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

April 2017 - Financial Management: "Five Steps To Sustained Profitability"

In part one of our three part series, (March 2017), we focused on Personnel Management, which I feel is first and foremost in running a successful, profitable Parts Department. Our people are our most important asset and having the right people in the right positions is where it all starts.

As we move on to part two of our series, knowing after part one that we have the right people, it's time to focus on the business at hand. Managing sales, gross, expense and assets, (inventory) is where it all comes down to in determining the overall success of the Parts Department.

We will focus on "asset management", which is the parts inventory in part three of our series next month, (May 2017).

In my opinion, there are five key ingredients, or "steps" that ultimately lead to "Sustained" Parts Profitability, month in and month out, year after year.

I also believe that the most successful and most profitable Parts Departments also follow these same five steps, no matter the size or location.

So let's run down the list of the "Five Steps To Sustained Profitability"!

Step One: TRAINING

My partner, Guy Salkeld has always said that..."Training is the Key that Leads to Knowledge and Skill and Desire is the Key that Leads to Success".

Quite simply, if we don't have the knowledge and the skills to perform the tasks at hand, success cannot be achieved. Sustained Profitability starts at the top with Parts Manager Training and trickles down from there with parts staff training.

Unlike other departments in the dealership, the Parts Department Manager is required to have a unique set of skills and knowledge in order to be successful. Even though some of these skills and some of this knowledge can be applied to the Sales Department, in my opinion, it goes much more "in-depth" and "detailed" than the Sales Department.

First and foremost, the Parts Manager must have a fair degree of knowledge in Business Accounting, including accounting integration, sales and cost of sales accounts, expense and asset management and reconciliation. On top of that, the Parts Manager also has to know the Parts Departments' role in overall "Service Absorption" and/or "Fixed Coverage".

If any of these terms are unfamiliar to some Parts Managers, then this is where you need to start if you are looking for on-going, sustained parts profitability. This training is more available today than it ever has been in the past and at a reasonable price, including a great curriculum now being offered by NADA, (National Automobile Dealers Association).

It's not just about managing a parts inventory and pushing parts over the counter anymore, the Parts Department is now a huge part of the dealers' overall business and profitability.

Unfortunately, many Parts Managers attained their position without the proper training as many were "promoted" into the position because they were next in line or perhaps, a parts counter person for many years and the owner thought they deserve the opportunity.

On top of skill and knowledge of basic accounting, managing a parts inventory that averages 5000 - 6000 part numbers in most dealerships is not an easy task.

Skill and knowledge in inventory management which includes managing inventory turns, sales activity, obsolescence, first time off shelf fill rates, stock order performance, level of service, etc. are also basic requirements. As mentioned, we will go in much more detail on inventory management next month in part three of this series.

In my opinion, this is one of today's automotive dealers' biggest "under sights" and most "passed over" areas of training and opportunity within the dealership. Due to the fact that most Parts Departments are already profitable, why the need for added expense of Parts Manager Training?

The part that most dealers miss though is how much more is out there and most importantly, how the Parts Department could be "negatively" impacting other departments, especially the Service Department.

Step Two: BUSINESS PLAN

In most successful businesses today, whether retail or any other business for that matter, having a "Business Plan" is a necessary part in going forward.

Determining items such as how much inventory we should stock, overall inventory value, market share, new and used sales volume, service capacity and area location are just a few items, or "ingredients" in putting together a viable, achievable forecast, or "business plan".

Creating a Business Plan also involves and requires our people achieving their goals and capabilities. Having a Business Plan that doesn't encourage our people to grow and achieve their goals will ultimately insure the failure of the overall Business Plan.

As I have mentioned in previous blogs, these targets for the Business Plan also need to be S.M.A.R.T. This simply means that the overall Business Plan needs to be Specific, Measurable, Attainable, Realistic and Time Focused.

Near the end of each year, the "Smart Parts" Manager should be involved in the Parts Departments' and Dealers' annual Forecast Meeting to determine the new year's Business Plan along with other dealer departments to ensure that the Business Plan is fair, achievable, and....Oh Yes...S.M.A.R.T.! 

So, as you can see, the Parts Manager has to be a business minded person, much like running their own business within a business with risks and challenges. Again, not like in the old days where the Parts Manager was just an administrative person that pushes parts over the counter and perhaps performs and inventory once a year.

Once again, if you have, or are a Parts Manager that has not had the proper training in business management, or as we used to call back in the day...Management By Objective, (MBO), you could be missing out on great future opportunities and Sustained Profitability.

Step Three: GUIDELINES/BASE LINE BUDGET

In order to even create a Business Plan, the Parts Manager must have some basic goals and guidelines that will manage sales, gross profits and expenses to achieve a desirable net profit for the Parts Department.

Basic knowledge in industry guidelines in the following areas are necessary in operating to a standard that is acceptable;

• Sales and Gross Per Employee
• Inventory Days & Months Supply
• Inventory Gross & True Turn
• Gross Profit Retention, (Customer Pay, Warranty & Internal)
• Net to Gross Profit %
• Level of Service
• Off Shelf Fill Rates, (Including "First Time" Off Shelf Fill Rates)
• Sales Activity, Inventory Aging, Obsolescence
• Parts to Labor Ratios
• Parts Department Absorption %

These are just a few industry guideline categories that may differ from industry analysts as well as manufacturer, but they all have one thing in common and that is they all require a basic minimum standard and achievement levels.

Baseline "budgeting" as I called it back in the day required a different frame of mind in my opinion. My "frame of mind" when it came down to managing expenses was just like managing expenses, or "budget" in my own home.

You can't spend what you don't have and if the money wasn't in the bank, I couldn't write the check. Getting "credit" or "charging" anything wasn't an option with my dealer back in the day.

Unfortunately, in many dealerships, managers seem to have the mindset that the dealer has this never ending supply of money that can never go dry. Even though a department can lose money, another department still has to absorb the losses of each individual dealer department.

This is why having a good "Service Absorption" rate is critical. "Service Absorption" is the ability of the Fixed Operations to cover the dealership expenses, minus owner salaries and variable expense.

Service Absorption is as important today as it was years ago. The very survival of many dealerships today requires an overall Service Absorption rate well above 75%, in order to bring down the number of "break even" units, or new vehicle dependency each month.

The ability of the fixed operations to not only be profitable, but profitable to the point of expected guidelines of the individual manufacturers' and industry on "net to gross" percentage is crucial.

The "Smart Parts" Manager also needs to maintain expense guidelines in all three key expense categories of personnel, semi-fixed and fixed expenses. Even though fixed expenses are not controllable 100% by the Parts Manager, personnel and most semi-fixed categories are and require daily, weekly and monthly controls.

This means that the Parts Manager has to have access to accounting and financial information on a daily basis. 

Unfortunately, there are still many dealers today that will not give up the information that is needed on a daily basis for any dealer manager to manage their profits and expenses. Then they wonder why they are losing money in some departments.

You can't control what you can't see and measure, especially after the time has already passed. We can't go back to fix what has already happened, whether planned or unplanned.

Step Four: DEALER SUPPORT/MARKET 

There is no doubt that the overall success and profitability most often relies on the sales and gross support from other dealer departments such as Outside Sales Markets, Service, Collision Center and the Sales Department. 

Some may debate support from other areas should move this ingredient" or step higher on my list, but in my opinion, without the first three, it would be very tough to manage a high degree of sales and gross volume. It would also be much tougher to manage expenses and sustain profits without the proper training, business plan and guideline compliance.

With that said, the sales and gross environment can definitely impact the amount of sales and gross volume from one dealer to another, but on a percentage perspective, it really doesn't matter the size of sales and gross volume. What matters most is the Absorption Percentage, how it's managed and what's left on the bottom line. 

In most dealerships, the Parts Department is dependent on the Service Department for their sales and gross volume in excess of 60%, with the exception of high volume Parts Wholesale Dealers. In most dealerships, the Service Department accounts for the majority of the parts sales and gross volume in customer pay, warranty and internal parts sales areas.

On the reverse side of things, the Parts Department can and does highly impact the overall Service Department sales and gross volume as well.

Service productivity can impacted a great deal from the Parts Departments ability to provide a high level of service, with high "First Time Off Shelf Fill Rates". In the Service Department, it's all about productivity and cycle times that allows the Service Department to run efficiently.

The support from the Sales Department cannot be overlooked as well as a healthy front end Sales Department, both new and used keeps the "iron on the road" and provides on going customer retention and sales for the Service, Parts and Collision Center Departments.

The last area of support that can highly impact the overall Parts Department goal in Sustained Profitability is location, location, location. Although, it's no guaranty that having the right dealership location will sustain profitability, it still can make an impact in overall sales and gross volume.

We also have to understand that a prime location with higher sales and gross volume can also impact cost and expense in a negative direction.

It's not uncommon that higher volume dealers actually miss out on the more opportunity than smaller volume dealerships. This is because there can be so much sales and gross going on at a high rate that added cost, waste and missed opportunities go unnoticed.

I've always believed that the time to "dissect" and "drill down" opportunities should be when sales and gross are at their highest levels. We always tend to only do our "drill downs" when sales drop below expectations.

It's easy to overlook and not pay attention when we are "satisfied" with current sales and gross volumes. Once again, more evident in higher volume dealers as opposed to the average sized dealership.

The same holds true in high volume wholesale parts dealers as cost aren't usually measured thoroughly to include acquisition and holding costs, insurance and added personnel expense. All should be measured on a scale that represents all sales, gross and overall expense, including the parts inventory assets and purchase discounts and allowances.

Overall support from all these areas are extremely important, but the most important factor is that all the previous three steps need to be applied, no matter the size, location, and overall sales and gross volume in any particular dealership.

Step Five: DESIRE!

As I mentioned in Step One with my partner Guy Salkeld's quote on Knowledge and Skill, without the Parts Manager's "desire" to succeed, sustainable profits cannot be achieved. Even though training to acquire the skill and knowledge is necessary, we all have to have the confidence and desire to succeed. 

Desire comes from within, but there are many ways to increase that desire if the Parts Manager is "goal oriented". The successful, "goal orientated" manager in any department or business have many things in common. One major commonality that I have witnessed and experienced is that they all have a passion for what they do.

They are also self motivated, reading and studying from noted authors, speakers and industry analysts. They don't approach each day as "just another day" as each day, week, month and year has a goal to be achieved. Once each goal is achieved, the challenge begins all over again with new goals and heights to attain.

If the Training that allows us to acquire knowledge and skill, along with the right Business Plan, which includes the proper Guidelines, Budget and Support, we can and will achieve Sustained Profitability month in, month out, year after year.

After all, as my partner Guy Salkeld also says..."We only do things for two different reasons....either by Desire or Fear!"...which basically means...either I WANT to do it...or, I HAVE to do it! Question is....What's your reason?....

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

March 2017: Personnel Management: "Five Steps To Developing An All Star Team"

For many Parts Managers, including yours truly, March has always meant the end of the first quarter of any given year. The first parts inventory activity cycle of the year and the first opportunity to evaluate what I call the three most important management categories for a parts manager.

These three categories I am eluding to include personnel performance, sales and gross trends in the first quarter as well as the first inventory activity cycle of the year. All of which provide the Parts Manager an overall "performance rating" of the parts department in general compared to expected dealer goals and projections.

Over the next three months, starting with this issue of "Smart Parts", we will provide our readers a five step "blue print" in managing these three categories which include; Personnel Management, Financial Management and Inventory Management. In my opinion, managing each category plays a critical role throughout the year, but no more critical than in the first quarter of each year, our first indicator to what the rest of the year will bring.

The first of our three part series is titled; Inventory Management; "Five Steps To Developing An All Star Team".  It takes an "All Star Team" with a Parts Manager with great leadership skills along with a "road map" to success that the overall team can achieve and believe in.

So, Let's Get Started With Part One and the "Five Steps To Developing An All Star Team!"

Step One: "First Things First" - Staffing Metrics

The first step in building our "All Star" Team is to determine the right staffing metrics, or in other words, the right number of people to be employed in the parts department. In addition to "how many", we need to know the positioning of these employees, or "staff members".

How many back counter people?....front counter?...shipping and receiving?...inventory clerks?...do I need an assistant? These are all questions that can answered very easily.

Determining the overall number of parts employees and their positioning requires research into industry guidelines and a little math. For example, NADA, (National Automobile Dealers Association) Guidelines indicate that the average "sales per parts employee" should be approximately $36,000 per employee and "gross per parts employee" at approximately $12,000 per employee. Some European franchises may be slightly higher in each category.

That pretty much sums up the total number of employees, buy what about the position of the parts employees? The answer to that question is also an industry guideline that many Parts Managers either don't know about, or never thought about it in the first place.

Much like in the service department, the guideline of having a 2:1 sales to support ratio, (productive vs. non-productive) needs to come into play. Based on the NADA statistics above, we have to take into consideration that not all parts employees are responsible for their portion of the "sales & gross per parts employee" category. Parts shipper/receivers, delivery drivers, inventory clerks and even some Parts Managers are not directly involved in the selling of parts.

This means that the "front and back" counter staff have to absorb these average sales & gross per employee numbers themselves at a 2:1 sales to support ratio. So, if we do the math, the overall number of parts employees is dictated by total sales and gross per employee number and the total number of "sales staff" versus "support staff" is determined by this 2:1 sales to support category.

An example of this, using NADA's "sales per parts employee" as a guideline, if I were running a parts department that averaged approximately $145,000 in monthly parts sales, then I would need four total staff members, with two of my four supporting my front and back counter sales positions, considering $36,000 per parts employee and a 2:1 sales to support ratio. Each would have to absorb approximately $72,000 in sales to cover the other two "non-productive" parts employees.

The other two "support" positions in the above example would usually be filled by the Parts Manager and a shipper/receiver that may also handle deliveries and stocking shelves. Often times, multi-tasking is utilized with the Parts Manager filling in at the counter, or supporting other positions.

One of the last two indicators in Step One that the Parts Manager has to consider in building this "All Star" Team is to know the Parts Departments role, or portion of total dealer expense, or "Absorption", which may range from 20% - 30%, depending the manufacturer and if the dealer has a collision center or not. The Parts Manager also has to maintain a total personnel "expense to gross" percentage, within industry and dealer guidelines.

Lastly, the Parts Manager has to provide a "true" Level Of Service over 90% to the dealer customer base while insuring annual Gross Turns eight times a year and annual True Turns five times a year, no matter what the overall inventory amounts are.

Step Two: Recruiting The Right People:

After determining the right number of parts employees and the positions required, now the Parts Manager has to have a recruiting process that will not set the dealer or the potential employee up for failure. In my opinion, dealers lose many employees because we either hired the wrong person in the first place, or the dealership didn't provide the proper training and/or career path for the employee. 

It is not uncommon for any employer to be looking for experience as part of the recruiting process, but that can also sometimes lead to failure. Often times, training new employees without experience can prove more beneficial than hiring experienced employees as they have no bad habits. The training provided would be the only way they know as opposed to hiring someone that has, let's say twenty years experience, which could actually be defined as one year, twenty times.

For this reason, I am a big fan of utilizing a personality profile index when considering new hires. As mentioned earlier, often times we set up our new employees for failure when we hire them for a position that doesn't suit their personality and behavior patterns. Even though utilizing a personality profile index cannot be the ultimate reason for hire, it's still a great tool in hiring employees for positions they are more likely to succeed in.

Another key element, in my opinion to getting the right people is to have compensation plans with comprehensive incentives to encourage employee growth and development. It's hard to evaluate personnel performance without incentives as salaries and hourly wages only reveal the employee 's timeliness, not their performance. It's just human nature that people work their pay plans, so why not have a pay plan that rewards both parties.

Lastly, where to find, or look for the right parts employee has always had it's traditional path. Placing help wanted ads, posting a sign in front of the dealership, checking local parts stores and "word of mouth" have been some of the primary resources used to find applicants and candidates.

With social media and the internet, our resource base has grown tremendously over recent years, giving the Parts Manager a greater source for hiring the right people. It also can't go understated that each potential hire needs to follow dealer background tests along with "cross interviewing" between dealer managers to get a different views. Sometimes the best potential hires slip between our fingers because we tend to want to hire an image of ourselves instead of what the position requires.

Step Three: Orientation - Employee Success Starts Here!

I am a true believer that the success of all new hires is determined by how we greet them into our dealership, our "culture" and how we provide a career path for them. Unfortunately, many dealers do not have a "Dealer Orientation Process" to begin with and often times, great employee opportunities are wasted because we hire them and throw them into the position, expecting results immediately.

The first part of the Orientation Process should be between the Parts Manager and the employee to review the employee's job description, pay plan as well as what expectations both the Parts Manager and the employee intend to accomplish in this "learning period". This will give the Parts Manager ample time to observe and evaluate how the new employee interacts with other employees.

In my opinion, a new parts employee, or any employee for that matter needs at least 2 - 4 weeks of dealer orientation before actively taking on any position. The new employee has to learn company policy & procedures, inter-departmental training with time spent in other departments, manufacturer certification & training, employee "shadowing", etc. 

In addition, all new employees should receive the dealers' "Employee Handbook" along with a complete explanation of benefits with all their options including health care, 401K's or other retirement programs, disability insurance, vacations, employee functions, group organizations, etc. These are just a few of the orientation priorities I believe need to be addressed before entering any position 100%. 

Step Four: Employee Goals & Guidelines

Once the employee has completed the Orientation Process, it's time to get started. An initial meeting between the Parts Manager and the new employee needs to take place to review the Parts Manager's guidelines and expectations as well as the new employee's individual goals. It's important "right out of the gate" to get the employee's individual expectations of goal achievement.

I didn't invent the term, but I learned a long time ago that every employee needs to have individual goals, and these goals had to be S.M.A.R.T. Simply put, the goal had to be Specific, Measurable, Attainable, Reasonable and Time Focused. Lastly, the goals need to be written down and signed by the employee. It's been proven over and over again that individuals that have clear, "written goals" succeed far more often than "unwritten goals".

As mentioned earlier, it is critical to provide a career path for all employees, creating an expectation that most of these goals are based on. In my opinion, it's the responsibility of the Parts Manager, and all managers for that matter, to always be developing their employees. Providing a career path that includes on-going training, semi annual and annual reviews, pay plan and incentive potential, position advancement potential, timely critique with positive reinforcement can only lead to "predictable results" for both the manager and the employee.

Perhaps most importantly, achieving personal goals while following company guidelines cannot happen without accountability, both personal and by the Parts Manager. Developing personal accountability in our employees can be considered a skill by some, but I've always found that if I give the employee more responsibility, they will become more accountable to themselves.

In my opinion, personnel development is one of our biggest duties and responsibilities as managers. I've always felt that it was my job to "train myself out of the job", not only for my own career advancement, but also for those following in my footsteps. We all had to start somewhere and we have all had someone that took us under their wing.


Step Five: "Promoting From Within"

One of the best compliments that can be made to any manager is when they are able to "promote from within". It is the best testimony of all four steps prior to this one, and a sign of success that will continue in the on-going, overall success of any department. Promoting from within provides an opportunity for department growth, as well as an opportunity to delegate more responsibility. Lastly, an opportunity for employees to expand on new goals and expectations.

Employee goal accomplishment always leads to new goals and new heights of achievement for the whole department. Individual goals also lead to team goals and when the Parts Manager promotes from within, in most cases, the trust within the team also rises to a new level.

Promoting from within also projects a sense of security from others within the department as opposed to employees coming and going. This sense of security can also be felt by customers, especially repeat customers who like to see the same faces when they come into the dealership.

Promoting from within also saves the dealer money as the cost to hire and train employees goes beyond just the money spent as future revenue can be affected from lower customer retention numbers. Training costs alone could mean the difference of being profitable or not in any given month, depending on the size of the department and the overall cost of training, both internal and from the manufacturer.

Promoting from within encourages employees to engage more as a group and to provide positive input with individual ideas and recommendations. If the first four steps are followed correctly, more opportunities to promote from within materialize. Future advancement with the opportunity for financial growth is one of the most important items that dedicated employees are looking for today.

Lastly, there is a right way and a wrong way to promote from within. If we promote from within and follow the prior four steps to "Developing An All Star" Team, success is limitless and perpetual. If we promote from within just on the basis of tenure, or perhaps because "they are the next in line", without following the first four steps on building our "All Star Team", we would just be illustrating the definition of insanity, doing the same thing over and over and expecting different results.

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

February 2017: "How Truthful Is Your D.M.S. Monthly Management Report?"

The first couple of months of each year, as "Smart Parts" Managers, we have a tremendous opportunity to purge and "refresh" our parts inventories. In addition to the physical inventories that are usually performed in December of the previous year, we also have the opportunity to "reset the clock" on key inventory management areas.

Once we enter into a new year, "annualized" calculations such as Gross and True Turns, "First Time" and Overall Off Shelf Fill Rates, Stock Order Performance, Level Of Service, Demand Filled From Stock Ratios, Rates Of Change and Sales Activity Cycles are all highly impacted from the first couple of months of each year.

As the year progresses, annualized calculations kind of settle in, especially around June and July where it becomes much more difficult to positively impact some of these Key Performance Indicators, (K.P.I.) from an inventory management perspective.

This "refreshing" of the parts inventory can be a great thing, but if we don't act, or "stop the bleeding" in some of these key areas, we will just see this new year repeat the results of the previous year. More importantly, if we don't understand how these numbers are calculated in the first place, we can pretty well assure ourselves that the results will repeat themselves, year after year.

First of all, we have to know industry guidelines in all these above mentioned areas of Key Performance Indicators. We also have to know and understand how to do these calculations ourselves and not relying solely on our Dealer Management Systems, (D.M.S.). 

Before we get into how these Key Performance Indicators, (K.P.I.) can be misconstrued, incorrect and misleading, let's first look at some of these industry guidelines set by various industry groups such as NADA, Mike Nicoles, NCM and ACG.

Once we know and understand these guidelines, we will then look at how to calculate these Key Performance Areas, (K.P.I.), without utilizing our own Dealer Management System, (D.M.S.)

Guidelines - Definitions - Formulas

Stock Order Performance/Demand Filled From Stock Ratio:

Overall Stock Order Performance, or Demand Filled By Stock Ratio, indicates how well the stock order purchases compare to overall purchases, or "demand". The formula to calculate Stock Order Performance, or Demand Filled From Stock Ratio is:

YTD Sales, (at cost) of *Processed "Normal Stocking Parts" - Divided By - YTD Total Sales at Cost.

Industry Guideline: 75% - 85%

(*Parts ordered and receipted as "normal stocking parts" and have met basic stocking criteria)

Level Of Service/Sales Closing Ratio: 

Level Of Service, or Sales Closing Ratio is defined as the ability of the parts department to provide parts from stock to customers. As you can see from that definition, this category can be misleading in itself. 

Technically, if I receipt my "Customer Orders" as normal stocking parts, I could actually score well in this category, but never even have the parts on the shelf to begin with.

In addition, as you will see from the formula below, if the parts manager doesn't record Lost Sales and Emergency Purchases, it will also lead to false calculations on this particular Key Performance Indicator, (K.P.I.)

It all depends how these parts are ordered and receipted in the first place and how the D.M.S. is calculating the information that is entered by the parts manager.

This is the main reason why I am a huge advocate of measuring "First Time Off Shelf Fill Rates". The formula to calculate Level Of Service, or Sales Closing Ratio is:

YTD Sales, (at cost) Minus YTD Emergency Purchase Receipts - Divided By - YTD Total Sales, (at cost), plus YTD Posted Lost Sales.

Industry Guideline: 85% - 95%

Gross Turnover Ratio:

Here's  another Key Performance Indicator, (K.P.I.) that, if not understood, can also be misleading. The formula to calculate Gross Turnover Ratio is:

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

Industry Guideline: 8 Gross Turns Per Year

As you can see and read from the formula, Gross Turns is just an indicator that measures inventory "dollars" turning in the parts inventory. Technically, I could have a Gross Turn Rate of 8 or better and not even have a single dollar of inventory on the shelf. It's just a measurement of gross dollars of inventory receipted and sold through the parts inventory account, including outside purchases.

Measuring Gross Turns is extremely important though as it's a measurement of the proper inventory amount and "Days Supply" of any given inventory. In other words, if you take the average cost of sales monthly, multiplied by twelve, then divide that total by "8 Gross Turns", that will equal the proper inventory amount with a (45) Days Supply.

True Turnover Ratio:

True Turnover Ratio is more of a direct measurement of how the "stocking inventory" is performing. This Key Performance Indicator, (K.P.I.) can also be misleading if not totally understood. The formula to calculate True Turnover Ratio is:

Total Sales, (at cost) of Stocking Parts for the Last Twelve Months - Divided By - the Average Inventory Investment for the Last Twelve Months.

Industry Guideline: 5 True Turns Per Year

Once again, just by reading the formula, you can see that this measurement "keys on" parts that are supposed to be "normal stocking parts". That means these "normal stocking parts" must meet basic stocking criteria set by the Dealer Management System, (D.M.S.). Criteria such as Phase-In and Phase-Out Parameters, Best Reorder Points, (B.R.P.) and Best Stocking Levels, (B.S.L.).

Here's where it gets tricky and potentially misleading...

The Dealer Management System, (D.M.S.) is only going to reveal results as entered. In other words, if the Parts Manager receipts in Special Order Parts for example, as "normal stocking parts", this will give us a misleading True Turnover Ratio. 

Just because the Special Order Parts were ordered on the Stock Order, it doesn't mean they qualify as "normal stocking parts" because they haven't met basic stocking criteria as mentioned above. Also, if we don't utilize the D.M.S. Special Order Parts Program, these parts could also be considered as "normal stocking parts" by the D.M.S., depending on which system is utilized. 

So even though the D.M.S. Monthly Management Report says one thing, it doesn't necessarily mean these Key Performance Indicators, (K.P.I.) are actually true and realistic. This is why the Parts Manager's "Belief System" has to be truthful and accurate when reporting this information into the Dealer Management System, (D.M.S.).

True Turnover Ratio can only be measured "truthfully" if we follow the proper procedures in basic reporting practices and utilizing the Dealer Management System, (D.M.S.) as intended. We all know the old saying...."Garbage In?....Garbage Out!"

Another big contributor to misconstrued, misleading and incorrect information comes from our manufacturers and their Vendor Managed Inventory, (V.M.I.) Programs. So, not only did we have enough problems already with the above mentioned situations, let's get the manufacturer in there to really cause mass confusion to our Monthly Management Reports.

To start with, Vendor Managed Inventories, (V.M.I.'s) combine individual dealer set up criteria along with "group" criteria to define what the dealer should stock, or in their minds, the dealers' "normal stocking criteria". Problem with that is, no one's telling the various Dealer Management Systems, (D.M.S.) that these V.M.I. Parts should be considered as "normal stocking parts".

Parts receipted on the Vendor Managed Inventory, (V.M.I.) are coming into most Dealer Management Systems, (D.MS.) as "non stocked parts" instead of "normal stocking parts". The reason for this is quite simple as many these V.M.I. Parts have not met the individual Dealer Management System's, (D.M.S.) basic stocking criteria.

This means that even if the manufacturer is considering these parts as "normal stocking parts", they are not considered as such by your own system until they have had enough demand. All of which will impact the D.M.S. Monthly Management Report in a negative way when measuring True Turns, Stock Order Performance and "First Time" Off Shelf Fill Rates.

Parts purchased on the manufacturers' V.M.I. Programs should be considered as "normal stocking parts" and should be included when measuring the above mentioned Key Performance Indicators, (K.P.I.). The only way they can be measured properly is by positive actions taken by the Parts Manager.

One way to do this is to insure that the manufacturers Vendor Managed Inventory, (V.M.I.) parts are receipted into a "default parts source" that brings these parts in as "normal stocking parts". If the particular Dealer Management System, (D.M.S.) is unable to perform that task, then the Parts Manager would have to manually receipt these parts as "normal stocking parts".

As you can see, there's even more potential today for misleading and inaccurate information to find it's way to the D.M.S. Monthly Management Report. Unfortunately, too many parts managers trust what their D.M.S. Monthly Management Report tells them as many have never "done the math" themselves.

In my opinion, there IS too much misleading and inaccurate information on the D.M.S. Monthly Management Reports today. This is mostly due to the manufacturers' Vendor Managed Inventories, (V.M.I.'s) parts not being receipted with the proper stocking status. That one item alone effects so much on the Monthly Management Report as mentioned above.

There is no better time than the beginning of a new year to correct these inefficiencies in reporting to the Dealer Management System, (D.M.S.). The sooner we get these issues corrected, the sooner we will see accurate "annualized" information on the Monthly Management Report going forward.

It's time "Smart Parts" Managers, for us to get back to basics and "do the math" ourselves in order to get the right information on these Monthly Management Reports. Most importantly, it's time to give our dealers accurate information that will "truthfully" inform them on how their parts investment is performing. 

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