O.E.M. Stock Replenishment Programs: "The Good, The Bad & The Ugly"

Happy New Year "Smart Parts" Readers and Welcome to January 2014!

We are going to "kick off" the new year with a topic that is very much a part of many Parts Managers lives as more and more manufacturers are offering automated stock replenishment programs.

Basically, participating manufacturers are providing Dealers and their Parts Managers the option to have their stock orders generated by the manufacturer. This option allows the Dealer and Parts Manager to have a bigger overall picture on parts movement or demand in multiple dealerships rather than just their own.

In theory, the results would provide higher "First Time Off Shelf Fill Rates", fewer "stock out" situations, higher accruals and return reserves. Some manufacturers will even provide inventory protection over a period of time.

All this sounds great, but what about the "unknown" costs? What about acquisition and holding costs? What would the overall "cost of goods" be? Does this program replace the stock orders generated by the D.M.S. (Dealer Management System)?

In my opinion, the only way to "drill down" these O.E.M. Stock Replenishment Programs , we have to look at "The Good, The Bad & The Ugly" to get an overall view. Keep in mind that many of these manufacturer stock replenishment programs may differ in content and provision.

First..."THE GOOD" 

I believe there is a definite benefit to being able to take advantage of numerous dealer parts demand. Overall market trends and demand can provide Dealer Parts Managers the ability to stock more of the right parts in order to increase "First Time Off Shelf Fill Rates".

Some manufacturers may also offer "inventory protection" over a period of time. This simply means if "qualified" parts don't sell, they will accept returns on those parts with little or no impact to return accrual amounts. As long as the Parts Manager returns those slow or non-moving parts within stated guidelines.

Another benefit to O.E.M. Stock Replenishment Programs is that it can replace the Parts Manager's daily stock ordering responsibility. Reviewing the stock order becomes less time consuming and provides more time for the Parts Manager to perform other duties & responsibilities.

Lastly, these factory sponsored programs can be very attractive to Dealers and Parts Managers as they usually provide the biggest discounts and allowances available on total manufacturer parts purchases. As long as the Parts Manager maintains compliance levels, substantial added profits can be attained.

Now..."THE BAD"

With all that good news, what can possible be bad? Let's look at some of the ramifications....

One of the basic duties and responsibilities of the Parts Manager is to maintain one of the Dealers top two assets by managing the parts inventory. Once enrolled in one of these factory sponsored stock replenishment programs, Parts Managers may not review or adjust these stock orders as often as they would have previously.

Reviewing the stock order is one of the most important Parts Manager functions that requires consistent review, even if the manufacturer has done all the "leg work". In many factory programs, the Parts Manager doesn't even have the ability to choose his/her own Set Ups & Controls.

Items such as Phase-In/Phase/Out, Days Supply, Source Ranking and other Order Parameters are controlled by the manufacturer, not the Dealer Parts Manager.

This can lead to over stocking AND under stocking certain parts. What sells in one dealership may not sell in another, even though the overall market demand indicates that they should be stocking certain "qualified" parts in the program.

Another dilemma that I often hear from Parts Managers is how some "fast moving" parts in their inventory DO NOT even qualify while other parts that are slow or non-moving DO qualify for the factory sponsored program.

Meeting compliance levels can also be a challenge as many Parts Managers may tend to "over purchase" qualified parts in order to achieve or maintain these levels in order to maximize discounts and allowances. Even though some manufacturers "protect" these purchases by not charging the dealer for these returns, there is a cost.....

Lastly...THE UGLY

Many Dealers and Parts Managers tend to overlook some of the most common costs that can be heightened by not properly managing any O.E.M. Stock Order Replenishment Program. Even though there are benefits to these programs, there could be underlying costs that can outweigh these benefits.

Acquisition and Holding Costs as well as the overall Cost of Goods Sold can be impacted or increased through these O.E.M. Stock Replenishment Programs if not managed properly.

According to a very popular website (accountingcoach.com), the cost of carrying or holding inventory is the sum of the following costs:

• The total cost of the inventory
• Physical space occupied by the inventory including rent, depreciation, utility costs, insurance, taxes, etc.
• Cost of handling inventory items
• Cost of deterioration and/or obsolescence

Costs are usually calculated over the course of the year and then expressed as a percentage of the cost of the inventory items. The cost of carrying inventory can vary from dealer to dealer, but can be as high as 20% of the total inventory value each year.

A dealership with excess space for storage may incur a lower cost of carrying inventory than a dealership with less space for storage as deterioration and obsolescence are more probable.

Incremental holding costs should be calculated if additional items are purchased or for E.O.Q. (Economic Order Quantity) orders. In other words, calculations for additional holding costs should be considered in the additional or "promo" purchases.

Even though some of the manufacturers offer to "protect" the parts inventory on qualified purchases, we must consider the time and cost that these parts are kept on the shelf, not selling. Some manufacturers require that these qualified purchases to be held on the shelf for up to 18 months before they can be returned. 

These added costs of carrying inventory can outweigh the benefits of these programs if not managed properly.

The Solution?

Make the best of both worlds by not being fully dependent on O.E.M Stock Replenishment Programs. Utilize the information and the additional market demand information to "enhance" the "in-house" D.M.S.(Dealer Management System).

If properly managed, the Parts Manager can protect the Dealer's investment, maximize discounts and allowances while maintaining compliance levels within the O.E.M. Stock Replenishment Program.

 By combining the performance and demands of the individual dealership along with current market trends and demands, the Parts Manager can maximize on all opportunities, especially "First Time Off Shelf Fill Rates"

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

Dave's Top Ten Indicators: "Number TEN: Parts Net Profit"

We've finally made it to the top in our ten part series titled "Dave's Top 10 Indicators" with our last indicator being Parts Net Profit!

As we have with our previous nine indicators, we will "drill down" the Net Profit indicator within itself. Most of us realize that if we do well with the other nine indicators, or by "doing the right things", the bottom line net profit will take care of itself.

Although this may be true to a point, we still have to measure and control this net profit by understanding all the variables and not by just managing the previous nine indicators. Variables such as expense allocation percentage, dealer location or demographics and manufacturer franchise requirements can impact the net profits heavily from dealer to dealer.

Managing a "predictable" and successful bottom line net profit requires Parts Managers to meet and exceed all the guidelines in the previous indicators as well as working with the variables. To simplify it even further, the Parts Manager needs to establish his "budget" and that "budget" is gross profit.

The Parts Gross Profit is the one "constant" that we need to use in setting our budget. Setting this gross profit budget is the key in achieving a "predictable" bottom line net profit.

Establishing this gross profit "budget" begins with sales and gross profit history and trends. Much like our own personal "budget", we shouldn't be spending what we don't have. In order to achieve net profit guidelines, we have to start with what we can afford, including all the variables and allocations. As the old saying goes..."It is what it is"....

Even though the dealer looks at his financial from the bottom up, it all starts at the top of the page with sales and gross profit. This is why we climbed the mountain in our "Top 10 Indicator" series with Parts Net Profit being number ten and not number one. Achieving a successful bottom line Net Profit always starts at the top.

There is one "variable" that I have not mentioned yet and it's one of the hardest for a Parts Manager to manage and that's "origin of sales". In most Parts Departments, parts sales are highly dependent on other dealer departments.

In many dealerships, parts sales dependency on other internal departments can be as high as 70% or more. This requires the Parts Manager to manage personnel expenses very closely as this category is normally the highest expense category in the department.

Parts Department Net Profit Guidelines also vary between manufacturers and dealers, ranging from 25% - 40% or even more with some manufacturers.

These guidelines help in determining just how much of the Parts Department "budget" can be allocated for Personnel, Semi-Fixed and Fixed Expenses. Keep in mind that Fixed Expenses are "fixed" for a reason.

The Parts Manager must control the expenses that he/she can control based on the gross profit "budget" without any deviation, much like our own personal budgets. As sales and gross profits grow, our "budget" grows due to the increased cost of doing business. 

Managing the Parts Department Net Profit may seem to be a "juggling act" at times, but it can be done. Following the guidelines laid out in our series of "Top 10 Indicators", these may be just the tools needed in achieving "predictable" bottom line results. 

If you missed any of our issues in this series, or want to review previous issues of "Smart Parts", just visit our website at www.smartpartstraining.com

Lastly, we hope you have enjoyed our series on "Dave's Top 10 Indicators", but more importantly, we hope this series along with numerous  "takeaways" help to improve YOUR bottom line!

To all of our "Smart Parts" Readers:

 "Happy Holidays" and  a Prosperous New Year!

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

Dave's Top 10 Indicators: "Customer Pay Gross Percentage to Sales"

Our ninth "Top 10 Indicator" focuses on parts customer pay gross as a percentage to sales. Our pricing policies have a definite impact on what we retain on the "bottom line".

In many cases, these pricing policies, particularly on customer pay parts, can often be the determining factor in overall Parts Department profitability.

Most industry guidelines for customer pay parts gross profit ranges anywhere between 40% - 45%, depending on the manufacturer.

Sadly enough, I see many Parts Managers failing to achieve these benchmarks more often than not. Even worse, it's one of the easiest benchmark to achieve and maintain.

Achieving these benchmark levels requires a combination of pricing policies that will allow the Parts Department to be competitive in all areas.

As many of us already know, utilizing a parts pricing escalation matrix is the key to achieving the proper gross retention percentage.

Many Parts Managers may already utilize a pricing matrix, but still don't achieve the proper customer pay gross retention because they are not utilizing it properly.

They may not realize that there are some price ranges that need to be more aggressive than others, especially on "captive" parts sales.

First of all, we absolutely should not be using an escalation matrix on competitive parts or "fast moving" parts. Actually, we should be lowering our gross expectations on these parts to remain competitive and to retain our customer base.

Our best opportunities for maximizing a parts escalation matrix comes from sales on "captive parts". Another fact is that 80% of our parts sales come from the $10.00 - $25.00 parts cost range.

Increasing the matrix percentage in this cost range on "captive parts" can dramatically impact the overall customer pay parts gross percentage.

Customer perception also plays a key role in proper use of a parts escalation matrix. Customers usually have a general idea of what competitive parts sell for, but not so much on "captive" parts.

Here's an example...

Let's say that you are bringing your car in for service with two primary concerns. The first is your "Check Engine Light Is On" and the second is "Interior Lights Are Inoperative".

After diagnosing the first concern, the cause on the "Check Engine Light" is a P0301 code stored for a misfire in the number one cylinder due to a cracked spark plug.

The diagnosis on the second concern revealed that the drivers side door jam switch was sticking, thus causing the failure on the interior lights.

Parts needed for repairs are a spark plug, (non-platinum) and the drivers door jam switch. The customer retail price for both the spark plug and the door jam switch is $12.50. The question is, which item do you think the customer is going to think is too expensive?

Perception is everything in this case as most customers would perceive that the spark plug is too expensive and the door jam is perceived to be priced fairly. The irony here is that the spark plug actually costs more than the door jam switch!

The matrix price on the more "captive" part, (door jam switch) allows us to retain more gross profit so we can sell the spark plug at a more competitive price. This balance in pricing can insure an overall customer pay gross profit percentage to the desired level and beyond.

So, how do we determine which parts are captive, competitive or fast moving in order set up the proper matrix?

Setting up our parts sources and ranking them by piece sales allows us to separate these three categories as well as setting up individual escalations for each individual source.

For example, parts with sales in excess of 100 times per year are apt to be more competitive and/or fast moving. These parts should not be attached to a matrix in order to remain competitive.

Parts with sales with perhaps 5 - 14 sales per year are more likely to be "captive" which allows the Parts Manager to be more aggressive with the matrix in that source. Once again, perception is the key on these sales on "captive" parts.

In my opinion, if a customer says "yes" to a sway bar link that sells for $22.87 at factory list price, they would also say "yes" to $26.22 for that same part. Especially if the Service Department is using "One Price" estimates properly.

In my opinion, maintaining the proper customer pay gross retention percentage has always been one of the easiest goals to attain. I can't think of any other department in the dealership where you can manage the gross retention by using a key board and a computer.

Lastly, there's a right way and a wrong way to having an effective pricing policy. Don't be one of those Parts Managers that tries a get "all the money" on those fast moving, competitive items because they are guaranteed sales.

There are a lot of missed opportunities on getting a little more for stocking the right "captive" parts, the first time!


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

Dave's Top 10 Indicators: Number Eight: "Expense Management"

Our Number Eight Indicator is very close to our top indicator for a very important reason. Expense Management is probably the most "under managed" duty and responsibility in most dealerships. It seems that, other than the dealer, many managers don't realize that you can't spend what you don't have!

Personally, I've always tried to manage my dealership expenses like I would my own expenses in my personal life. Managing our "check book", budgeting our expenses versus our income is an essential practice to maintaining a "healthy" standard of living.

I believe that these "core principles" that we abide to in our personal lives should also be reflected in our duties and responsibilities as a dealer manager. Our "belief system" has to be one where we not only understand the "checks and balances", we have to abide by them.

Although, in many cases, it's not quite that simple as there are many departments within the dealership. There are also a variety of expense allocations that can determine the "net profit" of any one individual department within the dealership.

Managing Expenses begins with the knowledge that it takes to properly read, understand and "dissect" the dealer's financial information that is provided to most managers.

It's hard to believe, but there are still dealers that do not provide this information to their managers. Managers should at least be provided a D.O.C (Daily Operating Control) on a consistent basis.

As most of us know, there are three main categories of expenses to manage which are Personnel, Semi-Fixed and Fixed. The guidelines for "expense to gross" in these three categories, including allocations may vary depending on the manufacturer or individual dealer.

The Parts Manager, as well as all managers need to know what these guidelines are in order to maintain a healthy "bottom line". The manager also has to have the mentality that they are managing someone else's "check book" and they have to treat it like their own.

Now, let's break down these three categories...

Parts Personnel Expense:  (Guide: 32% - 50%)

Most manufacturers and dealers allocate anywhere from 32% to 50% towards personnel expense with higher allocations to some European Manufacturers. This allocation range depends on the manufacturer or, my preferred reference, N.A.D.A.'s (National Automotive Dealers Association) guidelines.

Staying within this personnel expense budget also requires the proper "metrics" when selecting parts staff members. Having the right mix of people on the "front and back" counter, shipping & receiving, stocking, inventory, sales and drivers is crucial to meeting the appropriate guideline.

Not having the right "balance" of personnel can not only effect overall "expense to gross" targets, it can also impact the initial sales and gross profit numbers. As we all know, gross can take care of everything and if we fail to meet our gross targets, our personnel "expense to gross" percentages will rise.

Parts Semi-Fixed Expenses:  (Guide: 10% - 19%)

The Semi-Fixed category contains some of the most fluctuating and under managed expenses on the dealers' financial statement. Expenses such as advertising, freight, outside services, training, policy and supplies are just a few of the expenses that can vary considerably from month to month.

I recommend that many of these Semi-Fixed expenses carry limits set by the dealer and require authorization if over exceeded. Discipline is the key word and if there is one expense category that requires a "check book" mentality, it's Semi-Fixed. 

We also have to keep in mind that many of these Semi-Fixed categories have a "Fixed Expense" nature. Expenses such as Data Processing, Legal & Auditing, Vehicle, Telephone and Uniform, though categorized as Semi-Fixed are pretty stable and steady each month

. 

Categories such as these should be budgeted in the "expense to gross" numbers and percentages, leaving the other fore mentioned controllable Semi-Fixed categories to carry dealer authorized limits each month.

Parts Fixed Expenses:  (Guide: 9% - 16%)

Well!...they call them Fixed Expenses for a reason! They are going to be there and we have to include them in our budget each month.

Many managers believe that Fixed Expenses are uncontrollable and we have to live with whatever number that the dealer throws in there such as Rent (the big four letter word!), Repairs to Real Estate, Taxes, Heat/Power & Lights and Insurances just to name a few.

Well?...I have news for those who think that we can't impact or control Fixed Expenses! We CAN impact those Fixed Expenses by increasing our gross! Unless the dealer changes the Fixed Expense allocations mid stream, we can actually lower them by being "gross minded".

Parts Overall Net To Gross:  (Guide: 25% - 40%)

This is what it all about...the "Bottom Line"! After all has been said and done, the dealer is going to read his/her financial statement from the "bottom up".

Expenses can be a "gross killer" and I have seen too often where records are made in sales and gross, but because of "under managed" expenses, so much hard work and effort is wasted. 

Bottom Line is..."The Bottom Line" and you don't have to be big to be successful and profitable. We just have to manage our "check book" and treat it like your own....

Struggling with YOUR Net Profit?

 ACG's "Smart Parts" can get you back on track and ready for the new year with this month's exclusive offer. Have your own exclusive and confidential Expense Evaluation which includes a one hour webinar with Dave. Offer also includes your own individual Staffing Metrics for the Parts Department to determine if you have the right mix of personnel as well as a detailed review of each expense category!

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October 31, 2013

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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

Dave's Top 10 Indicators: Number Seven: "Inventory Gross & True Turns"

As we get closer and closer to our top indicator, our number seven indicator is probably one of the most important indicator in determining just how "healthy" the parts inventory is. Inventory Gross & True Turns have two distinctive meanings, even though their formulas of calculation may be somewhat similar.

Ironically, many Parts Managers don't even know the difference between Gross & True Turns or even how they are calculated. In this issue, we will not only review the proper definitions of Gross & True Turns, we will also review their individual meaning in determining just how "healthy" the parts inventory is.

First, let's review the definitions;

GROSS TURNS  (N.A.D.A Guide: 8 Turns Per Year) 

Total Sales (at Cost) for the Last Twelve Months, Divided By, Average Inventory Investment for the Last Twelve Months.

TRUE TURNS (N.A.D.A Guide: 5 Turns Per Year)

Total Order Receipts for the Last Twelve Months, Divided By, Average Inventory Investment for the Last Twelve Months.

Many of the Dealer Management Systems, (D.M.S.) automatically calculate Gross & True Turns on the Parts Monthly Analysis Report. Although, it is extremely important for Parts Managers to know their individual meaning and how to calculate their own Gross & True Turn.

First, let's look at Inventory Gross Turns;

The biggest difference between the two is that "Gross Turns" focuses on parts sales at cost. Unlike the True Turn calculation, Gross Turns only calculates and focuses on the sale of parts at cost on an annual basis. 

Technically, we could maintain a guide level of 8 Gross Turns Per Year without even stocking a single part. All inventory purchases, whether in stock or not, are measured in the Gross Turn calculation, including outside purchases.

To explain further, Gross Turns measures my total sales at cost which really represents my inventory marketability. In other words, with a guide of 8 turns per year, that means I should have a 45 days supply, whether on the shelf, or available to meet the sales demand.

As in new and used vehicle sales, a 45 days supply has been a standard in meeting market demands. This 45 days supply also equates to our Gross Turn Guide of 8 Turns Per Year. "Turning" the inventory every 45 days equates to 8 gross turns per year. There are also potential concerns for Gross Turns that may be too high or too low.

If my Gross Turn is too high, (Over 8 Turns Per Year, Less Than 45 Days Supply), it could indicate that I don't have enough inventory available to meet the demands of my market. This may result in chasing more parts at a higher cost, lost sales and lost productivity, just name a few.

In vehicle sales, a high Gross Turn or Low Days Supply could lead to more than desired "vehicle locates", lower gross or even lost vehicle sales. In either example, Gross Turns determines my marketability and just how much inventory VALUE needed and available to meet customer demands.

Now, let's look at Inventory True Turns;

Now that we know how to determine our marketability and just how much we can spend on inventory, it's time to measure our inventory investment. The True Turn calculation will help us determine how much of that "market potential" should be on the shelf to meet immediate demand.

True Turns also determines the overall "health" of the parts inventory. An "active" inventory should have 75% of sales at cost within the last three months, as we reviewed last month with our Number Six Indicator. Stocking the right parts, the FIRST time increases sales and gross potential as well overall service shop productivity.

Just as in the front end of our business, it is always easier to meet sales demands if the vehicle is on the lot. Having the most popular makes and models available always leads to higher vehicle sales and gross as well as higher vehicle turnover. It's no different in the parts department. 

Obsolete parts inventory, just like older aged units, freezes assets and reduces the amount of cash available to acquire the proper inventory in order to meet market demands. Measuring the Parts Inventory True Turns is the Number One measurement in protecting the overall investment.

Lastly, the Parts Manager's understanding of Gross & True Turns, by definition or meaning can easily be determined by reviewing the Dealer Management System's, (D.M.S) Parts Monthly Analysis Report. Unlike the Sales and Service Departments, Parts is "Black & White"...it either is, or it isn't with no grey areas.

Utilizing these measurement terms wisely can maximize market share as well as maintaining a "healthy" parts inventory investment. How "healthy" is your parts inventory? 

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

Dave's Top 10 Indicators: "Number Six: Sales Activity 0 - 3 Months"

Measuring sales activity in the parts department has always been, in my opinion, one of the key areas where we can see just how "healthy" the parts inventory is.

We can also break down our dealers investment in these categories which lead to our gross and true turn numbers. Here in lies some of our first "clues" to what these numbers really represent overall.

First of all, we have to keep in mind that many Dealer Management Systems, (D.M.S.) may list these sales activity categories differently. Some may have all the information we need readily available while other systems may require us to "do the math" ourselves.

I also want to start out with the guidelines that I have followed for years for these sales activity categories set forth years ago. The following guidelines by Mike Nichols and the National Automobile Dealers Association, (N.A.D.A). are as follows:

• Sales Activity 0 - 3 Months:       75%
• Sales Activity 4 - 6 Months:       23%
• Sales Activity 7 - 12 Months:       2%
• Sales Activity Over 12 Months:   0%  

This would mean that 75% of our total "inventory value" should have sales movement in the 0 - 3 month category. To take it one step further, 98% of our total "inventory value" should have movement in six months or less! Now THAT's a "healthy" inventory with lots of return on investment!

To accomplish this goal, we have to look at our inventory "face value" and how it plays into the guideline percentages. For example, if my obsolete or "idle inventory" over twelve months is excessive, then it will change the percentages in all of the sales activity categories.

On the other hand, if the sales activity in the 0 - 3 month category is HIGHER than the guide, it could indicate another issue. If this is true, than it could indicate that a "lack" of proper inventory or amount could be evident which may lead to lost sales, emergency purchases and lost shop productivity.

With both of these scenarios in mind, we have to be aware of the consequences from both sides of the perspective. Keep in mind that these "indicators" illustrate a different set of circumstances and follow up action plan.

Let's look at the first scenario which is Sales Activity in the 0 - 3 month category that is BELOW the guideline of 75%...

In most cases obsolescence is the culprit as all inventory dollar amounts are included in the sales activity cycles. It's quite possible that the obsolescence or "idle inventory" amounts of the inventory are excessive and may be "dipping into" the all the sales activity cycles, not just the 0 - 3 month category.

We not only have to measure this amount, we also have to keep it in perspective to the overall sales activity amounts.

For example, if the amount of obsolete or "idle inventory" over 12 months exceeds 10% of the total inventory value and the sales activity in the 0 - 3 month category is less than 75%, it is quite possible that the sales activity in the 0 -3 month category is well within guide.

If you "back out" the obsolete "idle inventory", the sales activity in this and all other sales activity categories could be well within guide.

Although, this is not an excuse or a solution to the problem, we still have to have an action plan to make these numbers real. Many dealers choose to keep obsolete or "idle inventory" on hand because in their mind, it's paid for, or..."it's gotta be worth something and I'm not going to just throw it out"!!...Sound familiar?

Problem is that most dealers don't realize that holding obsolete parts that have less than a 2% chance of ever selling again COSTS them in the long run. Never mind the acquisition and holding costs, carrying these "dead items" cost much more than they may think.

Those "inactive parts" could be costing dealers thousands as these parts take up the inventory value and space of "active parts" that may sell or "turnover" 5 - 8 times a year on average if not more!

Just like an "aged vehicle" whether new or used, get rid of it or at least, separate it from the active inventory. There are many avenues to market obsolete parts inventories with today's technology.

Now, let's look at the second scenario where perhaps the 0 - 3 month Sales Activity is ABOVE the guideline of 75%. It is quite possible for the pendulum to swing the other way, with sales activity moving too fast.

 Moreover, if the inventory sales activity is moving, or "turning" too quickly, the missed opportunities will rise as "out of stock" and "lost sales" activities increase. This will also result in lost productivity in the service shop and lower "First Time Off Shelf Fill Rates".

Not having enough parts inventory is similar to not having enough new and used vehicle inventory. The added cost of parts emergency purchases, lost sales and shop productivity is no different than vehicle swaps and dealer locates.

Even though we "may" save the sale, we will lose gross in the long run!

All dealer inventories have to be measured in a similar way based on days supply, sales activity and inventory turnover. Too many turns will indicate a lack of sufficient inventory and increased lost sales opportunities even though it may insure a higher return on investment for the short term.

Having the right "balance" of parts inventory will always be based on proper sales activity. The right balance will also be determined on how many times the inventory "value" turns. All of which will lead to higher gross profits as well as predictable results and a "healthy" parts inventory.

Last question...."What's your SMART PARTS Action Plan"?

Contact Dave @ www.smartpartstraining.com


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

Dave's Top 10 Indicators: "Number Five: Special Order Parts"

Our number five indicator takes us to the halfway point of our ten part series to higher success and profitability in the Parts Department. In this issue, we will be focusing on "Special Order Parts" from all angles, from  "necessary evil" to "managed chaos".

The first thing we will have to determine is what really defines a "Special Order Part"? One Parts Manager's special order part just may be some other Parts Manager's stocking part.

In actuality, ALL parts have to be ordered for a first time at some point, but it's what happens from there that determines the stocking status of a part.

This is where the Special Order Part is born. It happens when there is a demand on a part that either has no previous history, or it may be a stocking part, but there is "stock out" situation for one reason or another.

 The demand requires immediate action and depending on the severity of the demand, may even incur added costs to acquire.

The decisions that Parts Managers make at this point can determine many different outcomes. They could order the part along with an existing daily order to reduce added costs, or they may try and locate the part the same day with potential added costs.

This decision can ultimate effect other departments in the dealership from service and sales. Customer satisfaction may also be impacted as well as service productivity, vehicle deliveries and promise times.

We've discussed over and over how a part comes into the inventory with phase-in/phase-out criteria, days supply, source ranking and so on. We've also discussed how demands are tracked in our Dealer Management Systems (D.M.S.) by sales and lost sales, but sometimes we are just not going to stock certain parts.

Over the past thirty years or so, I have seen the evolution of the "Special Order Part" go from REAL special to NOT SO special. Back then, it wasn't unusual to see Special Order Parts lead times in the weeks, not just days! That had to be a REAL special part to take that long to get!

Today, most manufacturers have better fill rates and offer dedicated delivery to their dealers, thus reducing lead times to two days or less in most cases. We can get almost any part within a few days now, thus me labeling them NOT SO special now, as they are all treated equally.

Even though the manufacturer's are doing a better job with better PDC fill rates, dedicated delivery and reduced lead times, there is an added cost for this increase in service to the dealer.

 Many manufacturers invoke penalties and/or fees if Parts Managers don't maintain compliance with "their" stocking levels. They may also invoke fees for parts ordered "outside" their basic parameters.

Most Parts Manager want to maximize any discounts even if it's a Special Order Part. They may receive that discount from the manufacturer and that's a good thing, but unfortunately seeking those added discounts may not always benefit the customer in the long run.

Maximizing the discount may not maximize the repair turnaround time. Unfortunately, time is a "perishable" inventory in the service department that we can never get back.

This evolution has also created another "double edged" sword as many Parts Managers are stocking less and changing their stocking criteria because many parts are available over night. Even though some Customer Special Order parts are ordered on a stock order, they are still Special Orders.

Many Service Departments are experiencing lower productivity numbers as well due to this "double edged" sword. Repairs that would normally be done today have to wait until tomorrow to complete the repairs due to needed parts that have to be "Special Ordered" overnight on the Daily Stock Order.

The pendulum does swing in both directions though! One of my worst pet peeves as a Parts Manager was when a technician, advisor or manager "has to have the part right away"!!...Only to see it sit on the shelf for a week or so collecting dust.

All this adds up to one thing....Special Order Aging!

Many industry guidelines suggest and I would agree that Special Order Aging should always remain at thirty days or less. In most cases, thirty days is more than sufficient to complete the cycle from diagnosis to repair and satisfy the Special Order requirement.

In a perfect world, this would make sense, but it is not often the case. Special Orders tend to sit for months until the Parts Manager decides to return the parts, (if returnable!) and use up valuable return reserve monies that was designated for return of phased out, obsolete parts. This is why I often refer to Special Order Parts as "Accrual Killers"!

So, once again, this leads us to "How Do We Fix It?".....

Here are a list of items and/or processes that need to be implemented:

• Proper Set Ups & Controls have to be installed on the Dealer Management System, (D.M.S.). Criteria such as Phase-In/Phase-Out, Days Supply, Source Ranking By Piece Sales, etc. have to be set to maintain a minimum 75% FIRST Time Off Shelf Fill Rate or Stock Order Performance. Proper Set Ups & Controls will reduce the need for Special Orders.

• The Special Order Process should include a deposit or prepay option on Retail Parts Counter. Special Order Parts on Service Customers should be preassigned or prebilled to a Repair Order. All Special Orders should also be controlled in the Dealer Management System, (D.M.S.) as opposed to manual hand written Special Orders for proper follow up.

•  Special Order Parts should be "shelved" by days on hand, color coded and updated weekly to draw attention. Shelf One, (green side marker) would be for Special Order Parts received within seven days. Shelf Two, (yellow side marker) for Special Order Parts eight to fourteen days in stock. Shelf Three, (red side marker) for Special Order Parts fifteen to twenty one days in stock. Shelf Four, (black side marker) for Special Order Parts over twenty one days. Special Order Parts listed on shelf four referred to management for final decisions and/or fees assessed.

• Technicians do not order parts! They can requisition parts to a repair order as to what parts would be needed to complete the repairs, but they do not order them. Parts are only Special Ordered by customer approval via way of service advisors, managers or the customer themselves utilizing current pre-billing and/or deposit guidelines.

• Special Order Parts Reports should be generated daily on the Dealer Management System, (D.M.S.). Report should be generated by advisor and counterperson for management follow up. Advisor and/or counterperson updates Special Order by contacting customer and/or setting future appointment. Reports are then turned back to management after notes and updates are completed. 

Special Order Parts may be a "necessary evil" but we can manage them and protect our inventory at the same time. Controlling just who is able to order Special Order Parts is also crucial to maintaining this process.

Most importantly, keeping these parts to a "thirty day or less" standard will keep your obsolescence accrual protected and used for it's intent.

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