July 2024: Managing & "Preventing" Purchased Obsolescence

As we continue down this road and topic of Parts Obsolescence for the second straight month, we will focus on purchasing Parts Obsolescence from day one. Last month, we highlighted stopping obsolescence before it happens and this month, we will focus on stopping the actual purchase of obsolescence from the start.

Each year, on average, parts aging statistics tell us that no matter what we do, parts will go obsolete each year at a rate of at least 2% - 3%. That being said, we have to look at a few other things.

One, the fact that parts will go obsolete no matter what we do to try and keep up with it by sending parts back to the manufacturer, other vendors, or perhaps even scrapping them on in-house programs is a given. 

Second, we always seem to end up with a surplus of obsolescence after all options have been exercised as the obsolescence just keeps growing. No matter what we do, unless we are heavy into wholesale, we can never build up enough return allowance and we never seem to get a handle on it.

The third problem seems to go under the radar, which are those parts we actually buy that are obsolete to begin with. In other words, parts that we purchase that may not have sufficient sales history, such as Special Ordered Parts and/or parts that the manufacturer recommends us to stock based on "their" recommendations.

To kick this month's issue off, I am reminded of an acronym that goes way back, which is PMA = OPM. Definition: "Positive Mental Attitude = Other People's Money. The Positive Mental Attitude is great, but the "Other People's Money" issue is whose money are we playing with here?

If we are talking about a "money well" here where anyone can just spend someone else's money, in this case, the dealers' money, then it's easy to assume that there is no accountability on how the dealers' money is being spent.

If we put this into perspective and from a consumer standpoint, would any of us spend money on anything without an expectation of some sort of return for that purchase? Even if we invest our money, we still have an expectation, even if there are risks involved.

I'm quite sure if Parts Managers out there took "ownership" on their parts purchases if it was actually "their" money they were spending on parts. They might even have a different approach when purchasing some of these parts that I would consider to be obsolete at the time of purchase.

This leads us to our main topic of discussion and question...

"What Exactly is Purchased Obsolescence & How Do We Manage and/or Prevent It?"

When you think about it, in most Parts Departments today, we are buying "obsolete" parts every single day. But, before we even go down that road, we have to determine just what is an "obsolete" part.

One definition of an obsolete part is a part that has not sold in 12 months and by the IRS Standard Accounting Methods, is technically worth only half of its value at cost, with a 98% chance of no future sales after 12 months.

So, how can we say or even talk about buying obsolete parts that we haven't even stocked yet, or perhaps had in inventory for 12 months? Technically, we can't even consider the purchase of obsolete parts without the test of time over 12 months.

On the contrary, we are talking about parts that we purchase that have an overwhelming chance of no future sales from the beginning based on other factors. These other factors are based on total sales demands from a much larger market other than our own.

One good example may be an interior trim panel that may be of a certain, uncommon color. If this "Special Order" part is not replaced and sold on this vehicle, we can pretty much be assured that this interior trim panel will ever sell again in our own parts inventory.

On the individual dealership level, there are two major contributors to pre-purchased parts obsolescence. The first is Special Order Parts, which by definition, pretty much explains why they could be determined as purchased obsolescence.

There is a reason that we call them "Special Order Parts" to begin with as they are technically parts that have not met our own Parts Phase-In Criteria with less than at least three parts demands over a set period of time.

Even though Special Ordered Parts are a part of our daily lives in our role as Parts Manager, we need to at least try and lower our risks by managing and preventing future obsolescence from the start with some guidelines with some accountability built into the process.

Thus, if we Special Order these parts, we are already at risk if we don't have a Special Ordered Parts Ordering Process which includes deposits, Service Pre-Appointments, Return Fees and perhaps some consequences on those that have the authority to Special Order Parts.

As mentioned, we have to have consequences, or fees for Special Order Parts that end up being returned to the manufacturer. Return Fees need to be charged to the dealership department that authorized and originated the Special Order to begin with if repairs are not completed.

Just to keep this in perspective, I'm quite sure that if the Parts Manager was paying for these Special Ordered Parts personally, they would either one...make sure the part is paid for up front, or two...make sure someone will be paying for the part or paying for the return fees.

Even if it were a warranty part, the Parts Manager would find a way to recoup the cost of the part. They would also make sure they wouldn't be paying for a part out of their own pocket without getting reimbursed in some way.

This is one of the biggest problems as unfortunately, most Parts Managers don't take ownership as they are spending the dealer's money and not their own. This may come as a shock to some "Smart Parts" Managers, but it's the truth. Take a look at your P & A Parts Summary at the end of the month from your manufacturer and you will know what I'm referring to.

Bottom line is that every dealership needs a Special Order Parts Process to include the following...

• Special Order Parts Deposit, or Pre-Payment on Customer Pay Parts, (where applicable)
• Special Order Parts "Pre-Appointment" for Service Customers. (Back Order Parts to be Re-Scheduled Upon Notification)
• Special Order Parts Notification System to Service Manager & Service Advisors, (DMS Reports)
• Return Fees Applied to Department Responsible for Special Order Part(s)
• Special Order Parts are Returned to Manufacturer after 45 Days and Not Put on the Shelf in "hopes" of Future Sales, (First Loss is the Best Loss)

The second most common area of "Purchased Obsolescence", especially over the last 20 or so years is caused by the manufacturer. As more and more manufacturers enter into the world of Vendor Managed Inventories, (V.M.I.), more and more dealers are stocking parts that do not have sufficient individual dealer demand.

"So How Can These Vendor Managed Inventories Provided by the Manufacturer be a Contributing Cause for "Purchased Obsolescence"?

Many of these V.M.I.'s only require just one single sale in two years in order to "pull the trigger" with the manufacturer recommending the dealer to stock the part on a new proposal. Unfortunately, many Parts Managers think they are being "compliant" by accepting these new proposals, when all the while, they are just being "obedient" to the manufacturer in order to stay in compliance.

I've often asked Parts Managers if they would stock a part that had only one sale in two years and the answer I always receive is a resounding "NO"!. My response to them after asking this question is..."Then Why Are You Doing It?"

Manufacturers that offer these programs are basing these proposal recommendations based on "group" sales demands and not necessarily "individual" dealer demand. Once a part has met "group" demand, or "criteria", and when the "trigger is pulled" just one time by the individual dealer, "Purchased Obsolescence" is born. Just to hold that part for a year or just to send back and start the process all over again. 

Here's the worst part...even if we do hold that part for a year or so and send it back, often times the manufacturer comes right back and puts that same part on a new proposal the next day to stock it even again after we just sent that part back!

Sounds like a great deal if you are the manufacturer! All the risks of "Purchased Obsolescence" falls on the dealer and if the Parts Manager is not taking ownership of their own Parts Department, then they are just adding to their already on-going obsolescence nightmare.

In my opinion, it is not even worth being "compliant", or "obedient" to most of these Manufacturer V.M.I. Programs when you consider all the acquisition and holding costs of "buying" all this eventual obsolescence. Purchase discounts and so-called inventory "protection" will never outweigh the overall costs of holding inventory that does not sell.

I will say though that there are better V.M.I. Programs out there than others, but overall, if the dealers D.M.S. is not set up correctly by the math, then the manufacturers V.M.I. will just magnify the problem on "Purchased Obsolescence". 

The guidelines in preventing "Purchased Obsolescence" with the Manufacturers V.M.I. Program is as follows:

• First and foremost. the Dealers' D.M.S. must be set up properly with all the right math in the areas of Parts Phase-In/Phase/Out, Best Re-Order Points, (BRP) and Best Stocking Levels, (BSL) utilizing ABC Source Ranking.
• Better "drill downs" on the V.M.I. New Proposals and not just accepting every part proposed. Checking history and application usage, low & high model year, etc.
• Do not re-accept New Proposals after parts have been Phase-Out by the DMS.
• Do not re-accept New Proposals on parts that have finally met the return phase to the manufacturer. Many times, a part is "Re-Proposed" after we return the part.
• Do not accept New Proposals just to remain compliant. The Temporary Excluded Parts List is a great resource for filling in for those compliant percentage gaps.

If the math is not correct in the dealers' D.M.S., then the Stocking Levels recommended by the manufacturer on V.M.I. parts will also be incorrect. This results in too many of the parts we don't need and not enough of the parts we do need.

But don't worry!...the manufacturer absolutely loves the dealer being their second warehouse! Guaranteed sales and no risk as the dealer will hold many of these "pre-purchased" obsolete parts throughout the active parts life cycle. Even though many parts may be fast moving A & B Parts...many of these parts are just held for future return.

The sales of these faster moving A & B parts just "masks over" all these other parts in the C & D movement range that don't sell but have to keep as well. It's almost like New Vehicle Sales where dealers may be forced to carry New Vehicle Inventory that does not sell in order to get the New Vehicles that they do sell and want on their lots.

Keep in mind that there is no such thing as "Inventory Protection" as I can walk into any Parts Department today and find these so-called "protected" parts on the shelf that are several years old. It's just another fancy name for a basic "Return Policy", no matter what the manufacturer. All parts have to qualify for all parts returns, no matter who the manufacturer may be.

It's hard enough to manage our obsolescence that filters down each day and month that seems to grow higher and higher every year. We never seem to gain enough Return Allowance to make up for the natural progression of accrued obsolescence. We have to not only stop obsolescence before it happens as we mentioned last month....

"We Also Have to Stop Buying Obsolescence from the Start!

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...