing strategies and the overall "Bottom Line"?

Think about it for a moment, other than Competitive Parts, if I was to sell a part that cost $10.00 and sold it at $16.70 for a 40% profit margin, why couldn't I sell that part for $20.00 for a 50% gross profit margin? After all, it's only a net difference of $3.30!....Hmmmm

Let's go one step further and multiply this out to a monthly and annual gross profit difference with an average Parts Department that sells approximately $50,000.00 in Customer Pay Part Sales, (at cost). How much would that impact be going from 40%-42% to 50%?...

Let's Find Out!

The net result of selling those parts at cost for $50,000.00 would result in a total sales number of $83,500.00 at a 40% gross retention for a gross profit dollar amount of $33,500.00. If we sold those same parts at cost at a 50% gross profit margin, we would end up with a gross profit dollar value of $50,000.00

That's a increase of $16,500.00 per month and $198,000.00 annually, over and above the normal, "accepted" gross profit margin of 40%! One thing for sure in the Parts Department is that we may not have total control of where our sales come from, but we do have total control of our Customer Pay Parts Gross Profit!

Something to think about....

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...