Dealing with, or even discussing Obsolescence is not a new topic for sure, but it seems to still be a plague out there for many dealers and parts managers. If obsolescence is so common of a topic, then why haven't we stopped this plague yet?
In my opinion, obsolescence has just become a household name that we all know very well, and we are just going to accept things as they are. We know we have it; we know we are going to have more, and we know we are always going to have it, so we just have to live with it!
This may sound a little out there, but it's very true as many dealers and parts managers have just accepted the fact that they are carrying and have been carrying excessive amounts of obsolescence.
It's kind of like seeing the same piece of trash in the same spot each day and no one picks it up because we have grown accustomed to seeing it every day and it's now just a part of what we see each day during our daily routines.
To me, there are just three dealer, and/or parts manager "mindsets" when it comes down to handling or dealing with parts obsolescence. All three have a huge impact on how we look on paper in several Parts Key Performance Indicators, (KPI's), or Industry Guidelines.
The first mindset and also the worst is that it's just there and it will always be there. Most of these dealers and parts managers know it, but it's really not at the top of the list. I also find that these dealers tend "not" to take much interest in their Parts Department in general as they are more "front end" focused.
The second "obsolescence" mindset are those dealers and parts managers that do want to control their obsolescence and are battling this plague. They just can't get ahead of it, and they need a plan to control it.
The third and last obsolescence mindset are those dealers that have no obsolescence and prevention is a priority just as much as sales and gross profits. These dealers and parts managers know the actual, overall "true" impact of carrying excessive obsolescence.
Here's the question....
"What are the TRUE Impacts of Carrying Excessive Obsolescence and How Do We Control, or Eliminate It?"
First, we all have to understand one key element when we discuss obsolescence. Parts will and are going to go obsolete at a rate of at least 2% - 3% each year. So, it really isn't a question of having obsolescence, it's more of a question of what we are going to do about it.
We mentioned earlier that in my opinion, there are three mindsets when it comes down to dealing with obsolescence, whether a priority or not. That being said, we are going to start out by revealing the "true" impacts of carrying excessive obsolescence.
As many of us already know, there are several industry guidelines in Parts, just as in every dealership department. Although, I can't think of any one thing, that of course being parts obsolescence, that impacts so many of the parts industry guidelines.
We will kick this issue of ACG "Smart Parts" off by revealing the impacts of carrying excessive obsolescence and what it can and does bring. These impacts on several parts industry guidelines are not just opinions, they are facts as the math does not lie.
The only question after seeing what the impacts of excessive obsolescence will bring is... will it actually change one of the three mindsets? In my opinion, many dealers with the wrong mindset do not even know the ramifications. Hopefully, we can change that thought process during this reveal.
Once we go through the impacts of carrying this "monkey on our back", we will then move on into revealing the true secrets on how every dealer can be "Obsolescence Free Forever", no matter what manufacturer, or franchise.
Let's Get Started!...
Number One: Inventory Investment Analysis (Industry Guideline: 75%-85%)
This Parts Industry Guideline measures the percentage of parts inventory that is considered Normal Stocking Parts vs. Non-Stock Parts, or Active vs. In-Active Parts in inventory, depending on the DMS used.
Obsolete Parts fall into the Non-Stock, or In-Active category so right off the bat we can see that a higher than acceptable amounts of obsolescence can impact this guideline. For example, let's say that we are not in guide, but 25% of my parts inventory is obsolete. But after "Backing Out" the obsolescence, we find that we would be in guide if we did not have that high amount of obsolescence.
We also have to be careful not to include "so called" Normal Stocking Parts that have not sold over 12 months as these parts need to be added to the obsolescence amounts. So, when we do the calculation on this guideline, we have to include all Normal Stocking Parts minus the Over 12 Months - No Sales Normal Stocking Parts.
Just because a part is still considered a Normal Stocking Part, but has not sold in over 12 months, it's still an obsolete part and is actually no longer a Normal Stocking Part and needs to be added in the obsolescence equation.
Number Two: Sales Activity: (See Guidelines Below)
0 - 6 Months Sales Activity: 85%
7 - 12 Months Sales Activity: 10% - 15%
Over 12 Months Sales Activity: 0% - 5%
Obsolescence can surely impact this Key Performance Indicator, or Industry Guideline. All these categories have to add up to approximately 100%, so if the Sales Activity in the 12 Months or over category climbs, the percentage drops in the other two.
Excessive amounts of obsolescence can actually "shadow" and hide potential good percentages in the 0 - 6 Month and 7 - 12 Month Sales Activity categories. Often times, I've seen where a dealer's 0 - 6 Month Category was at only 50%, but when we backed out the obsolescence in the 0% - 5% category, the 0 - 6 Month Sales Activity jumped to over 85%.
Very deceiving for sure, but when we look at all these categories, obsolescence values are included with all inventory values. This is where many dealers get confused as it is possible to have a low 0 - 6 Months Sales Activity on paper, but in reality, with Over 12 Months Sales Activity backed out, they may actually be in good shape.
Number Three: Annual Gross & True Turns: (See Guidelines Below)
Annual Gross Turns = 8
Annual True Turns = 5
The true measurement of how well the dealer's parts investment is working for them is Annual Gross & True Turns. These two "turn rates" are slightly different from each other as one, (Gross Turns) measures the "dollars" of inventory that is "turned" through the Ledger Balance Inventory of the Parts Department, whether the part is stocked or not.
True Turns measures the actual sale and "Annual Turns" of the Normal Stocking Parts Inventory based on Stock Purchases. All this being said, we can already see what's coming as far as obsolescence. Gross & True Turns includes all the Parts Inventory, including the obsolescence.
Gross & True Turns also includes "overstock" amounts of Parts Inventory as well, even if they are fast moving parts. Combined with the obsolescence, overstock amounts and obsolescence all add up to the Parts Inventory "Over Valued Amount".
If this "Over Valued Amount" is excessive, it will lower the Parts Gross & True Turn numbers for sure. If Obsolescence & Overstock numbers are held at Industry Guide, the Gross Turn will be at 8, and the True Turn would be at 5 Annual Turns. This will also add up to 45 Days Supply of Inventory, which is also the Industry Guideline for Days Supply.
Number Three: Acquisition & Holding Costs: 25%-30% of Inventory Value
Probably one of the most under looked category of them all as you will never see this expense, or cost on any financial statement. Not only an Industry Guideline in our industry, as Acquisition & Holding Costs are measured in any industry that includes an inventory asset or commodity for resale.
Acquisition & Holding Costs includes all the expenses to manage the Parts Inventory such as Personnel, Rent, Insurance, Advertising, Depreciation, etc. Not, only that, the "IRS Accounting Straight Line Method" says that any inventory or commodity for resale that has not sold in 12 Months is only worth half it's value, or $.50 cents on the dollar.
Now we are really seeing how much it costs to hold obsolescence once we back in all the costs, whether seen, or unseen. Acquisition & Holding Costs are real, even though dealers that carry excessive obsolescence may not think so.
Now that we have drilled down why the cost of carrying any obsolescence is not worth it, it's time to start building a regular plan to not only control obsolescence, it's also time to have a plan to get rid of it as we...
"Stop It Before It Happens!"
There is an old saying out there that reads..."An Ounce of Prevention is Worth a Pound of Cure". That cannot be any truer than when we talk about Controlling & Eliminating Obsolescence.
We have to have a plan of course, but what's different about this plan is that we are going implement a "monthly" Obsolescence Plan. We aren't going to wait until it's too late and has grown beyond our means of keeping up with it.
We are going to implement a "3-Stage Obsolescence Plan" that will be an on-going process each month to keep obsolescence out of our lives. We will go beyond just our Return Reserves and Accruals, which we all know and use, but never enough.
Let's Get to Fixing It!...
Stage One: In-House Return Policy/Obsolescence Prevention
The first thing we need to set up is In-house policy on Special Ordered Parts, Returns, Handling Fees and Authorized Personnel ordering parts to begin with. In most dealerships I visit, there are really no parts order policies as anyone can order a part.
This is where obsolescence begins as there is no accountability in what I call the "purchasing of obsolescence". There has to be consequences to go along with the accountability.
That being said, there needs to be handling fees charged to the department on the returns of Special-Order Parts after 30 Days. Parts will not be held over 30 days unless by manager approval and will be sent back to the factory. Return Fees & Unreturnable parts will be charged to the authorized ordering department as well, no exclusions.
Of course, Special Orders should be pre-paid, when possible, pre-appointment on Special Orders in Service, signing off on Special Orders, Proper Notification upon part arrival are all included in Stage One.
This first part of our "3-Stage Plan" is most crucial as this stage puts the wheel in motion to preventing obsolescence as most Special Ordered Parts not sold end up being obsolete. After all, there is a reason we had to Special Order the part in the first place, it's not a stock part.
We have enough to deal with in the area of obsolescence with parts going obsolete by an average rate of 2% - 3% a year all by themselves without having to add to the situation by having unsold Special Order Parts added to the mix.
Stage Two: Monthly Returns: Manufacturer & Outside Vendors
There is nothing new in our second stage as far as sending parts back to the manufacturer as this has been our routines for years. Even though manufacturers have different return policies, we are all pretty familiar with this monthly routine.
But if I was to ask the question to parts managers out there as to how often they are shopping out their obsolescence to outside vendors, I would guess that they are not doing it monthly. Vendors such as Parts Broker Direct, (OEC), Dealermine, Parts Voice, Find Rare Parts, etc. just to name a few are out there and should be utilized monthly.
Why is it that we wait until we have accrued way too much obsolescence before we shop it out to these vendors when we should be sending lists monthly. Parts go obsolete every month and more parts get added to the list and can be shipped out to these vendors.
Many parts managers just go with one big list after it's built up and pick one vendor for their obsolescence purchases. After the vendor picks through the list as to what they may what to purchase with pennies on the dollar, the process seems to stop right there.
When in all actuality, the process has just begun here in Stage Two. In my opinion, we should be sending the obsolescence list to all the vendors out there and doing it monthly. The auto parts world market is always changing and what they may not want today becomes next month's hot item.
Just because the vendor passes on a part or offers a lower than desired offer today doesn't mean that it will stay that way down the road. Either way, our first loss is our best loss, and we need to get rid of it. If it hasn't sold in 12 months, there's a 98% chance that it will never sell.
Stage Three: Create an In-House Scrapping Account
In my opinion, our Stage Three is the "glue" to the whole process of being "Obsolescence Free Forever", (just like O.F.F. Mosquito Repellant). Even though many dealers may already have a Parts Scrapping Account where they set aside a certain amount each month, there is a better way than just setting aside the same amount each month.
The difference, in my opinion, in having the "right type" of scrapping account is what will make the difference. The first thing to remember is that the scrapping account has to be based on the rate of "net obsolescence", after Stage One and Stage Two.
The second thing is that the Scrap Amount that is set aside each month should not be one set amount. You heard correctly...even though I like the fact that the dealer is willing to set aside a certain amount each month for parts scrapping, there is a better way.
In my opinion, the Monthly Scrap Amount should be charged back to Customer Pay Repair Order Parts Gross at a monthly rate of 2%. This way, the scrap amount each month will flow with the CPRO Parts Sales & Gross and won't impact any more than the 2%.
Here's the big question...
"Where Are We Going to Make Up for That 2% Loss in Gross"?
If we are utilizing a "Cost Plus Matrix", it's rather easy to regain that 2% loss of gross that went into our Monthly Scrapping Account. The one thing about math is that it's irrefutable and it is what it is. Roughly, every 10% that we raise from cost up with net us 2% retained gross.
For example, if I have a part that costs $10.00 and the MSRP is $16.70, my "cost plus" markup may be 100%, which would be a sales price of $20.00 and a 50% gross margin.
By bumping it to "Cost Plus 210%", versus "Cost Plus 200%", (depending on the DMS, cost plus 100% to 110%), we end up selling that part for $22.00 instead of $20.00. The extra $2.00, or 2% retained gross allows me to set aside that $2.00 for scrapping and maintain my average gross retention before the 10% matrix modification.
Stage Three is the last resort as Stage One an Two are primary in Obsolescence Prevention and Control, but when Stage Three kicks in, we are talking about the elimination of Obsolescence altogether.
The mindset that we started this all out with is the most important element to the overall results as we, in my opinion have to have that mindset that we are not going to tolerate obsolescence, no matter what the manufacturer.
"Let's Get This Monkey Off Our Back Once & For All!"
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...
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