October 2017: "It's Time To Do The Math Ourselves!"

As many "Smart Parts" Managers know, I have written many past articles on the importance of having the right parts Set Ups & Controls. I have also touched on how not having these proper Set Ups & Controls can and could lead to problems in the areas of obsolescence and over stocked inventory amounts.

As we enter the last quarter of 2017, I felt it very appropriate to "dig into" these topics again, but with a different twist and a more detailed approach into how these Set Ups & Controls continue to be a "monkey on the back" for many parts managers today.

Even though Dealer Management Systems, (D.M.S.) vendors continue to improve on their products, I think it is actually working against many parts managers. Many, many parts managers today still don't even know how to calculate the proper Days Supply, or True & Gross Turns.

The effect of just "not knowing", has and still does lead to unacceptable obsolescence and overstocked inventory amounts. Then, once you add in manufacturers who offer Vendor Managed Inventories, (V.M.I.), the problem is actually growing in many dealerships today, in my opinion.

In this issue of ACG "Smart Parts", we are going to highlight four specific areas that are, in my opinion, the biggest contributors to obsolescence, over stocked inventories, and most importantly, low "First Time Off Shelf" Fill Rates.

The first area that we will attack is "Days Supply", which some may not know, but actually have two different meanings when managing a parts inventory. It's not just a calculation for how many days of supply to carry on a specific part number. 

The first "Days Supply" definition that we will review is one that I have to say is perhaps one of the biggest misconceptions that some parts managers have today. Many parts managers still confuse "Days Supply" with the inventory "quantity" that should be stocked of a given part number. 

In other words, a "Day's Supply" of a particular part could be 1, 2, 10, or even 20 or more per day. A "Days Supply" of any given part is just that, the number of parts needed of a given part number to get through a single day, or even over a course of days throughout a month, or number of months.

"Day's Supply" of an oil filter can be many in one day, as opposed to "Day's Supply" on a valve cover gasket, which may only sell once a month. This would equate to just one gasket over a thirty day period, thus, a thirty "Day's Supply" of the the valve cover gasket.

To properly calculate the proper "Day's Supply" of any given part, we first have to "do the math ourselves". An example of this would be if a part sells only twelve times a year, which averages out to once a month, the "Low Days Supply", or "Best Reorder Point", (B.R.P.) would be thirty days.

The "High Days Supply", or "Best Stocking Level", (B.S.L.) would be anywhere from 50% to 150% of the "Low Days Supply", (B.R.P.) according to Mike Nicoles guidelines, which I agree with as well. The percentage utilized, (50% - 150%) would be determined on how fast the part moves.

The less a part moves, a lower percentage the "High Days Supply", (B.S.L.) should be applied, and the faster a part moves, a higher percentage should be applied to the "High Days Supply", (B.S.L.) to avoid "out of stock" situations.

On the "Low Days Supply", (B.R.P.) calculation, vast moving parts will have fewer Days Supply, while slow, or slower moving parts will carry a higher "Low Days Supply", (B.R.P.). This may sound confusing, or even backwards to some, but this is how the math works.

Here is the formula to properly calculate the proper "Low Day's Supply", (B.R.P.) of any given part;

Total Annual Days, (365) - Divided By - Total Annual Piece Sales of a Particular Part = Low Days Supply, (B.R.P.), Best Reorder Point.

Example on a part that sells (24) Times Annually;

365 Days - Divided By - 24 Annual Piece Sales = 15 Days Supply, (B.R.P.), Best Reorder Point

Keep in mind that the the "High Days Supply", or Best Stocking Level, (B.S.L.) is calculated from the "Low Days Supply," Best Reorder Point, (B.R.P.) at Mike Nicoles guidelines of 50% - 150%, pending on overall average annual movement.

If a part tends to get overstocked, a lower "High Days Supply" percentage should be used, and if a part is in an "out of stock" situation, even though the "Low Days Supply", (Best Reorder Point, or B.R.P.) math is still correct, then the "High Days Supply" percentage, (Best Stocking Level, or B.S.L.) should be increased.

With all this said, I'm not at all surprised at how some parts managers may be confused on how all this math works because it may appear to be backwards in a way. This is why we need to "do the math ourselves", and we will see that the math doesn't lie, just "black and white" facts. 

What I can't understand is why some of the "Low Days Supply" Set Ups in many Dealer Management Systems are so far off. If we just "do the math ourselves", we would see that these "Low Days Supply" set ups just don't add up, especially if all parts are in a single "standard parts" source.

It's so obvious in many cases that I see that no one...no one has "done the math themselves" as so many part numbers with various annual piece sales differences have the same Low and High Days, (B.R.P. & B.S.L.). There is no logical way that one "Low Day's Supply" calculation can satisfy all parts with so many different movement cycles.

How can a part that sells only 6 times a year be put into the same "Low Day's Supply" category as a part that sells over 100 times a year? If you are a dealer, it would be like carrying the same number of individual model vehicles on the lot, regardless of how each unit sells individually.

The same holds true for parts, as varied parts annual movement cycles requires the right "Low Days Supply" calculations. This is also the reason why parts should be in "part sources" that are ranked by their piece sales movement.

Now, let's take a look at the other "Days Supply" definition, or dilemma as it equates to how many total "Days Supply" that we should have in the parts inventory in the area of total dollars. Keep in mind that this just illustrates how much the total dollar amount of the parts inventory should be, whether active, idle or obsolete.

I'm sure that many "Smart Parts" Managers have heard the term of carrying a 45 "Days Supply" of parts inventory, or a 1.5 Months Supply. This is what this terminology of "Days Supply" represents. Much like new and used vehicle inventory, where the overall "desired" vehicle inventory dollars would equate to a 30 - 45 "Days Supply".

Enough inventory in this case, whether vehicles, or parts to "satisfy" customer demand for a 30 - 45 day period, without replenishment, based on inventory dollar value, not necessarily individual demand of a particular part or vehicle. It's strictly a dollar value number used to base overall "desired" inventory amounts in the marketplace.

Here's how to calculate your "desired" parts inventory amount;

Total Parts Sales at Cost for the Last Twelve Months - Divided By - 8 Gross Inventory Turns = Total "Desired" Inventory Amount

Here's the Example:

Total Annual Parts Sales at Cost = $1,200,000.00 - Divided By - 8 Gross Inventory Turns = $150,000.00, (Desired Inventory Amount)

The last two areas that I feel that "It's Time To Do The Math Ourselves" is calculating parts Gross and True Turn. Especially with many manufacturers offering Vendor Managed Inventories, (V.M.I.'s). It actually comes down to what parts we define as "Normal Stocking Parts".

I've always defined a "Normal Stocking Part" as a part that has met MY Phase-In Stocking criteria and ends up in a normal stocking class. That appears to all be changing now as many of our so called "Normal Stocking Parts" are entering into our inventory as "Non-Stock" parts.

Now, with manufacturers' offering Vendor Managed Inventories, (V.M.I.'s), parts are actually being ordered as "Normal Stocking Parts", when they haven't met our own Phase-In criteria. Thus, unless the parts manager makes manual changes to the stocking status, they will enter in as "Non-Stock" parts as they haven't met Phase-In criteria into the D.M.S. yet.

All this confusion just adds to the "improper" calculation of the parts inventory's True Turn capabilities and accuracy. The True Turn calculation can be highly impacted, both negatively and positively by improper stocking class updates by either the D.M.S., or the parts manager.

So, let's "do the math" and calculate proper True and Gross Inventory Turns, starting with Gross Turns. I will provide the true definition, and then I will give you my "Layman's Term" definition....

Gross Turns Definition;

Total Sales at Cost for the Last Twelve Months - Divided By - Average Inventory Investment for the Last Twelve Months. (NADA & Mike Nicoles Guide: 8 Gross Turns)

A "Layman's Term" Example;

Total Cost of Sales for Last Twelve Months, ($1,200,000.) - Divided By - Average Inventory Investment for the Last Twelve Months, ($150,000.) = 8 Gross Inventory Turns.

Keep in mind that this above calculation represents inventory sales at cost over the period of a year and not necessarily the inventory that we actually stock. In other words, I can sell $100,000 in inventory at cost and technically, none of it has to be actually in stock. 

It just represents inventory "dollars" passing through the inventory asset account and the actual "marketability" and necessary dollar amounts needed to meet customer demand. Gross Turns does not indicate, or represent how well the "stocking" inventory is performing. 

The only true measurement of how well the actual "stocking" inventory, meaning parts that have met Phase-In Stocking Criteria for "Normal Stocking" parts in in the area of the parts inventory's True Turn capabilities.

True Turns Definition;

Total Stock Order Receipts for the Last Twelve Months - Divided By - Total Sales at Cost for the Last Twelve Months - Divided By - Average Inventory Investment for the Last Twelve Months.

This one is very confusing as the actual industry definition refers to "receipted" stock order parts and then calculating total sales at cost, then dividing by the average inventory for the last twelve months. That's the "true" definition, but I've always felt it much easier to calculate the sales of "normal stocking parts" as a percent of total sales at cost, divided by the last twelve months average monthly inventory.

Here's my "Layman's Example", which usually comes extremely close;

Total Annual Cost of Sales on Normal Stocking Parts, ($600,000.) - Divided By - Average Monthly Inventory Investment, ($120,000.) = 5 True Turns

Much simpler calculation, especially with the fact that it's very difficult calculating "Stock Order Receipts" these days with the manufacturers' Vendor Managed Inventories, (V.M.I.'s) and Customer Special Orders not getting receipted properly in the first place. The "Smart Parts" Manager must determine the proper receipting practices and stocking categories.

To this day, I'm still seeing many Dealer Management Systems, (D.M.S.) with the same Set Ups & Controls as they had when first installed by the D.M.S. Vendor. The problem is, often times, the D.M.S. installers and trainers don't even have a clue on what the proper Set Ups & Controls should be in the first place.

Perhaps even worse than that, many parts managers have not even checked, researched or even modified these very important set ups in a very long time, if at all. The simple fact is, if the D.M.S. is not working for the parts manager, than the parts manager has to work the for D.M.S. with countless overrides, adjustments and corrections.

Quite simply, if you are not seeing, or getting the right results from your Dealer Management System, (D.M.S.), or you are having to constantly make adjustments to suggested order amounts, that may just be your clue into getting it fixed and getting it right.

It's time to "Do The Math Ourselves" and make your Dealer Management System work for you...and not the other way around!

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 2017: Pricing Strategies: "Do You Have The Right Recipe"?

It's not that often that I run across a topic that never seems to stop intriguing my mind and is perpetual in subject matter. Staying on top of managing our "Pricing Strategies" is a never ending process and requires consistent maintenance.

Coming up with the right "Pricing Strategy", whether it's selling automotive parts and service, smart phones, or food products requires an on-going strategy to achieve a product's or service's maximum sales and profitability potential throughout the sales cycle.

Business Dictionary defines the meaning of "Pricing Strategies" as follows;

"Activities aimed at finding a product's optimum price, typically including overall market objectives, consumer demand, product's attributes, competitor's price, and market and economic trends."

There are actually quite a few definitions available on the internet and they all appear to be similar, but beyond just the basic definition, there are actually four basic descriptions of "Pricing Strategies" that some "Smart Parts" Managers may not be aware of. 

For as far back as I can remember in my parts manager days, parts pricing was pretty simple and were mostly dictated by the manufacturer, local competition and demand. Back in the day, we didn't really care to even "delve into" the topic of "Pricing Strategies".

I do believe that all of that has changed in today's automotive parts marketplace. A couple of month's ago, I wrote about how competition between the Original Equipment Manufacturer, (OEM) and Aftermarket Parts Manufacturers' has grown into a multi-billion, world-wide industry that is responsible for a considerable percentage of our overall Gross Domestic Product, (GDP).

I believe all this growth, competition and demand requires "Smart Parts" Managers to take a leap forward in today's marketplace to take a serious look into our "Pricing Strategies". This also requires the "Smart Parts" Manager to know the four basic pricing strategy descriptions. 

The best place that I would recommend to get educated on "Pricing Strategies" is a website called marketingteacher.com. The website actually breaks down the "Pricing Strategies" matrix on these four basic descriptions, which are as follows;

Premium Pricing: Product or service is considered at a premium, which allows the product or service to be marketed at a higher price and is of higher quality. 

Penetration Pricing: Product or service is designed or considered to sell at a high penetration rate with higher quality at a lower price resulting in higher volume sales.

Economic Pricing: Product or service is considered or designed for the market at lower quality and at a lower price. This pricing strategy is generally attracts all consumers in all marketplaces.

Skimming Strategy: Product or service is designed or considered to sell at a higher price, even though the product or service is of lower quality. Most often utilized in products or services that are "captive" in nature and less competition.

I think most of us can visualize, or think of many products and/or services that fit each one of these four basic descriptions listed above. In my opinion, we could also apply these pricing strategy descriptions in all areas of automotive parts sales.

To make these pricing strategy descriptions come to light for "Smart Parts" Managers, let's actually apply these pricing strategies with a few examples of where they would fit in the automotive parts world that we live in today;

Premium Pricing: In the premium pricing category, we could perhaps include "factory specific" parts, or even "captive parts" such as Body Control Modules, (BCM), Wiring Harnesses, Interior Trim, Instrument Control Modules, etc. 

We could even include "factory specific" parts at lower cost prices such as certain bolts, fasteners, clips, retainers, etc. where an escalation "cost plus" matrix can be applied to maximize gross profits to offset parts sold at lower gross margins. 

Penetration Pricing: In this pricing strategy, we could definitely include our OEM oil filters, air filters, cabin filters and wiper blades where quality is an expectation from our customers at a competitive price. Most of these parts are usually "flat priced", utilizing a weighted price averaging calculation.

Most competitive parts, or menu parts could also fall into this pricing strategy description with the end results being high sales volume and gross profits, not necessarily focusing on gross profit retention percentages.

Economic Pricing: Appropriately named, in this pricing strategy description, there is perhaps a lesser chance of "Smart Parts" Managers utilizing the strategy due to the customers' expectation of quality service and products provided by the automotive dealer. 

This pricing strategy is more often used by independent automotive service facilities as quality is not as important and price is the driving force. Although, with more and more dealerships offering "good, better and best" options on some services and repairs, this pricing strategy could come into play.

Skimming Strategy: Not one pricing strategy that I would recommend that often, but it could come into play in some low cost accessory or display items in the Parts Department, which I refer to as "trinkets".

Items such as key fobs, key chains, air fresheners, license plate frames, some wearable items, or any other "point of purchase" item that usually attracts the impact buyer. 

Quality of product is not usually questioned in lieu of the desire to buy because it doesn't cost that much and can relieve that "itch to buy" which we have all experienced from time to time.

Quality of product may also not be a factor in some other "NPN" part numbers such as nuts, bolts, screws, some chemical products, etc.

In my opinion, having a pricing strategy which helps sorting parts into these individual descriptions makes it much easier to distinguish how parts are priced in the first place. 

It would also make it much easier to categorize parts that need to have an escalation matrix, flat price or carry the manufacturer's suggested retail list price.

Most importantly, we need to realize that parts can move from one pricing strategy description to another at any time based on movement, demand or competition.

Knowing which "Pricing Strategies" to use at the right time is always a good recipe for achieving expected results in sales and gross profits.

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 2017: "Is Your D.M.S. Monthly Management Report Telling The Truth?"

If I were to make a comparison of the importance of the Dealer Management System, (D.M.S.) Monthly Management Report to the parts manager, I would compare it to the actual Dealer Financial Report to the dealer.

The performance of the parts inventory, which is the dealers second highest asset can only be analyzed through the "accuracy" of these D.M.S. Monthly Management Reports.

The question I have is..."Is Your D.M.S. Monthly Management Report Telling You The Truth?" 

The reason I ask this question often of parts managers after I have reviewed their D.M.S. Monthly Management Report is because it just doesn't make sense. After reviewing literally thousands of these reports with various systems and dealers, I can tell if the information on these monthly reports is actually "truthful".

Here are some of the most common questions I have asked parts managers after a thorough review of their D.M.S. Monthly Management Reports; 

• "How is it possible that you haven't had any Emergency Purchases?"
• "You really don't have any Lost Sales?"
• "You really don't have any Customer Special Orders?"
• "Your First Time Off Shelf Fill Rate shows you at 99.9%...how do you do it?"
• "How is it that your True Turn is 10.0 Turns, but you have all these Special Orders?"
• "Do you really have over $50,000 in Outstanding Orders with an Inventory of only $125,000?"

I could go on and on, and of course I already know the answers to these questions because each one is due to the lack of, or improper D.M.S. reporting. Unfortunately, in many cases, it's not the parts managers' fault directly as most often times it's due to a lack of proper training.

Another actor that is a major contributor to inaccurate information on the D.M.S. Monthly Management Report is the parts manager's "belief system". As a matter of fact, having the right "belief system" is the Number One Habit in our Smart Parts "Eight Habits of Highly Successful Parts Managers" Training Program.

The "belief system" I'm referring to is that the parts manager must "believe" in reporting to the D.M.S. correctly and accurately in order to take advantage of what the D.M.S. has to offer. Could you imagine what would happen if the Dealer's Financial had inaccurate information as I mentioned in my earlier comparison?

Honest and proper input leads to accurate information in these monthly management reports. If the information revealed is accurately reported, even if the results are not up to standards and guidelines, proper actions can be taken to achieve predictable results.

Following basic, honest reporting practices is not the only issue some parts managers have to deal with today. With some of the new Dealer Management Systems out there today, it's a challenge to even find some of this vital information that we would expect to see on an end of month inventory analysis report. 

Over the past three years, I have had to learn and absorb three new Dealer Management Systems, (D.M.S.) with various dealer clients. It seems that more and more D.M.S. Vendors are jumping into the automotive dealership arena due to increased competition, primarily due to pricing.

It's no secret that D.M.S. Vendors such as Dealertrack, AutoMate, AutoSoft and Adams have increased their dealer market share by offering a D.M.S. product with a lower cost than the top two vendors, which are Reynolds & Reynolds and ADP/CDK.

With the availability of more choices for dealers with far many more pricing options, it appears that there are more dealers "switching" D.M.S. Vendors than ever before. This means that more and more dealers have to deal with change as all departments have to learn a new system, which doesn't really go over very well at first.

I have personally assisted and witnessed many of these dealer parts managers fight through the actual transition from one system to another. All of a sudden, what we were normally accustom to suddenly changes and now we are cast into unfamiliar territory.

Switching over to new systems has never been easy, but what it does do is "wake us up" as we are forced revisit basic parts Set Ups & Controls, Parameters, Pricing Levels & Strategies and Specification Listings, etc. Most, if not all of these areas are rarely revisited, unless modifications are required from time to time.

So now, if a parts manager is on a new D.M.S., not only do they have to focus on proper input to get accurate results on these monthly reports, they have to know where to find where this monthly information is compared to their previous Dealer Management System.

It is in this area that dealers really need to do their homework by including their managers from all departments to participate in the actual decision that is made before switching over to a new D.M.S. Vendor. We all know the old saying that we get what we pay for and that phrase is definitely true with some of the D.M.S. Vendors.

Without naming these vendors specifically, some don't even provide the vital information that is needed on a monthly basis. Other D.M.S. Vendors may provide this vital information, but it's not all on one report as the parts manager would need to run several different reports just to get the information they were accustom to getting on one monthly inventory analysis report.

As I mentioned earlier, the D.M.S. Monthly Analysis Report is to a parts manager as the dealer financial is to the dealer. The information on these reports, if properly reported, "tells the truth" on just how well the parts inventory is performing.

Now, let's take a look at some of items that a typical D.M.S. Monthly Analysis Report should contain. Keep in mind, that in some systems, all of the following items may not be available, or may require the parts manager to run several different reports to gain access to the information;

Cost of Sales Analysis: This report breaks down all of the parts sales at cost. It also provides the parts manager a breakdown of the stocking status of these sales including; stocking parts, non-stocked parts, phased-out parts, etc. as well as providing information that will determine our "True Turn" calculation.

Investment Analysis: This analysis breaks down the status of all the parts in the inventory, including stock parts and all other categories of non-stock parts. Once again, this analysis is crucial as it gives us a percentage of the parts inventory that is classified as normal stocking parts, which should represent 75% - 85% of the parts inventory.

In some Dealer Management Systems, this is also where the parts manager would see the overall days supply of inventory as well as overstocked and "over valued" inventory. Industry guidelines for total days supply of inventory is 45 Days, or 1.5 Months.

Sales Activity: In this report, we find just how well the inventory is moving over the course of twelve months. According to industry guidelines, the majority of the parts inventory should have 75% movement in the 0 - 3 month category, 23% in the 4 - 6 month category and only 2% in the 7 - 12 month category and zero over 12 months.

Sales Activity over 12 months also represents the obsolete parts inventory, or in some Dealer Management Systems, it could be referred to as "idle inventory". Extremely vital information as this category determines just how "liquid" the parts inventory asset is as well as how healthy the True Turn number really is.

Emergency Purchases/Lost Sales: Another crucial report, that is of course, IF the parts manager reports Emergency Purchases and Lost sales. If the parts manager does not report any, that wouldn't be "telling the truth" and would give us false first time and overall off shelf fill rates.

Even with today's dedicated delivery service from manufacturers, there is still opportunities out there that reporting Lost Sales and Emergency Purchases that can benefit the parts manager. Lost Sales to me have always defined as "Potential Missed Opportunities".

Even if a sale was eventually realized, it doesn't hurt to post Lost Sale, just to insure that the demand is recorded.

Order Processing: This report breaks down all parts orders processed, receipted and those orders still outstanding. In some systems, this report also breaks down those orders that are for stock versus customer special orders.

This is another area that I find that parts managers don't "tell the truth" as customer special orders are ordered on a stock orders as stocking parts which gives us incorrect True Turn numbers as well as incorrect first time off shelf fill rates.

Inventory Adjustments: This is a great report as it tells the parts manager just how many plus or minus adjustments were made throughout the month. This is where the parts manager can find the inventory's "rate of change".

A parts manager can calculate the "rate of change" by adding all the plus and minus adjustments, multiplied by 12, (annualized) and then divided by the total part numbers in inventory. The current industry guideline for the parts inventory's rate of change should be 5% or less.

Gross and True Turns: Two of the most important calculations on a monthly management report, but in many cases, the two most incorrect calculations on the monthly management report. If the parts manager does not properly order, receipt and sell stocking parts versus non-stocking, the True Turn especially will not calculate properly in the D.M.S.

Most systems will calculate stocking parts in the True Turn calculation, but if the parts manager is ordering, receipting and selling non-stock parts such as customer special orders as normal stocking parts, the system will not "tell the truth" as these parts have not met phase-in requirements.

Off Shelf Fill Rates: This category is highly skewed in many systems, especially if the parts manager is not reporting Lost Sales and Emergency Purchases correctly and honestly. There is also more than one "Off Shelf Fill Rate" as we have "First Time Off Shelf Fill Rates" and "Overall Off Shelf Fill Rates".

The most important of course is the "First Time Off Shelf Fill Rate" as it this calculation represents the percentage of times that the parts order is filled the first time. The "Overall Off Shelf Fill Rate" just means the parts order was filled, regardless of how long or how many days it took to fill the parts order.

Depending on the D.M.S., the Off Shelf Fill Rate categories can be called Demand Filled From Shelf, Level Of Service, Sales From Stock Ratio, Stock Order Performance, or even just plain old Off Shelf Fill Rate. The important thing to remember is how to separate the two fill rate categories, both first time and overall fill rate.

These are just a few of the categories that I feel are extremely important for a parts manager to have access to each month. Equally important is understanding what these numbers, percentages and calculations actually mean.

Many systems also provide much more information such as clean and dirty core values, opening and closing inventory balances, sales trends, appreciation & depreciation amounts, etc. All represent great information for the parts manager to stay on top of each month.

Even though there are many systems out there to choose from, the one the parts manager has is the most important system and the one they have to work with. Being honest to the D.M.S. by reporting accurately is the only way that all this information can be an asset to the parts manager.

Many "Smart Parts" Managers out there may not know this, but many years ago, the dealers' financial statement used to be called the dealers' "facts sheets". In my opinion, that's how all "Smart Parts" Managers should treat their D.M.S. Monthly Analysis Reports.

It all starts by being honest with the D.M.S. and it will work for you instead you having to work the system.

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

July 2017 - OEM vs. Aftermarket Parts: "The Battle Continues"

For years, we have seen the on-going battle for market share in the secondary market of the aftermarket parts industry. The Original Equipment Manufacturer, (O.E.M.) has been losing more and more of their market share in this secondary market, but they are not going down without a fight.

According to a report by the International Trade Administration in the Department of Commerce, they define this secondary market as follows;

"Aftermarket parts are divided into two categories; replacement parts and accessories. Replacement parts are automotive parts built or re-manufactured to replace OE parts as they become worn or damaged. Accessories are parts made comfort, convenience, performance, safety, or customization, and are designed for add-on after the original sale of the motor vehicle."

Now that we have the "formal" definition of what this secondary market represents, we can break down just how big this market is and who the players are. We will also see just what's different today versus what we have all known for years.

According to estimates by Auto Care Association, the automotive aftermarket is estimated to be worth $273.4 billion dollars in 2017, which is a $35 billion increase over the last four years. This estimate contributes approximately 2% - 3% of our Gross Domestic Product, (GDP).

This secondary aftermarket industry does't just effect our GDP, it plays a huge part of our job market as well. Currently, the aftermarket employs 4-5 million people who work at manufacturers, distributors, retailers and repair shops.

Let's start off with what the difference is today versus the battleground we've all known for years. That main difference, of course is the internet which has made this secondary market a "global" market with players all around the world.

A recent Frost & Sullivan study explains in detail the current trends in this secondary market as well as what we can expect going forward in their published study; "The Future of Parts and Service Retailing in the Automotive Aftermarket".

One of the first "bullet" points in the study was the mention of the rise of eCommerce with their B2C, (Business to Consumer) sales of automotive parts, which is expected to become a $20 billion dollar business by 2020. In itself, that would a equate to a 9%-10% penetration rate within the overall secondary aftermarket sale of auto parts.

The next thing that caught my attention in this study was the fact that direct selling will be the "norm" for suppliers and vehicle manufacturers. They are even starting to set up shop on known websites like TMall.com, selling directly to businesses and end consumers.

The study goes further to say that B2B sales, (Business to Business) will be the new battlefield with online players, traditional distributors and retailers. China is one of the biggest players in this B2B venture with their online industry giant, Alibaba. Autozone is among the competitors gearing up as well with many others to follow.

We also can't leave out the traditional online retailers like Amazon.com and eBay Motors, as they are still big players as online retailers of aftermarket parts and accessories. As more and more enter into the field of battle, I would expect the competition to start having a huge impact on price and quality of product.

Speaking of eBay, in a fairly recent article, they noted that back in 2013, by the end of the second quarter of that year, the U.S. had reached an all time high on imported auto parts from around the world. An estimated 220,000 containers were off loaded at our docks from around the world.

The eBay article goes on to say that approximately 1 out of 20 factories in mainland China were producing auto parts considered to be OEM equivalent under U.S. standards. Even more shocking, Taiwan had approximately 15 of 25 factories that were devoted to producing auto parts considered to be OEM equivalent and suitable by U.S. standards.

Now that we see who the players are and how the secondary market has grown to be a world wide industry, let's take a look at what all that means when it comes down to price and the overall quality of these aftermarket parts. As we will see, some things haven't changed, but on the other hand, much has changed.

Parts quality and price has always been the difference in which parts eventually end up on the customers vehicle. What's new today is, in the case of some aftermarket parts, quality and price are going hand in hand as this world wide competition has actually put the two together. 

For the sake of comparison, I'm going to use brake pads and rotors as the example of many secondary market parts that have impacted the automotive parts industry.

We will look at some of the features and benefits of buying OEM parts versus Aftermarket replacement parts, starting with the manufacturers' OEM parts.

As many of us know and have known for years, purchasing OEM parts from the manufacturer, in most cases, provides a better warranty and insures the quality that the manufacturer requires.

OEM parts also gives the consumer the assurance that the part will, or should perform as well as the original part they are replacing. This is why many of our customers choose OEM parts as they provide that added "peace of mind".

On the other hand, when it comes to brake pads and rotors, using OEM semi-metallic brake pads can cause brake rotors to wear far quicker than ceramic brake pads, even though the "brake feel" may be better than ceramic, or other brand name, aftermarket brake pads.

The OEM brake pads also tend to be more expensive, even though most of the manufacturers have made great strides in providing alternative choices for dealers. These choices include a more competitive price for the consumer as well as different material composition on the brake pads themselves.

Lastly, when talking about OEM parts, we also know that availability can be an issue as they can only be purchased at the dealer, making it, in some cases more difficult and less convenient for customers to purchase these OEM parts.

In comparing brake pads and rotors from the aftermarket side of things, we have always known that there is an expectation of lower price and "fair" quality. There are also more choices when considering aftermarket parts, in both brand name and in brake pad materials.

The difference today is, when comparing to years ago, the quality of these aftermarket parts can actually be as good, or even better than the OEM parts in some applications.

For example, you can purchase brake rotors with a varied amount of rotor fans that help keep the brakes cooler and prolong the life of the brakes in general.

Aftermarket brakes also offer a wide variety and even lifetime warranties on some brands, but there are always "pluses and minuses" to each eventual choice. For example, a semi-metallic brake pad can shorten the life of the brake rotor, but tends to have a better "brake feel".

Ceramic brake pads, on the other hand, can lengthen rotor life, but may not provide the same "brake feel" and may not perform as well in colder weather. Ceramic pads may also cause the vehicle to brake differently, and not as efficient as semi-metallic brake pads.

Another "minus" for some aftermarket brake rotors is that they may actually be thinner than the OEM brake rotor, thus causing more "out of round" situations as well as a shorter brake rotor life span.

I have actually witnessed aftermarket rotors being "out of round" right out of the box, causing further brake issues as well as a potential dissatisfied customer. This doesn't even account for the lost "down time" in the service shop, waiting for parts that will fit and perform to expectations.

In addition, aftermarket brake parts may have a tendency to be noisier than OEM parts, or even mixing and matching aftermarket parts to OEM parts can be a nightmare.

Lastly, and perhaps most important to Parts Managers, purchasing and perhaps even stocking aftermarket parts can be a nightmare, if not taken seriously and correctly.

All these "choices" can even cause problems with obsolescence and even lost sales of parts actually on the shelf, but perhaps under a different part number, or brand, due to a lack of proper part number cross over information noted in the Dealer Management System, (D.M.S.).

With all these choices and "good, better, best" options, it's no wonder why consumers get confused when "price shopping" their brake repair options. We have to do our homework if we are to enter into this new world of offering all these options to our customers.

Another area of aftermarket parts that has entered the battle field over the past several years is in the area of collision parts. Like, Kind & Quality, (LKQ) parts are finding their way on more and more collision repair orders than ever before.

It is in this area of comparison that I have to lean 100% to OEM parts. The problem is, in my opinion, when comparing OEM to aftermarket collision parts there are way too many players on the battlefield.

Not only are we dealing with a wide variety of manufacturers of these replacement parts, including the OEM manufacturers, we also have to deal with auto insurance companies. These auto insurance companies have brought in a whole new level of competition to the battlefield.

A recent Edmunds Car Care article had some shocking information that I did not realize. We have all experienced "fit" issues when utilizing aftermarket collision parts, but the surprising thing to me was just how uninformed the consumer must be when selecting their auto insurance company.

Here's the part of the article that grabbed my attention....

"In 21 states and the District of Columbia, a body shop's repair estimate does not have to indicate whether aftermarket parts will be used. You'll often find that your insurance company will favor aftermarket parts because they are cheaper. If you request OEM parts, some insurance companies ask you to pay an additional fee....all aftermarket parts are not created equal, but all OEM parts are..."

The other important thing that this article pointed out when considering aftermarket collision parts versus OEM collision parts is that these aftermarket collision parts may not have the proper "crumple zones", which is required for crash safety. To me, safety is the key part in comparing aftermarket collision parts to OEM, far outweighing the proper "fit".

It was recently reported that if we were to replace every part on a mid-size, domestic vehicle with secondary market parts, the cost to replace every part would exceed $100,000.00. That's over five times the original purchase value of the vehicle. That indicates to me that it shouldn't be any surprise that we are seeing this battle field getting bigger and bigger.

The last area in this battle field that I'm seeing growing larger and larger each year is OEM replacement parts being parts being purchased and repackaged under a different, aftermarket name for repurchase. This area of repackaging has gone on for years, but in my opinion, not to the degree it's being done today.

For years, we have known that there may be just a few actual manufacturers of certain automotive parts that many vehicle manufacturers use in initial production as well as in the secondary market. 

Years ago, I can remember reading that most ignition parts were only actually made by just a few vendors, such as Echlin, Standard Parts, Delco Remy, Motorcraft, Robert Bausch, etc. This wasn't uncommon back in the day, but what I'm referring to is much different.

It is not uncommon today to see OEM replacement parts being purchased from the dealer and then repackaged under a different brand. This also contributes to more actual "dealer item" parts being available in the aftermarket and online worldwide.

As auto manufacturers continue to compete in both the primary and secondary markets, I believe that we will see more and more battles on the OEM's trying to fight for disclosure. 

Meanwhile, overseas countries such as China, Taiwan, Indonesia and Japan will continue their fight against the OEM manufacturers monopolizing these primary and secondary markets.

The fight isn't over by any means as the battle field gets bigger and bigger, involving companies and countries from around the world. In my opinion, this battle will continue to grow and "Smart Parts" Readers need to be more and more aware of what we are buying and what ends up on our customers' vehicles.

As more and more manufacturers and vendors enter this field of battle, it is quite possible, in my opinion that we will see more and more dealers offer their customers more options in the parts used to service their customers vehicles. 

After all, if we want to keep up with our competition and stay in the fight on our battlefield, we need to keep our minds open to all of our parts purchase options. Our battle is not just retaining our customers, we need to make sure we are giving them the best product at the right price.

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

June 2017 - An ACG "Smart Parts" Perspective: "The Future Of Parts Profits"

A recent National Highway Traffic & Safety Administration, (NHTSA) study revealed that there are currently approximately 253 million passenger cars and light trucks running on our roads throughout the USA today. The age of these vehicles is approximately 11.4 years, dating back to almost 2005.

This information caught my attention as I was thinking about all these recalls going on out there and I started to wonder just how many of the vehicles on the road today are being effected by all these recalls. I also wondered about how all these recalls actually impact our dealers overall profitability.

The first thing that came to mind was the fact that automotive dealerships are really getting a huge "gift" by the manufacturer with so many recalls driving customers to their respective dealerships without even having to spend a dime in advertising to get them in.

The next thing that led me to even more "fact checking" was that I was witnessing astronomical increases in warranty parts and labor increases in all the stores that I visit on a regular basis. These increases also seem to be going well beyond any particular dealer's forecasts, or projections made prior to the start of the year.

As I began my research, I found out that in 2014, a record number of passenger car and light truck vehicles had been recalled. In retrospect, I realize that this statistic isn't surprising to "Smart Parts" Readers out there, or even the fact that their warranty parts sales have also increased dramatically.

What is interesting about what we have been experiencing over the past few years is how this all breaks down and where it's leading us to. Let's take a look at the progression on these statistics that will give "Smart Parts" Readers a better view on my perspective going forward.

In 2011 and 2012, there were approximately 16 million U.S. Vehicles recalled by the manufacturers, issued either voluntarily, or by NHTSA and the Department of Transportation. Prior years were similar and didn't waiver too much from these statistics.

In 2013, however, the trend started to shift drastically with 22 million U.S. vehicles being recalled, which was an increase over previous years by almost 38%. This trend continues in 2014 with a record of approximately 51 million vehicles being recalled, which was initially predicted at 64 million, but downplayed due to vehicle recall duplication on Takata Air Bag Recalls. 

This whopping increase of 131% over the previous year was matched and even slightly higher in 2015 with 51.3 million vehicles recalled by manufacturers and NHTSA. That's approximately 20% of the total estimated passenger cars and light trucks on the roads of the U.S. today.

General Motors leads the "recall charge" with approximately 27 million of the 51 million vehicles recalled due to not only the Takata Air Bag issue, but also, the faulty ignition switch and seat belt recalls. Other leaders that follow are Honda, Fiat/Chrysler, Toyota and Ford Motor Company. All pretty much led by the Takata Air Bag Recall.

In January of this year, Honda added 772,000 vehicles to the list of effected vehicles with the Takata Air Bag Recall and expects this number to keep rising throughout 2017 and into 2018. The trend continues primarily due to "safety recalls" issued the NHTSA.

Of the 900 recalls issued through January of this year, 123 are considered "safety recalls" issued by the NHTSA involving over 19 million vehicles. Predictions on the Takata airbag recall alone will exceed 42 million vehicles before it's completion.

Even manufacturers of vehicle child safety seats have been hit with the "recall bug" with approximately 8 million child safety seats recalled over recent years by the National Highway Traffic & Safety Administration and the Department of Transportation.

"So, what does all this have to do with the future of parts profits?"

First of all, let's consider one of the basic facts that are revealed in the above research, which is the fact that approximately 20% of the vehicles on the road today could be filtering back into automotive dealerships.

Return visits that could result in both sales and service opportunities without the added expense of advertising or even dealer reputation to some extent. More customer visiting dealer showrooms and service departments that perhaps would not have, if not for the recall on their vehicle.

Let's take a look at another fact in the above research, which indicates that of the approximate 900 recalls issued, 123 were issued by the NHTSA due to safety. The 123 "safety recalls" added up to approximately 19.1 million vehicles.

Even if some of these vehicles may not actually be on the road today, it's still a staggering number. Well more than all recalls combines back in 2011 and 2012.

These are staggering numbers, even though, according to NHTSA, 75% of all recalls are performed within 18 months, resulting in the remaining 25% of all recalls that do not get repaired.

Another recent study says that there are approximately 17,450 new car dealers currently in the United States, not counting Canada. So, if I just do a little math on the numbers, it indicates that there is an average of 913 "safety recalls" out there, per dealer in the U.S., 913 potential new opportunities that perhaps would not have been there without these "safety recalls".

The average automotive dealers' ""active" customer base ranges anywhere from 7,000 to 15,000 customers. So when you think about it, there is a potential on increasing a dealers total "active" customer base by 7% - 13%, based on these averages.

So, with all this information and all this potential in increasing overall parts profits, in my opinion, there has to be some questions answered as well as an overall "game plan" in capitalizing on these new opportunities. Some of the questions that came to my mind are as follows;

• How can we change our dealer image to keep these customers coming back?
• Is it finally time where we can be that "my mechanic" to the customer and regain their trust?
• Do most people still think that the dealer is way too expensive?
• Are we more concerned about industry percentage guidelines or overall gross profit?
• What do we have to do to change this image and get more competitive?

These are just a few the questions that popped in my mind and I'm quite sure many other "Smart Parts" Readers out there could add to this list quite easily.

I also think our "frame of mind" should change with these recall customers as I still often hear Service Advisors say..."They'e not going to buy anything anyways, they're just here to get their "free" recall done"...

One other most shameful "overlooked" fact about most of these "safety recall" vehicles is that a great majority of these "safety recall" vehicles have well over 50,000 miles on them and may require other needed repairs or maintenance services.

Unfortunately, many of these recall customers don't even receive a "Complimentary Multi-Point Inspection" from the service department, which is crazy, in my opinion, especially for safety and liability reasons, not even counting in the potential sales opportunities.

I do believe though, that many of these customers are only there for their "free" recall and wouldn't even consider going to the local dealer for their service needs. Some even hate the thought of even going to a dealer for any reason, and some even consider forfeiting their opportunity to get their recall taken care of. 

Given the fact that we all know this already, but what if....what if we could change this perception of these potential "gold mine" customers. What if....what if, we came out with a concept that would include dealership advertising to something like..."Dealership Service WITHOUT Dealership Prices!"

The above phrase, of course, is an example of how we could overcome the perception that's been out there for years. If we think about it though, what if we could change this perception, what impact would it have and what can we do to get change started?

One thing I have been noticing more and more lately is that dealership parts departments are now starting to offer more choices. Choices that include aftermarket parts to give customers more options, such as "good, better, best" options.

Common services such as brakes, shocks & struts, batteries, steering, axle & suspension, etc., are some of the services that some dealers are experimenting more and more with. Staying up to date with the competition with competitive pricing is back in the limelight. 

Not only have I seen more and more of this in my travels, I am also seeing the overall prices on these common parts going way down in price. Not only in the aftermarket, but also in the manufacturers competitive pricing.

In a recent dealership visit, I was involved with the parts and service managers, conducting a competitive market survey on some of the most common, comparable services and repairs that can be performed not only at the dealer, but at local garages and aftermarket facilities.

I was actually shocked to learn that I could buy a front brake "kit" that includes brake pads and two front rotors for less than $100.00! Of course, the quality would fall more into the "good" category, but even in the "better & best" categories, I could purchase that same brake "kit" for $125.00 - $150.00. This price was of name brand quality backed with a lifetime warranty.

I guess I didn't realize just how competitive it has gotten and with today's technology and social media, the customers are far more informed than ever before. Quality is one thing that has always been the difference, but now, quality and competitive pricing are going hand in hand.

We are definitely competing in a new age that, in my opinion, really needs a "shake up" from some of the standards that the automotive dealerships' service and parts departments have lived by for many, many years. Industry guidelines on percentages and standards have been with us for years and for good reason.

The dealership structure in general is unique compared to many other retail businesses. The automotive dealership actually operates with up to five or six separate businesses under one roof. It takes a unique set of guidelines and standards to be profitable overall as compared to other retail parts and service companies.

I believe we can have the best of both worlds where we can still operate under the standards and guidelines that have shaped the industry as well as having a little "shake up" in order to stay competitive in our auto repair parts and service industry.

I was told years ago when it comes down to maintaining industry guidelines and percentages..."You can't spend a percentage, but you can spend gross profit."

In other words, would I rather have 35% of $100,000.00, as compared to 45% of $50,000.00. The choice is obvious and I feel we need to get on the bandwagon.

In my opinion, a great deal of our future parts profits will come from this huge, expanding customer base as automotive dealer warranty parts and service continues to skyrocket, primarily due to the massive increase in factory recalls, along with a better strategy in staying competitive in the marketplace on customer pay parts and labor.

We also have to continue to change our overall image as a whole to regain customer trust. It's time we lose the image of "dealer prices" as far as customer perception. Maybe, just maybe, we need to look at our gross margin expectation in customer pay to more overall gross in general, at a lesser gross retention on more than just oil and air filters.

With many manufacturers in selected states now paying retail on warranty parts, we are actually seeing warranty parts retention percentages now in the low to mid 40% range. A far change in the expected 28% retained warranty parts gross in the past.

This "shift" in warranty sales and gross profits along with the vast increase in recall traffic may just be what we need to refocus on who our customers are and where our future customers will come from. The facts indicate that the potential to increase these "overlooked" opportunities as well as customer base is right in front of us.

With this "revitalized" and growing customer base along with a more competitive customer pay marketing plan, I believe this could be the time to shift gears and get "more" of our customers back into our dealership parts and service departments.

In addition to that, it appears that the manufacturer is offering more and more incentives, or "purchase power" discounts on overall parts purchases. Even though they are also highly focused on "brand loyalty", we still have tremendous options and new opportunities to grow parts profits.

The future of parts gross profits, in my opinion, is bright and full of new and existing opportunities. We just need to "get out of the box", instead of just "thinking out of the box".

Eventually, we have to stop complaining about how we lost all these customers to the aftermarket, and start doing what it takes to capitalize on the opportunities.

"The future of parts profits is right in front of us....the questions is....are we ready for it?"

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

May 2017 - Inventory Management: "The Five Basic Essentials"

Imagine if you will, that you have just purchased an existing automotive dealership and you are assessing your Parts Department for the very first time. You are also in an area of the country that you are not familiar with as far as demographics, customer base, or even your own employees for that matter.

You may have some idea of the dealership's potential from marketing surveys, manufacturer information, financial, and Dealer Management System, (D.M.S.) information, in actuality, you are really starting from scratch.

In the area of the Parts Department, you have an existing inventory that was valued, (but not evaluated) at the time of the "Buy/Sell" Agreement.  The inventory may or may not have a lot of "Blue Sky", meaning that the parts inventory on the D.M.S. is actually worth more than what's on the first page of dealer financial.

The questions may now start popping into your head such as;

• How much of my parts inventory is actually obsolete?
• Is my parts inventory "over stocked" in value and amount"?
• How much parts inventory do I actually need?
• Do I have the "right mix" of parts to serve my customer base?

These may be just a few questions that one must wonder when evaluating the Parts Department for the first time. After all, the Parts Department is one of the top two assets in the automotive dealership in the first place. "Liquidity" and "Return on Investment" have to be the first concerns when evaluating this asset.

In our final part of this three part series on Parts Management Fundamentals, we will finish things off with Inventory Management. I've titled this last part of the series on Inventory Management, "The Five Basic Essentials" for a reason.

In my opinion, and as you will see as we read on, these essentials to having a successful Parts Department are not only crucial, but necessary.

Like anything else we choose to endeavor in, the best place to start is at the beginning. So, let's get started with taking a Parts Department over "from scratch" and making it a successful asset with "The Five Basic Essentials".....

Essential Number One: Proper Set Ups, Parameters & Controls

One of the most important tools in the Parts Manager's tool box is the Dealer Management System, (D.M.S.). The D.M.S. is where it all starts, and then moving forward in having the right amount and right mix of inventory. The way parts come into the inventory is determined by these Set Ups, Parameters and Controls.

Most importantly, the Parts Manager has to have the "right" Set Ups, Controls and Parameters in the first place. How a part phases in and phases out is crucial to measuring demand on what's selling and what's not selling.

Along with the proper Days Supply, these Set Ups, Controls and Parameters really set the tone on having the right parts at the right time.

In addition, in many dealerships today, we not only have our own Set Ups, Controls and Parameters to insure the right mix of parts, we also have the manufacturers Vendor Managed Inventories, (V.M.I.) to contend with.

If we are not utilizing the proper Set Ups, Controls and Parameters in both the D.M.S. and V.M.I. where they emulate each other, we could be setting ourselves up for an obsolescence nightmare. Obsolescence is not the only nightmare as "over stocking" the inventory can lead to an "over valued" inventory as well.

We also cannot overlook our D.M.S. stocking parameters, relying primarily on the manufacturers' V.M.I. Programs as we will not be seeing the whole picture. The manufacturers' V.M.I. Programs utilize demand derived from a collective of dealership parts demand, not just yours. 

Relying primarily on the manufacturers' V.M.I. Programs may lead to overstocking parts you don't sell as well as not having the parts you do sell if we aren't utilizing our own D.M.S. to generate stock orders. Both systems need to be run in unison in order to get the best of both worlds, avoiding stock out situations and over stocked, over valued inventories.

The right Set Ups, Controls and Parameters may vary depending on demographics and market share, whether in a metropolitan, suburban or rural market place. Customer demand is the driving force to what parts sell, what parts don't sell, and how much. 

Essential Number Two: The Right Amount of The Right Parts

Here's a simple question for all "Smart Parts" Readers....

"How much parts inventory should I actually have and how do I measure the value?"

That's actually a great question and one that I often get asked by Dealer Principle and Parts Managers. To answer the first part of the question, we have to look at the inventory gross and true turnover guidelines set by the industry.

The National Automobile Dealer Association, (NADA) says the parts gross turn guideline should be eight turns per year while parts true turn should be five turns per year.

To start with, the gross turnover rate illustrates the gross "dollars" in parts inventory turned over the course of a year and not necessarily parts inventory actually on the shelf.

This inventory gross "dollar" turnover rate is where we determine just how much the inventory dollar amount should be. Using existing "cost of sales" information, we can now determine just how much inventory should be on hand.

Example:

Average Monthly Cost of Sales = $100,000.00 X Twelve Months = $1,200,000.00 Divided by 8 Gross Turns = $150,000.00 Suggested Inventory Value.

From this example, you can also see that this Suggested Inventory Value of $150,000.00 also represent a 45 Days Supply, (1.5 Months), the recommended amount suggested and recommended by NADA. This example, or formula can easily illustrate if our parts inventory is over stocked, or under stocked in value and amount.

A high gross turn rate indicates an "under stocked" inventory value and amount, which is turning at a high rate, with lower Days Supply,  while a low gross turn rate indicates that the inventory is "over stocked" in value and amount, turning at a lower rate, with higher Days Supply.

Many would think that a higher than suggested gross turn is a good thing as the inventory value is turning at a higher rate, but don't be fooled. If the parts inventory is turning at a higher rate, let's say at a gross turn of twelve times a year, that would reduce the actual Days Supply of inventory to 30 Days.

The second part of the above question on how to measure the inventory "value", (not amount) is determined by a couple of other industry guidelines called "true turn" and "sales activity cycles".

The NADA Guideline on True Turn is set at five, while the "sales activity cycle" category is set at 75% parts inventory cost of sales movement in the 0 - 3 month category.

As in calculating gross turns, true turns is similar, with the exception that the formula utilizes "sales of stocking parts" versus overall inventory "dollar" sales, which include all parts sales, whether in stock or not. The guideline of five annual true turns is also a measurement of "normal stocking" inventory value and not just the amount.

Essential Number Three: Proper Accounting & Reporting

In order to maintain this balanced inventory, the Parts Manager must also have steady and accurate accounting practices. This means that the Parts Manager must also have an accounting background in the first place.

Knowing the difference between inventory and expense accounts, debits and credits, as well as payable and receivable accounts is extremely important.

In my opinion, one of the most important accounting practices is conducting monthly inventory reconciliations. With multiple inventory accounts such as the the parts, tire and oil inventories, it's not that difficult to have multiple accounting errors any given month.

It is very common to see tires and oil receipted in the parts inventory and then sold out of the tire and oil inventories which causes improper inventory debits and credits in accounting. 

Often times, the tire and/or oil invoices from the manufacturer are credited to the main parts inventory instead of the tire inventory, thus resulting in what I call a "crossfire" effect. Parts receipted into one inventory, but sold from a different inventory resulting in an inventory variance.

Conducting monthly parts inventory reconciliations as opposed to annual reconciliations makes it much easier to control and maintain these variances.

Annual inventory reconciliations can be quite costly and much harder to determine the origin of these variances, thus making it much harder for the Parts Manager to control inventory assets.

Monthly parts inventory reconciliation also requires the Parts Manager to incorporate "daily" accounting practices such as proper posting and receipting outside purchases, inventory adjustments, discounts and allowances, and billing practices. 

In addition the Parts Manager must have a direct line of communication with the accounting office each day, maintaining proper paper flow on packing slips, receipts and invoices.

Proper accounting and reporting also includes accurate reporting in the Dealer Management System, (D.M.S.). The Parts Manager must have a proper "belief system" in honestly posting and receipting information into D.M.S.

Properly and accurately reporting Lost Sales and Emergency Purchases are extremely important and necessary to maintaining a well balanced inventory. Improper, inaccurate, or even the lack of reporting can actually lead to increased obsolescence and a lower level of service.

We can initially have the best Set Ups, Controls and Parameters, but if we don't maintain an accurate and honest reporting system after the fact, it won't matter in the long run.

In my opinion, it will not be possible to have the "right amount of the right parts" without having the proper, accurate and honest reporting "belief system".

Essential Number Four: Inventory Maintenance

Protecting the inventory investment is also a key essential to the basic fundamentals of Inventory Management. Protecting the inventory investment requires maintenance that goes well beyond just good housekeeping practices.

Inventory maintenance is an on-going, daily function of the Parts Manager and his/her staff to insure that the parts inventory is performing at peak levels. To start with, the parts inventory count needs to be as accurate as possible to insure stocking levels are correct.

It's crucial for the Parts Department to perform daily bin checks as part of performing an on-going Perpetual Inventory. The inventory adjustment "Rate Of Change" coming from from posting positive and negative adjustments should not exceed 5%.

Often overlooked, the Parts Department's "Rate Of Change" calculation is as follows;

Total posting adjustments, (positive & negative) divided by the total part numbers in inventory.

This "Rate Of Change" percentage is also a quick "snapshot", or indicator of potentially excessive inventory variances to come once the annual inventory is performed. Performing daily bin checks as part of the Perpetual Inventory process can minimize these overall adjustments, keeping the "Rate Of Change" withing guidelines.

Another key element to maintaining the parts inventory is monthly inventory reconciliation as mentioned earlier. Adjusting and maintaining variances on a monthly basis as opposed to annually exposes these variances at a much lower and manageable rate.

Our number four basic essential would not be complete without proper housekeeping and security practices. I can't tell you how many Parts Departments that I have visited over the years where anyone could just walk in at anytime as doors are unlocked, and shipping and receiving doors left wide open.

Another indicator that negatively reflects these housekeeping and security practices is parts laying on the floor or hanging out of the shelves and warranty scrap parts in a pile.

It doesn't take much to get an overall view on how the Parts Department is managed just by walking in and taking a minute to look around. 

Essential Number Five: Controlling Obsolescence

It pretty much goes without saying that if we are going to choose five basic essentials of Inventory Management fundamentals, we must include the ability to control parts obsolescence. After all, parts obsolescence is a huge indicator to an inventory's overall performance, whether positive or negative.

Going back to our introduction scenario as to purchasing an automotive dealership, I'm quite sure that if we are looking at evaluating the parts department and inventory, reviewing the parts obsolescence would probably be one of the first things we look at.

The key to controlling obsolescence is to avoid it in the first place by implementing all our resources available before we take that year end "write off". In addition, if we do eventually take that year end "write off", we want to also make sure that we aren't right back in the same situation next year.

We have to have an obsolescence management plan that initially avoids or reduces obsolescence by having the right "phase out" parameters in the D.M.S.

The proper criteria will alert the Parts Manager when a particular part has hit the timeline set for lack of movement and to take appropriate action to return, sell or write off the obsolete part(s). 

Our obsolescence management plan also needs to include outside vendors in addition to the manufacturer's return and accrual programs. Companies and options such as Dealermine, OEconnect, Ebay, Cobalt, (Now part of ADP/CDK), Parts Voice and others need to utilized, if necessary to manage obsolescence.

In my opinion, the biggest problem and the biggest reason so many dealerships still carry obsolescence well above accepted levels is the fault of the dealer. So many dealers just won't part with their obsolescence because they think it's already paid for and it has to be worth more than just $.50 cents on the dollar.

What they may not realize is that there are costs to holding obsolete inventories such as acquisition and holding costs, insurance, personnel, etc. Industry analysts say these added, unnoticed costs can be as much as 25% - 30% of the entire inventory value each year.

In the end, carrying obsolete inventory negatively impacts the overall inventory performance and reduces the dealers' return on investment.

Even though it's number five on our list of "The Five Basic Essentials" on Inventory Management, obsolescence just may be the number one essential that if not managed properly, will negatively impact the first four essentials.

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