Managing any inventory is a task in itself, but when it comes down to managing the Parts Inventory in the automotive dealership, it can be even more diverse. In the automotive industry, and for years, the Parts Inventory has been broken down into three separate inventories.
These three parts inventories, especially from an accounting standpoint, has always been the main parts inventory, the tire inventory and the gas, oil & grease inventory, (G.O.G.). Although, some dealers today have actually combined all three of these parts inventories into one main parts inventory.
Most Dealer Financial Statements have this separation of parts inventories on the first page of the Financial which is called the "Balance Sheet". Some manufacturers even have Accessories separated on the first page. Much like the separation of the New & Used Vehicle Inventories, they are all listed as "assets".
Before we get down to the reason of this separation of Parts Inventories, let's break down some of the facts, or "differences" in the parts Main Inventory, Tire Inventory and the Gas, Oil & Grease Inventory. As a matter of fact, "back in the day", dealers actually had gas on sight, which was part of the Gas, Oil & Grease Inventory to fuel their New & Used Vehicle Inventory.
Here are some of the facts on the differences of these parts inventories, then we will get into the reasons for the separation....
Main Parts Inventory:
The Main Parts Inventory carries the bulk of the overall parts inventory value and most of the part numbers in the overall inventory. Also, the Main Parts Inventory also carries the largest life span of parts with more consistent overall demand over time.
The Main Parts Inventory requires different criteria on Parts Phase-In, Phase-Out, Stocking Levels and Pricing Strategies. Lost Sales play a huge part in the Main Parts Inventory initial demand set ups on parts Phase-In to record overall demand compared to the lower Lost Sales demand on tires and oil.
Lost Sales are hardly ever recorded on Tires and Oil, although Lost Sales should be recorded on tires as they tend to have more part numbers than oil and far many more vehicle applications. Tires should be considered as regular part numbers, even though they should be separated from the Main Parts Inventory.
The Tire Inventory has far many more obstacles and concerns to overcome. First and foremost, tires take up a lot of space and weight which requires not only space requirements, but they also require safety considerations when storing them. Along with the expected lower gross margins and shorter life span, tires can be literally "a pain in the butt" for Parts Managers.
Although, from the Service side of things and from a retention standpoint, tires are essential to keep our customers coming back to the dealership. Selling tires, much like selling a basic Lube, Oil & Filter are the two primary services that lead to keeping our customers coming back.
Tires are also always changing designs and superseding to an upgraded tire which requires updating tire inventory constantly. As a matter of fact, it is most likely that the tire that came with your new vehicle will be replaced by an upgraded tire by the time of replacement.
Gas, Oil & Grease:
Oil is the highest volume part number sale in the whole parts inventory, even though oil has the lowest inventory of part numbers in the parts inventory. Oil also is never considered as a part that will ever go obsolete. On the contrary, oil can be the highest asset purchase risk in our entire parts inventory.
Oil can't be returned and is an environmental risk while occupying valuable inventory space forever once it becomes obsolete. Are there any vehicles utilizing 10W-40 oil any more, or an even better question: Does anyone still have 10W-40 in their inventory? Oil is ours once we purchase it and will most likely stay where it's at right now.
"So!...What Are The Reasons For Separating These Inventories?"
Let's look at the reasons...
Reason Number One: Reconciliation
First and foremost, the Gas, Oil & Grease Inventory is the toughest one of the three to keep reconciled to correct amounts between the Accounting Ledger and Controlled Inventory Amounts each month and year. Bulk oil is the biggest culprit as varied amounts are pumped out each day.
Receipting oil is also a problem as often times oil is receipted into one inventory and then sold from another inventory. The sales and cost of sales accounts must be linked correctly with the proper parts source or stocking group to insure proper reconciliation.
Tires also fall into this category as parts may be purchased as a part and receipted into the main parts inventory and then sold from the tire inventory. Most invoices from the manufacturer on both oil and tires allow for the dealer to receipt to either the main inventory, or the other two.
Reason Number Two: Inventory Aging
Oil and Tires age much differently than the parts in the main parts inventory, especially tires as the life span is much shorter. That being said, tires require different set ups as far as Phase-In, Phase-Out and overall Stocking Levels. Tires need to especially have a shorter Phase-Out timeline as tires tend to supersede to updated part numbers.
Also, tires only come around for replacement approximately 24 - 36 months so they are especially hard to track for consistent sales demand. That being said, it's very unlikely that we get return tire business from the same customer. It's much better to capture initial tire sales and then let them Phase-Out after six to nine months.
Believe it or not, oil can also go obsolete as most parts managers keep refilling the tanks until one day, the manufacturers come out with a new grade of oil to meet new emission and fuel conservation requirements, or regulations. At that point, we are stuck with what we have left in the tank with no options to get rid of it.
Number Three: Inventory Discrepancies
Even though it's our number three reason for separating these inventories, it's probably the most important reason. Oil is the number one reconciled inventory of all the inventories because it has the highest individual unit of sales by quantity.
It also has the most "crossover" inventory accounting between the main parts inventory and the gas, oil & grease inventory. Packaged oil may be considered a part while bulk oil may be considered gas, oil & grease and they may even have the same part number. We could have 0W-20 oil in bulk and packaged in two separate inventories.
Tires may also fall into this same category as we may purchase tires from the manufacturer and is receipted and sold as a part. We can also purchase tires from the local tire vendor and those tires get receipted and sold out of the tire inventory.
Crossover accounting from the main parts inventory, the tire inventory and gas, oil & grease inventory happens all the time and creates an accounting nightmare in many dealerships. If only one main inventory is used for three of these inventories, it is much harder to "trap" overall parts inventory discrepancies.
The Bottom Line:
With all of the above facts and reasons mentioned above, the separation of these three inventories seems pretty obvious. It may be easier for accounting to have them all looped into one inventory, but when a problem, or a huge discrepancy occurs after the physical inventory is performed, no one is happy.
Also, a physical inventory can be performed on the tire inventory and the gas, oil & grease inventory to reconcile the Accounting Ledger Inventory and the Controlled Parts Inventory on the D.M.S. each month to control any discrepancies.
Unless we are performing Perpetual Inventories on the main parts inventory, we can't count our main parts inventory each month, but we can "trap" most of these most common discrepancies that happen mostly in the tire inventory and the gas, oil & grease inventory.
If we are just waiting until the end of each year when most perform their annual physical parts inventory to deal with these discrepancies, we are just leaving ourselves open to surprises that may not be in our favor...
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...