February 2016: Reconciling Parts Inventory

In my opinion, the last month of the year and the first month of each new year are the most important two months in the whole year for a parts manager. The overall "cleansing" that comes from year end physical inventory counts to starting fresh in the new year with a clean slate was always a great feeling of accomplishment for me.

Over the years, as most of us do, I learned a lot that helped me have more of the "feelings of accomplishment" as opposed to dreading those end of year physical inventories. Items such as expected variances, inventory write offs, inventory "write ins", duplicate bin lists and accounting differences were not fun experiences for sure.

Reconciling the parts inventory, for many parts managers, including myself years ago was pretty much a "once a year" thing. It wasn't something we worried about month in and month out "back in the day" because inventory values were much more stable with longer life cycles and fewer obsolescence situations.

Today, with the increase of vehicle manufacturers and models compared to even twenty five years ago is astronomical! The overall number of parts and part numbers has skyrocketed to a point where managing the parts inventory has become more of an art and at times, or maybe even a  full time job in itself! 

Parts are becoming idle and obsolete much faster today than ever before while customer demand has increased. The demand on the parts manager to have the "right part the first time" is crucial to the overall success of the parts department. Not only that, this "trickle down" effect also impacts the whole fixed operations including overall shop productivity.

So, not only do we need to make sure we have the correct set ups and controls, Proper phase-in/phase-out parameters, days supply, in house and manufacturer sponsored ordering procedures, etc., we also have to insure that all of the inventory amounts balance when it's all said and done every month.

Reconciling the parts inventory on a monthly basis as opposed to reconciling on an annual basis CAN and WILL make the parts inventory more profitable with higher gross and true turns. Monthly inventory accountability also reduces obsolescence and will increase overall service productivity.

So!...how can simply reconciling the parts inventory on a monthly basis accomplish all this?

First of all, reconciling the parts inventory on a monthly basis "requires" quite a few prerequisites in order to even qualify for monthly parts reconciliation. Obsolescence has to be dealt with along with proper set ups and controls to insure that obsolescence doesn't reoccur. 

We have to stop the bleeding before we just "write it off" and have the same problem next year. After all, there has to be a reason these parts got in the obsolescence category to begin with. As you will see in the next prerequisite, it wouldn't make much sense to count the same, obsolete parts every month.

The second prerequisite is to implement a "perpetual inventory" process where all parts bins are counted on a monthly basis.

An example would be if there are a total of one hundred bins within the Parts Department, then approximately five bins a day would need to be counted and reported. Most Inventory Management Systems provide this option as part of the physical inventory options.

Next, we have to insure proper posting of receipts to the proper accounts on a daily basis. Some of the most common areas with posting discrepancies are outside purchases, tire account, inventory core values, both clean & dirty and finally, the gas, oil & grease account.

Reconciling the tire inventory accounts as well as gas, oil & grease accounts have become nightmares of late due to the vehicle manufacturers getting into the tire and motor oil business.

 Many of these purchases that are indirectly billed from tire and oil vendors through the vehicle manufacturer who, often times, have the improper account posted on their invoice. 

The tire inventory account as well as the gas, oil & grease account have always had separate inventory accounts. Even though they still do, many of these tire and motor oil purchases that involve the manufacturer are being "inventoried" to the parts inventory account, instead of the appropriate inventory account for tires and gas, oil & grease. A huge problem if not watched, managed and reconciled properly.

If a tire, or a quart of oil gets charged out on a repair order utilizing the manufacturers' applied part number that matches what's on the manufacturers' master pricing guide....guess what happens? That tire or quart of oil just got "relieved" and "costed" out of the main parts inventory account, even though the tire and/or oil was receipted into the separate tire and gas, oil & grease inventory accounts.

One other big discrepancy that often occurs when trying to reconcile the parts inventory is the "new" and "dirty core" inventory. Even though most Dealer Management Systems account for the "new core" inventory value on the Parts Monthly Management Analysis Report, many systems do not have an option as to managing the "dirty core" inventory.

Managing the "dirty core" inventory requires manual, monthly physical inventories to be performed as well as managing the returns with "outstanding credits" pending. All of which, must be reconciled with the dealer account and/or office manager.

Here are just some of the advantages to Monthly Parts Inventory Reconciliation;

• Higher Gross and True Turns due to monthly managed obsolescence, bin variances.
• Lower Inventory Management Fees due to Perpetual Inventory practices.
• Higher "First Time Off Shelf" fill rates due to monthly managed obsolescence.
• Increased 0-3 Month Sales Activity from reduced obsolescence.
• Less cost incurred from end of year physical inventory variances.
• Decreased potential for parts pilferage, damage or loss due to accounting errors.

In the beginning of this blog, remember when I mentioned that "cleansing" feeling as well as that feeling of accomplishment at the end of each year and the beginning of the next?...Imagine having that feeling each and every month!

It all starts with getting our house in order and meeting all the prerequisite requirements. Each and every dealership Parts Department that I have either trained and coached in, or managed myself that made it a Standard Operation Procedure, (S.O.P., not Special Order Parts) to reconcile the parts inventory each month also had many things in common......

1. Consistently "at or above" NADA Guide on Gross and True Turns
2. Stock Order Performance or Sales From Stock Ratio above 80%
3. "First Time Off Shelf Fill Rate" above 80% (replicates # 2 above)
4. Obsolescence less than 2% annually (12+ months No Sales)
5. Parts Gross Profit at or above NADA Guide
6. Overall Level Of Service above 90%
7. Annual Physical Inventory Variance Less Than 2% (reported monthly)
8. Service Shop Productivity above 95% - 125%

As you can see, simply reconciling the parts inventory has quite an impact or "trickle down" effect on many areas in the dealers' fixed operations. The advantages are obvious, but in order to ultimately accomplish the task, we have to have a measurement of accountability and perhaps a guideline to implementation.

ACG's "Smart Parts" Monthly Inventory Reconciliation Report may just be that motivation for "Smart Parts" Managers to "get it right" going forward. I can speak from experience when I said that "cleansing" feeling along with starting off fresh each month is a reality.

It's been quite a while since I've offered a FREE "Takeaway" just for being avid, loyal "Smart Parts" Readers and so I decided that this is the month! If you would like a FREE Excel Copy of our ACG "Smart Parts" Monthly Inventory Reconciliation Report with up to five inventories included to reconcile "controlled" versus "accounting inventory, simply email your request to:

dave@smartpartstraining.com 

Don't forget to enter "FREE Reconciliation Report Takeaway" in the subject line of your email request!

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

January 2016: "A Look Ahead and a Look Back"

Once again it's that time of year where we devote our first issue of ACG's "Smart Parts" to what lies ahead in the New Year. We will also take a back at results and trends from last year that just may support forecasts and predictions for what lies ahead in 2016.

As I mentioned in the intro, this is one of my favorite issues each year because it gives me a chance to reflect back on my own personal performance as well as looking ahead to what I can do better in the new year. In order to do this year end assessment and future forecast, I need to start with some facts and trends from reliable sources to support my own future goals.

Normally, when I do my year end assessment and future forecast, I would always take a look back at what history and the latest trends to get an idea of what lies ahead.

 This year, I decided to "flip it around" and take a look at what industry analysts are forecasting for 2016.  After a review a their forecasts, I can then look at last years' results to see if the they support these forecasts made by industry analysts.

One of the best resource providers that I have always relied on is the N.A.D.A., (National Automobile Dealers Association) for the latest and most accurate industry guides, data and trends. Plus, with such a massive dealer participation and membership rate, it is an obvious choice to gather resource information.

One of NADA's most recent "state of the industry" presentations in November 2015 featured one of their top industry analysts and economist, Steven Szakaly. Steven is currently NADA's chief economist and has held this position since October 2013. His resume is very impressive with many years as an economist in the automotive industry

His forecast for 2016 starts with an increase in new vehicle sales in 2016 from 17.3 million in 2015 to 17.7 million in 2016, which represents a 2.3% increase. If true, this would be the seventh straight year of new vehicles sales growth.

Not only has this trend been growing over the last seven years, I was rather surprised that the gap between new light duty truck sales versus new car sales is at an even bigger gap with new light truck sales accounting for 56% of overall new vehicle sales to new car sales at 44%.

Some of the positive indicators for this growth forecast are; projected increases in employment, rising new vehicle sales trends, consumer confidence and stable oil prices. Some other "neutral" indicators are the equities market and industrial production. 

After the GDP, (Gross Domestic Product) crash in 2008 and 2009 where the GDP fell to approximately -3.0%, the GDP percentage rate has slowly risen back to it's current rate of 2.5% and is predicted to be hitting as high as 2.9% over the next four years. 

A much stronger U.S. Dollar is also a major contributor to Steven's forecast as indicated in the rise of our U.S. Dollar in Trade Major Currencies worldwide. This steady rise over the last seven years has also been consistent to other trends mentioned earlier.

What does all this mean to the average consumer though?...there has to be more than just lower gas prices! To me, it appears that new vehicle prices just keep rising and that doesn't add to my consumer confidence. Most importantly, what does all this "stuff" mean to our Fixed Operations Departments as we forecast the year ahead?

Even though Steven's Szakaly's forecasts for 2016 look great and with much great research to back it up. How do these forecasts play into our roles in the Dealers' Fixed Operations Departments? Last I heard, Customer Pay Repair Order Counts have been dropping at a rate of almost 10% since 2014.

In order to bring this all together, it's now time to look back into 2015 to see where we have been with some data and information once again provided by N.A.D.A.'s Dealer Financial Profile for 2015.

The following information was provided to N.A.D.A. by dealer members through October 2015. Not the complete year, but still a very good sampling with great information.

Let's start out with the average life span of a new vehicle today which is almost twelve years. That in itself is pretty amazing, but just why is that number growing and growing? Better vehicle manufacturing can't be the only reason.

A few other reasons for this longer vehicle life span are; longer lease terms, higher vehicle prices, higher vehicle average payments, ($550 Monthly) and higher extended service contract penetration. Extended service contracts are up from 23.5% in 2000 to 41.7% through October 2015.

Quite simply, people are being forced to keep their vehicles longer. As a matter of fact, over the past few years, retail prices are out pacing peoples wages! Worst part about that though is that those higher retail prices aren't going to the dealer as one might think.

Even though new retail vehicle prices are getting higher, the dealers' profit margin is shrinking. Through October of 2015, new vehicle retail selling price has increased 2.5% over the same period in 2014 while new vehicle gross, excluding F & I has decreased, -3.3% over the same period.

Increasing regulatory costs is one of the major contributors for this increasing gap over the past few years. It's not getting any easier for new car dealers and that's where we come in from the Fixed Operations side. Even with all the above adversities, here are a few facts from NADA's Dealer Financial Profile through October 2015 compared to the same period, through October 2014;

• Total Dealer Total Gross Up 6.3%
• Total Dealer Total Net Profit Up 8.8%
• New Vehicle Sales Up 7.7%
• Used Vehicle Sales Up 6.6%
• Total Dealer Expense Up 5.7%

So just how can these dealers be doing so well with less net gross opportunity on new and used vehicle sales?

Quite simply, New Vehicle Sales Incentives, Used Vehicle Sales, Finance & Insurance, (F & I) and Fixed Operations Departments are where most the gross is created in today's automotive dealership. As profit margins continue fall in New Vehicle Sales, the strongest needed gross producer from the above mentioned is the Fixed Operations.

Even though I mentioned earlier that Customer Pay Repair Order count is steadily dropping, to the tune of almost 10% over the last few years, the Dealers' Fixed Operations are still growing from a sales and gross perspective.

The increases in Express Service, Warranty Repairs and higher customer loyalty numbers have given dealers the "shot in the arm" needed to sustain these rather impressive results in growth as well as healthy forecasts looking ahead in 2016.

Looking ahead to 2016 and beyond, I believe customer loyalty, or "retention" will replace our industry standard "Customer Satisfaction Index", (C.S.I.) as to how dealers and manufacturers are measured in the near future. 

With longer new vehicle "life spans" due to higher average monthly payments, longer lease terms and on going higher new vehicle retail prices, it just makes sense to me that customer retention needs to be the number one factor in overall dealership profitability.

I guess the old saying is still true today...."the more things change, the more they stay the same"....

Take care of your customers and they will take care of you. Also, don't discount the fact having strong Fixed Operations Departments with strong Service Absorption percentages is even more important today than it has ever been. 

Are you ready for 2016?....Is your staff trained and prepared? Are you ready to achieve "Predictable Results"? The competition has never been stronger or better and all the market indicators seem to point in a very positive direction. Maybe that's why we have been extremely busy here at ACG!...Training and Coaching never stops....

Wishing All a Happy, Healthy and Prosperous New Year "Smart Parts" Readers from ACG!!....Make It Your Best Year Ever!

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

December 2015: Controlling Parts Obsolescence

One of the most interesting topics in parts that not only never gets old, it never seems to go away and that is parts obsolescence. No matter who try's to come up with the ultimate solution, including myself or how it's done, controlling obsolescence is no easy task.

In my opinion, the first thing that has to happen is that we must have a proper definition of just what is parts obsolescence. Much like "Lost Sales" or even "Emergency Purchases", believe it or not, many Parts Managers have different definitions as to when a part has lost it's ability to sell.

Many industry "experts" may also refer to obsolete inventory as "idle inventory" and to me, that's where it can get confusing. After all, ALL parts are idle until they sell so why complicate things? Call it what it is and then we can start fixing it.

Let's start out with the definition of "obsolete inventory" as stated by investopedia.com....

"Term that refers to inventory that is at it's end of it's product life cycle and has not seen any sales or usage for a set period of time determined by the industry"

Now that we have that out of the way, the next question we have to ask is...who determines that set period of time in our industry? Just when is a part at the end of it's life cycle?

For many years, NADA has pretty much been our guideline for industry standards as have many other similar groups. In the area of parts, these groups as well as myself, have trusted Mike Nicoles for most of our parts industry standards and guidelines.

So let's take a look at what our parts industry guidelines tell us as to just what the timeline or "life cycle" of the majority of automotive parts are and when they have met their ultimate demise. Keep in mind that these following Mike Nicoles stats have been in place for decades.

Chance of no future parts sales with activity after:

Six Months - 49%

Nine Months - 67%

Twelve Months - 98%

Along with that information, here's Mike Nicole's and NADA's Guidelines for parts active inventory movement as a percentage of total parts active inventory movement:

Parts Active Movement 0 - 3 Months   =   75%

Parts Active Movement 4 - 6 Months   =   23%

Parts Active Movement 7 - 12 Months   =   2%

Parts Active Movement Over 12 Months   =   0%

Now that we know what definitions, guidelines and standards we are supposed to live by, we can actively format a plan to identify and control obsolete parts inventory. Not only that, we can now also create a plan to keep it from happening over and over again in the future.

First, what causes these parts to become endangered and obsolete to begin with? How do these parts seem to keep falling down in each of the above categories? Even though some manufacturers offer stock replenishment programs with inventory protection, how come we still have obsolete inventory?

One of the most common contributors to obsolete inventory is Special Order Parts. As vehicles get more complex with more technology, each manufacturer has seen a drastic rise in the number of individual part numbers over the last 30 years.

This rise in part numbers makes it much more difficult for parts managers to keep special order parts at a minimum, even if "First Time Off Shelf Fill Rates" are at 80% or better. There will always be special order parts so we need to make sure we have a process in place with a high standard of accountability.

One area of accountability that I recommend is to charge internal parts handling fees or maybe even the whole cost of the part up to a certain amount.

Even though there is no actual expense incurred to the dealer, it only takes a couple of times before a department, department manager or even an advisor to "take a hit" in pay or department expense for it to stop. 

As I mentioned last month when we talked about controlling parts purchases, we also need to make sure that not just anybody can special order parts, especially technicians and salespeople. We also have to make sure that if these special order parts are not maintained within a 30 day period, there will be consequences.

Having a system in place that includes parts prepayment or deposits for customer pay repair orders and "over-the-counter" sales is a necessity. Even wholesale customers should be kept under watch for the amount of their returns and ability to pay within proper time frames. 

Another huge area of special order parts that contributes heavily to parts obsolescence is warranty parts. It just seems like anybody can order a part for a warranty repair without consequence. The amount of parts that end up on the shelf is staggering as these parts do not require any deposit, prepayment or authorization.

As I mentioned, technicians and salespeople play a big part in the parts obsolescence problem even though they should not be ordering parts in the first place.

Only the Service Advisor, Managers and ultimately the customer should be the ones authorizing special order parts. These parts must also be billed on the repair order or future appointments need to be set before the Parts Manager will authorize the special order.

The biggest contributor to parts obsolescence is hidden right within every Dealer Management System, (D.M.S.) and will continue to breed obsolescence. Many Parts Managers don't even realize their existing  and future obsolescence problems are in their Parts Set Ups and Controls.

Approximately 90% of the over 200 dealerships that I have visited, after reviewing the Parts Managers Monthly Analysis Reports as well as their Set Ups & Controls, I am not surprised that parts obsolescence is an epidemic in these parts departments.

Some of the most common Set Ups & Controls that are either set up incorrectly or go under managed are Phase-In and Phase-Out Parameters and Days Supply.

Believe it or not, many Parts Managers don't even know how to manually calculate Days Supply or True & Gross Turns. After all, isn't that why we have computers?

Problem is, most of these above mentioned Set Ups & Controls are usually set by either an outside source or maybe the Dealer Management System, (D.M.S.) vendor. Unfortunately, many of them are not even close to being qualified or even know what these Set Ups & Controls should be in the first place.

In order to fix the obsolescence problem, we must "stop the bleeding" first, than fix these Set Ups & Controls with updated and "common sense" parameters. A couple of the biggest areas that need to addressed in most stores I visit are Phase-In/Phase-Out parameters and Days Supply that actually make sense.

Phase-In parameters can be debated, but Phase-Out parameters should be set to kick in at the eight to nine month time frame, never at twelve months or higher. Days Supply should also be set with Source Ranking based on annual piece sales.

A part that sells only six times a year only needs a low days supply of 60 days as those parts only sell on average every other month as opposed to parts that sell maybe 24 times a year that would only need a low days supply of only 15 as those parts sell on average twice a month.

When I see Parts Managers that have most or all or of their parts in one or two standard sources, I already know that there is an obsolescence problem before I even look at the Parts Monthly Analysis Report....guaranteed. 

If all or most of the parts are in the same source, then the Days Supply set ups for the source applies for ALL parts, no matter how they move.

If all parts are treated the same as far as how many are stocked,  whether Low Days Supply (Best Reorder Point or BRP) or High Days Supply, (Best Stocking Level or BSL) it can only mean one thing...shortages and overages.

Source Ranking by Piece Sales eliminates both shortages and overages as the Days Supply Set Ups & Controls are set to how a part moves on an annual basis. Each "ranked" source accompanies the proper low and high days supply, (BRP & BSL) that is calculated and matches average annual piece sales.

As movement changes during the part(s) "life cycle", it is adjusted by the D.M.S. to move into the appropriate "ranked" source that matches the proper low and high days supply, (BRP & BSL). Once the part nears the end of the "life cycle", the low and high days are increased, resulting in fewer reorders until final phase out occurs.

Utilizing Source Ranking by Piece Sales definitely helps to eliminate the future obsolescence issues along with the right Phase-In/Phase-Out Parameters. If the D.M.S. is set up properly, the Parts Manager can learn to trust the system to do the right functions.

The last area that contributes to obsolescence, though not as drastic as the prior two is the Parts Manager. Many Parts Managers cause their own obsolescence problem with "forced" Phase-In practices.

Listening to technicians, reacting to peek demand periods by increasing quantities, overriding suggested stock orders and lack of parts special order controls and standards are just a few of the areas.

With all these contributors, it's no wonder why parts obsolescence is an ongoing issue, even with the manufacturers' stock replenishment programs and inventory protection. There is no guarantees or protection for a lack of proper process and accountability.

Lastly, in order to tackle this obsolescence monster, Parts Managers need to be looking at "potential" obsolescence coming down the pipe in the 4 - 6 month sales activity area. It's easy to look and see what is obsolete over 12 months.

Parts Obsolescence can only be stopped at it's core. Especially when we consider all the above mentioned and perhaps others not mentioned. Obsolescence prevention should be the focus, especially after year end parts "write offs" going forward.

Parts Obsolescence is a disease that requires the proper controls to eliminate future obsolescence from happening in the first place. If the problem keeps reoccurring, the problem is not fixed...you have to go to the source to make the problem go away for good.  

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

November 2015: Controlling Parts Purchases

In part two of our three part series, we will focus on one of the most lucrative functions of all Parts Department Controls and that is purchases. The Parts Department not only controls the purchase of automotive parts, it also controls many, if not most of the monthly dealer purchases, excluding vehicle purchases of course.

With that said, it's amazing to me that there really aren't that many controls or restrictions in many dealership Parts Departments concerning these purchases. Just about anyone can write a purchase order, or pick up the phone to buy anything from automotive parts, sublet purchases to paper towels and AAA batteries.

In this month's issue of ACG's "Smart Parts", we will breakdown all of these areas of dealership purchases that are controlled by the Parts Department. We will also look at how not having the proper controls in place can heavily impact the dealers overall net profit.

First of  all, it's not at all surprising that the Parts Department gets this dubious responsibility. The security of the Parts Department makes it an obvious choice by most dealers. Shipping and receiving, the storage of parts, supplies and shop equipment as well as being the central dealership location are also major contributors.

Given these facts, I have to ask a few simple questions.....

• Is there an "automated" purchase order system in place in the dealership?
• Is the approved price included on the purchase order?
• Are purchase orders reconciled each month in Accounting?
• Are all Parts Department authorized to write purchase orders?
• Are parts purchases accounted for properly if there is a price variance?
• Are all purchases accounted for correctly? (asset vs. expense) 
• Are cost analysis studies on office and shop supplies done periodically?

If you've answered "no" to any of these above questions, there just may be some opportunities out there to increase bottom line net profits for your dealer. Purchase control means that we have to have controls in place and these are just a few.

One in particular from the above mentioned questions is automated purchase orders. Most Dealer Management Systems, (D.M.S.) have this option. This allows the Accounting Department to reconcile the purchase order schedule. It still amazes me that many dealers still operate on a "hand written" purchase order system.

Often times, an approved purchase order amount ends up being different from the final amount invoiced from the vendor. This often happens with sublet purchases, especially in the area of new and used vehicle purchases.

Here's an example using the following sublet scenario:

Customer purchases a new vehicle and wants to add a set of aftermarket custom wheels. Salesperson prices out the wheels locally for $800.00 and gets a purchase order from parts and adds in the appropriate price for parts and installation into the deal.

Wheels arrive and the repair order is generated to have the wheels installed in the Service Department. Wheels are billed on the internal repair order and the Service Department installs the new wheels before the vehicle is delivered to the customer.

Salesperson delivers the vehicle without any issues and the customer drives away satisfied with their new vehicle. Everything from start to finish went as planned except for one little problem that no one really expected.

The price quoted to the salesperson for the wheels was $800.00, but the actual price when the wheels arrived was $1000.00 and that's what the Parts Department billed out the repair order. These was no "approved" amount written on the purchase order, so the Parts Department billed the invoice amount of $1000.00.

The salesperson only had $800.00 plus the installation included in the deal so that was the amount added for the customer. The vendor stuck to their price of $1000.00 because the wheels that were sold were actually $200.00 more due to the customer changing their mind as to which wheels they actually wanted.

There were no adjustments made to the deal, so the customer didn't pay the additional $200.00.

End result?...$200.00 backed out of the deal and a loss of that same amount on the bottom line. The purchase order and "we owe" were hand written without an authorized amount so the Parts Department didn't know any different but to bill the amount invoiced on the internal repair order.

Lack of having the proper purchase controls in the Parts Department continues in the area of purchasing office supplies, shop supplies, uniforms, dealer cleaning supplies, equipment or even vending machine supplies. All of which require periodic price comparisons to insure the dealers' money is spent wisely without sacrificing quality or safety.

Price comparisons should be conducted at least once a year, if not more just to keep your preferred vendors "honest" as well. It's not unusual that even your most trusted vendor will increase prices from time to time and often times not intentionally. Sometimes even the vendors gets caught from their manufacturers' and pass the cost down to the dealer.

This is where the "Smart Parts" Manager who is conducting these pricing surveys from time to time will catch these errors and act to correct them. Some of the most common "lack of purchase control" areas that may be impacting the dealers' bottom line may include;

• Increased office supply charges from print overruns from printing companies not requested.
• Additional uniform charges and surcharges from missing or garments or shop rags.
• Unsupervised vendors in the Parts Department writing their own order.
• Unauthorized dealer personnel requesting or writing their own purchase orders.
• Lack of cost or price reconciliation on purchase orders.

The last area of purchase control that we haven't discussed yet is actually the primary function of the Parts Department is the "purchase" and sale of automotive parts. The "lost profit" areas in this category are actually different than sublet or dealer supplies purchase controls.

Lost profits resulting from a "lack of controls" in purchasing parts often times go unnoticed or undetected. When dealing with an asset, as opposed to a direct expense, lost profits get are hidden in inventory accounts, or "asset" accounts. Even though the sublet account is treated like in "asset" account, the parts inventory account has a much bigger and "active" balance.

Parts purchasing can be quite an "art" in addition to having the proper purchase controls in place. If the "Smart Parts" Manager has a clean, active moving parts inventory of 90% or better every six months, purchase control just turned into purchase power.

Controlling parts inventory amounts with controlled obsolescence allows the "Smart Parts" Manager to make wise purchase decisions maximizing earned purchase discounts. Taking advantage of the manufacturers' promotional discounts can make quite an impact on the dealers' bottom line.

In addition to that, if the "Smart Parts" Manager has a "First Time Off Shelf File Rate" of at least 85% or better, there are fewer Emergency Purchases at a higher cost. Another benefit is higher shop productivity with less "down time" waiting for parts.

The added costs from not having a controlled, active inventory and lower "First Time Off Shelf Fill Rates" can be astronomical. Some of these added costs and "profit killers" may include;

• Lost Service Productivity and Labor Profits 
• Added Personnel Costs Chasing Down Parts
• Missed Discounts Opportunities on Parts Purchases from the Manufacturer
• Parts Inventory Variances: Controlled vs. Accounting
• Lost Customer Retention, Poor Customer Satisfaction, (C.S.I.)

As you can see from all of the above examples and scenarios, "Controlling Parts Purchases" or, to put it a little differently, the "Control of Dealer Purchases" in the Parts Department impacts all dealer departments and can subsequently impact all dealer departments' net profit. 

Controlling Parts Purchases goes far beyond the tag line of this issue of "Smart Parts". We have to take a closer look at how we conduct our business in general. If we are to succeed and be profitable, we have to invest wisely and control what we spend. If controlled properly, higher returns on investment are inevitable.

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

October 2015: Controlling Parts Pricing & Discounting

In my opinion, there is a big difference between "managing" and "controlling" the average dealership Parts Department. Managing Parts Gross Profit, Expenses and Net profit, as we discussed in the last three part series is actually the "net result" from having the Proper Controls.

As we "kick off" the first of this three part series with "Controlling Parts Pricing & Discounts", I want to start out by asking "Smart Parts" Readers this question....

"Can you name one other dealership department other than the Parts Department, that allows other dealership departments to have control of pricing & discounting?" 

Pretty interesting when you think about it as other departments such as Service, Sales and even Collision Departments play a big role in parts final pricing. Not to mention, who has the power to give discounts in the D.M.S., (Dealer Management System).

Even though the Parts Department bills the part out and controls the "initial" price of each part, the final pricing is controlled by Service, Sales and the Collision Centers. I don't ever remember the Parts Department ever having that control over New & Used Vehicle Sales or even how much labor should be charged on each customer pay repair order.

If the parts price is "perceived" to be too high, or if mistakes are made in estimating job price, it's usually the parts that get discounted most often. I know that this may offend some Service Managers out there, but I don't think many of them can say that it hasn't happened before.

I do understand that parts need to be priced competitively on service menus items as well as "add on" accessory items in the sales department. I also know that most Parts Managers participate in the initial pricing with other department managers on these items, but once again...who's ultimately in control?

Even though the Parts Department needs to remain competitive on these items, safeguards should be in place. One feature is to use password protect features on the D.M.S. to maintain pricing controls and prevent unauthorized discounting.

In many dealerships, service and parts discounts are charged back to gross profit accounts as opposed to being charged to an expense account such as advertising. Even though this is a very common accounting practice, it is much harder to maintain accountability as these discounts just get lost in the "sea of gross profit".

Many Parts Managers don't even realize how much of their gross profit is lost to discounting until the month is over when it's far too late to recoup the lost revenue. Once again, discounts given on parts by other departments "with control" of our parts sales and gross profit.

So, how do we regain control of our gross profit lost due to others controlling our parts pricing and discounts?

First of all, we have to realize a couple of basic facts.....

Other than "over the counter" parts sales, parts invoicing is heavily controlled by repair orders in the service and collision departments. Other than having some control by utilizing password protect features on the D.M.S., the Parts Department does not have much control. 

With that said, the "Smart Parts" Manager has to regain control by managing the tools "within our control" to offset these basic facts. We have to have pricing policies that insure overall profit retention with the proper offsets in our escalation matrix that will balance with discounts.

Parts gross profit retention must be controlled daily in order to maintain proper gross profit percentage levels. The parts escalation matrix should be utilized on "captive parts" in the right cost of sales ranges on a consistent basis. 

A reduction of parts gross retention of 5 - 10% due to competitive pricing and discounts can easily be regained by modifying the parts escalation matrix. Modifying the non-competitive, captive parts in the $10.00 - $25.00 parts cost range by 20% can easily overcome this gross retention loss. This cost range is where 80% of our parts sales come from.

Another big key to controlling the gross profit retention is to know what the lost gross amounts due to pricing policies and "qualified" discounts are on a daily basis. This information is readily available on most Dealer Management Systems on a daily basis, whether the amounts are charged back to gross, or an expense account.   

In order to regain control of our parts pricing and discounting structures, we have to know how to play the game and do it on a daily basis. It's not uncommon or unusual to make these parts escalation matrix modifications far more often than most Parts Managers do.

Even though the facts are what they are, there is no reason to lose parts gross profit. Just because other departments may have the initial control of parts pricing policies and discounting, there is no reason to lose ultimate control of achieving proper gross profit retention. 

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

September 2015: "Managing Parts Department Net Profit"

As I mentioned in the intro, I believe that managing the Parts Department Net Profit requires a daily routine to insure a predictable "bottom line" each month. Not to say that managing Parts Department Gross Profit and Expenses doesn't also require managing on a daily basis.

Generally speaking, many Parts Managers don't even have a daily routine on managing the Parts Department Net Profit. Most often, in the last week of each month there seems to be more of a mad rush on getting as many sales in as possible before the month closes.

This is not unusual of course because we have to get sales in first before we even have gross and net profit. Although, sometimes this attention to sales and gross can effect the net as expense seems to take a "back seat" during this mad rush to the finish.

In order to have a predictable net profit, we must have a daily routine on how we manage sales, gross and expense. This daily routine cannot happen without forecasting as well as setting goals and guidelines. Much like managing our households, we have to know how much is coming in and how much we spend.

We have to have a budget and manage it daily in order to afford a home, possibly raise a family and have all the nice things in life, including saving for retirement. Much like managing the Parts Department Net Profit, we have to have a plan and live by that plan each day.

So!....where do we start and how can we manage a monthly "predictable" net profit on a daily basis?....

First of all, we have to have the skill, ability and knowledge to understand dealer financial information. We also have to have access to this information with open lines of communication between the Parts Manager, Dealer Principle and Office Manager.

Many years ago, dealer managers were not allowed to have access to financial information as it was considered to be a forbidden practice. Times have definitely changed as it would be next to impossible for a dealer manager to manage net profit without this information.

Second, the Parts Manager needs to have D.M.S. (Dealer Management System) accounting information in regards to all sales, gross and expenses entered each day. Most times, this information is available on the D.O.C. (Dealer Operating Control) Report.

Even though many Parts Managers already have access to this information on a daily basis, I wonder just how many actually look at these entries on a daily basis. Here are a few questions to ask yourself...

• How many Parts Managers have actually challenged or questioned certain expenses?

• Have they ever "drilled down" any expense by looking at a "detailed journal" as opposed to just the total expense?

•  What is a "detailed journal" anyways?....

Having access to the "detailed journals" of each account allows the Parts Manager to "drill down" certain expenses that may be questionable. For example, if I was to question, let's say the Office Supply expense and I notice that mid-month, it's way over budget already. 

Looking at the "detail journal" of that account would break down each Office Supply expense entry. Often times I have found that I got charged for an Office Supply expense that was supposed to be charged to a different department altogether.

If I had waited until after the financial was completed at the end of the month to notice this incorrect expense entry, it would have too late. Can't go back now and change it as the month is over and perhaps I have to beg for a credit next month.

Being able to monitor and understand each and every sales, gross and expense account daily is crucial to managing Parts Department Net Profit. If you don't get and understand the information, you will never have predictable results in the end.

The third key part of managing the Parts Department Net Profit is the Parts Manager must know and budget for fixed expenses and some semi-fixed expenses each month. Knowing beforehand what to expect on certain expenses going into each month allows the Parts Manager to factor in those expenses on a "per day" basis, or average.

In other words, if I break down my "known expenses" per day, then I can set my sales and gross goals accordingly. Managing the "unknown expenses" is where it gets tricky as close communication with the Office Manager and the Dealer is required.

Often times, Parts Managers seem to find it easy to spend other people's money, in this case, the dealer's money. Managing the dealer's "check book" should be just like managing our own. Believe it or not, there isn't a "never ending" balance to the dealer's check book.

Managing personnel expense is also key to insuring a healthy "bottom line" as this expense carries the most weight out of all expense categories.

Managing the "metrics" on proper staffing, not only in total number, but also each parts department job category. Areas such as counter staff, inventory clerks, drivers and management all come into play.

Having the right people and the right number of people to perform every day department duties & responsibilities can be quite a juggling act. Most importantly, we must make sure that the total Parts Department Personnel Expense falls within guidelines set by the manufacturer or other industry guideline.

Lastly, we have to have Parts Department Expense Controls to insure that only "qualified" individuals have access to make purchases. The "purchase order" book, or computerized  purchase order system is the dealer's check book and should be treated as such.

 I prefer using the D.M.S. (Dealer Management System) Purchase Order Process as it has full accountability.

I believe that all Parts Department personnel should have at least a basic knowledge of how expenses can impact net profit. They should also know the overall department's goals, guidelines and expectations and be accountable to them.

The "bottom line" is that if we want predictable results on Parts Department Net Profit each month, it starts with managing it on the first of each month and each day after. As we all know, the dealer looks at his financial from the bottom up, so we should start there as well....

 

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com

August 2015: Managing Parts Department Expenses

To me, one of the biggest "sins" that any automotive dealership manager and not just the Parts Manager can make is creating a "wealth" of gross profit, only to waste it away by not managing expenses.

There are many successful Parts Managers out there who are absolute wizards at creating and accomplishing tremendous sales and gross profit numbers, but unfortunately, they have never been properly trained to manage department expenses.

Back in the day, it was quite rare that any manager ever received any dealer financial information to even try to manage expenses. It was always a surprise about the 10th of each month when the dealer came out screaming because the department was in the "red" once again for the previous month.

Not surprisingly, I still see this situation happening today in many Parts Departments as well as other Fixed Operations Departments. The one common denominator in all these cases that I have witnessed in these dealerships is "lack of control" when it comes to managing expenses.

Even though this one common denominator seems to be present each time, there are still many "factors" to this lack of control. This is where I want to begin "drilling down" part two of our series on "Managing Parts Department Expenses"


Lack Of Control Factors:


Lack of control to me is just an easy way out, or one might say "an excuse" for perhaps lack of management, knowledge or education, experience, or information. Keep in mind that I am excluding those dealers that have "over allocated" uncontrollable expenses added to the Parts Department.

In order to be a profitable Parts Manager with healthy "bottom line", he or she must have access to the dealer's financial statement on sales and gross and expense pages for the Parts Department. Furthermore, the Parts Manager needs to have access to this financial information on a daily basis.

Even though pretty much all dealerships have daily access to sales and gross information on their Dealer Management Systems, (D.M.S.), many do not have daily access to what's being posted into accounting as far as final posting adjustments and expenses.

Accessibility to this information is vital to managing expenses, but even more crucial than the information is understanding the information. There is no substitution for the proper education and knowledge needed to manage any business, especially business administration skills.

Experience also plays a huge role in overcoming "lack of control" factors as skill ability and knowledge can get you there, but experience keeps you there. Learning from past experiences or mistakes can groom any manager to being successful and profitable.

In my opinion, if a dealer wants to be profitable in the Parts Department, they have to start with eliminating these factors from happening in the first place by employing the right manager for the job. Skill, ability, knowledge, experience and access to the proper information has to be in the fore front.

Once these "lack of control" factors have been eliminated, the proper foundation has now been set to go to the next level in Managing Parts Department Expenses. There has to be "goal setting" as well a set of rules and guidelines as to what is expected, acceptable and reasonable.....


Goals, Guidelines & Definitions:


Now that we have the right person for the job, there has to be an "net profit" expectation or outcome that the Parts Manager has to shoot for which leads to a few questions.....

• How much of my gross profit can I keep after expenses are backed out?
• How much should I be paying to staff my department with the right people?
• What percentage of my expenses should be allocated as "semi-fixed" expense?
• How can I control these "fixed expenses" that are actually "non-controllable"?

These and many other questions can impact the "bottom line" if we don't know the answers to these questions going into each month. Knowing what the "expense to gross" percentage guidelines are in all expense categories gives the Parts Manager a road map to achieving expected net profit expectations.

Expense control begins with knowing just how many expense dollars are allocated to each expense category. I have always considered my "expense to gross" allocations as my "check book" and I couldn't spend what I didn't have...No credit cards allowed when it comes to paying the Parts Department bills!

Every Parts Manager needs to know their respective expense allocation percentages provided by either their manufacturer, 20 Group such as N.A.D.A., N.C.M. or any combination of these groups in order to manage the Parts Department expenses.

Most dealer financials are broken down into three expense categories;

• Personnel Expense
• Semi-Fixed Expense
• Fixed Expense

I know that most "Smart Parts" Managers already know about the three expense categories, but believe it or not, many Parts Managers do not know. More importantly, a high percentage of Parts Managers couldn't even give me at least five examples of a "semi fixed" expense when I did my own recent poll!

How could these Parts Managers' control these "semi-fixed" expenses if they didn't even know what a "semi-fixed" expense was in the first place?

Outside of the people we hire in the personnel expense section of the financial, semi-fixed expenses are the most controllable on a monthly basis. By far the biggest expense factor as to what goes to the bottom line each month in the Parts Department.

The "Bottom Line":

The "Bottom Line" that I am going to close with is not the one you would expect as we will get into that in part three of our series on "Managing Parts Net Profit". The "Bottom Line" I am referring to in this case is if we don't do a few basic things such as...

• Eliminate The "Lack Of Control" Factors
• Set Proper Goals & Guidelines
• Understand Definitions & Financial Information

No need to worry....there will be no "Bottom Line"!!

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com