August 2018: "What Are The Costs Or Benefits To Loyalty?"

Purchasing parts from the manufacturer today is quite a bit different than it was years ago. Back in the day, we just had parts order options such as stock orders, supplemental stock orders, emergency orders and perhaps critical orders that we placed and received overnight.

Each order carried its own cost or benefit whether it was receiving the best discounts and most return reserve accrual from placing a stock order to higher costs from placing emergency or critical orders to receive the parts as fast as possible.

Today, we see these basic parts order functions expanded into programs where many manufacturers are controlling the dealers parts purchases through Vendor Managed Inventories, (V.M.I.'s) and in some cases, tying in the Service and Sales Departments for overall dealer incentives and program qualifications.

To me, many of these parts programs being offered by the manufacturer are beginning to emulate many of the dealers up front vehicle sales incentive programs that may even include "cash back" to the dealer if compliant to their respective programs.

Discounts, allowances and return reserve accruals are also available to the dealer, once again, if compliant to achieve maximum program benefits. Sounds great if all this comes together for the dealer, but in many cases, the reality of higher costs outweighs the benefits.

Let me explain.....

The first key word that we need to pay attention to is "compliance".....

Let's look at the definition of "compliance" as stated by dictionary.com;

"The act of conforming, acquiescing, or yielding, a tendency to yield readily to others, especially in a weak and subservient way, conformity and accordance..."

So, to me, when it comes to being "compliant" to these programs, the first question I have to ask is... 

"Who's In Control Here?"...

I would have probably thought that these programs would lean more towards program "qualifications", or perhaps even program "enrollment", instead of "compliance".

 It also leads me to believe that we don't have a choice, but to comply. It also seems to imply that if we don't comply, there will be costs and consequences.

As I mentioned in the beginning, it was much simpler back in the day as the Parts Manager had control of the dealers "purchase power" and the discounts, allowances, return reserves and any added costs were controlled by the Parts Manager.

Today, with many manufacturers offering V.M.I.'s, the Parts Manager has lost much of this control, or chooses to give up their control, thus leading to the dealers "purchasing power" being forfeited over to the manufacturers.

The end result in many dealers parts departments that I have worked with is an over inflated inventory with obsolescence in excess 25% or more.

Recently, I was interviewed by Fixed Ops Business on an article that is due out in November of this year and the subject matter focuses on "problem K.P.I's", (Key Performance Indicators) in dealership Parts Departments today.

Not to give too much away on the upcoming article, but I believe that parts obsolescence is one of the biggest "problem K.P.I's" that many Parts Managers deal with today.

One of the biggest contributors to parts obsolescence, in my opinion, is the fact that many Parts Managers "overextend" themselves into many of these programs offered by manufacturers just to be compliant.

So, who really benefits from these programs and who really gets impacted by the negative effects from these programs?

First of all, before we answer these questions, the news isn't all bad as there are significant benefits to being "loyal". Keep in mind that the following is just a sampling of my own research from dealers I have personally worked as well as a sampling of dealer 20 groups that I have also worked with.

Who Benefits?

For the most part, high volume dealers that have parts purchases in excess of $3,000,000.00 annually receive the biggest benefits from these "loyalty' programs offered by the manufacturer. Higher parts demands enables these dealers to achieve the biggest volume discounts by reaching higher discount percentage "tier levels"

Along with the higher demands, also enables these dealers to have a "broader inventory" with more part numbers that qualify for program benefits. Their inventory also tends to have higher gross and true turns annually so inventory is usually protected and obsolescence less likely to occur. 

Plus, with the strong "purchase power", accruing parts return reserves are much higher, thus allowing these dealer Parts Managers to keep up and return parts that may slip in that "over 12 months, no sales" category before the become obsolete.

These high volume dealers also tend to have strong wholesale sales which also allows the Parts Manager to keep their "loyalty" percentages strong as most of these wholesale parts are purchased from the manufacturer as opposed to purchasing parts from aftermarket vendors.

In the end, these high volume dealer Parts Managers can pretty much capitalize on all the benefits from these programs achieving the most in discounts, allowances, return reserves and overall dealer "cash back" from the manufacturer.

They are also a big player in the overall dealer programs that may tie in the Service and Sales Departments. So now we have "compliance" playing a role in all of the dealers operations and in all departments.

Who Does It Cost?

Well, I guess the opposite would be correct with dealers that have less than $3,000,000.00 in annual parts purchases. Especially, even those smaller dealers who don't  achieve that amount in annual parts purchases. Outside purchases are much more common from other dealers and aftermarket vendors as emergency purchases are much more frequent.

With so many part numbers out there in order to even qualify for some of these programs, it's becomes that much tougher to meet program requirements for "compliance". Because of this pressure to meet qualifications, oftentimes Parts Managers will purchase "qualified" parts just to meet compliance levels, even if these parts have little or no sales history.

These smaller dealer Parts Managers also tend to "walk away" from their own Dealer Management Systems, (D.M.S.) when it comes to creating their own stock orders, relying solely on the manufacturers' Vendor Managed Inventories, (V.M.I.). When this happens, the risks of overstocking the parts inventory and inflating obsolescence goes much higher.

In some cases that I have personally witnessed, Parts Managers are and have been pressured by their manufacturer to purchase more parts just to reach compliance levels just to gain a small discount. I have seen one case in particular where the Parts Manager would have to purchase $10,000.00 more in parts just to gain an additional discount of $2,500.00.

Sad thing is, these parts had very little or no sales history in this store, so you can imagine many of these parts will end up becoming obsolete and hopefully protected. The other sad truth of this example is that the discount isn't "real money" as discounts aren't realized until the parts sell, even though it is reflected on the financial as 100% gross profit.

On the brighter side of all this, there are manufacturer programs out there that benefit ALL dealers as some Vendor Managed Inventory, (V.M.I.) companies are better than some others. Some even encourage and credit the dealer for NOT overstocking or carrying obsolete parts inventory as well as shorter terms of months before parts can be returned to the manufacturer at no cost to the dealer.

I guess what it all comes down to is managing the parts inventory and the dealers' second highest asset without getting caught up in all the hype that the manufacturers' try to sell the dealer.

Getting the best return on the dollar is always most important without all the added expense and risks that overstocking and obsolescence can bring. In the end, I believe these programs should benefit the dealer and not be a second parts warehouse for the manufacturer.

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

July 2018: Obsolescence: "How Does It Happen In The First Place?"

Talking about parts obsolescence is nothing new of course, and to take it a step further, we should be sick and tired of this topic still being a topic of concern. The unfortunate reality of it all is this topic may never go away if we don't eliminate the root causes of parts obsolescence.

I am definitely not one who just accepts things as they are merely because "that's the way it's always been", especially when it comes to this topic. If any Parts Manager has this frame of mind, then maybe it's time to not only think outside of the box, it's time to "get out of the box" altogether.

One added note before we begin, I have some great business associates and partners out there that actually work with, and help dealers "buy down" their obsolescence and it's their business to do so. But, as a Parts Manager for many years, my goal was to prevent obsolescence from happening in the first place.

Before we get into the contributing factors that create the obsolescence mess in the first place, I think we need to look into the benefits of an "obsolescence free" parts inventory. Imagine if you will, just for a moment, what it would be like if the "Smart Parts" Manager was "obsolescence free".

Picture this if you will...

The "Monkey On The Back" has been lifted and now the dealers' second highest asset is experiencing gross and true turns at, or above the NADA Guidelines. Parts profits rise as now we can experience the highest margins and earn the highest discounts and allowances possible.

Without the obsolescence, my sales activity is much higher, to the point that sales activity in the 0-3 month category meets, or exceeds 75% of the total activity and in the 4-6 month category, sales activity meets, or exceeds 23%, both NADA Guidelines in each category.

This would mean that 98% of the inventory is active in the 0-6 month category! In addition to that, if we maintain a Level Of Service 90%-95% and a Stock Order Performance Level at 85% - 90%, our "First Time Off Shelf Fill Rate" HAS to be 85% -90% as well!

That being said and in addition, the Service Shop Productivity can be maximized, from a Parts Support standpoint, thus increasing overall parts and labor sales and profits. Parts purchase power is at its peak and achieving top levels of manufacturer parts compliance and loyalty are also maximized to gain the highest discounts available.

Even though the topic is obsolescence, I think anyone of us can imagine all the above scenarios, IF we didn't have to deal with obsolescence in the first place. We also have to keep in mind the cost savings from outside purchases, inventory acquisition and holding costs, physical inventory costs, etc.

So now that we have had a moment to dream of an "obsolescence free" parts inventory, let's take a look at what causes parts obsolescence in the first place. We will look at each factor individually and explain how each of them impact this obsolescence "end result".

First and foremost, Parts Manager Training is the Number One contributing factor to parts obsolescence. As you will see in each of the following contributing factors, if we don't know what these factors are, their terminologies, definitions, or even how to manage them, we will have parts obsolescence.

If we can't read or understand the D.M.S., (Dealer Management System) Parts Monthly Management Report, or even understand what the results represent, we can not manage the parts inventory, especially in the area of parts obsolescence.

The second "contributing factor" is Non-Stock Parts as parts that haven't even met phase-in criteria are almost a sure bet to end up in the obsolete category. Parts that are manually ordered, special order parts that are not sold, some V.M.I., (Vendor Managed Inventory) parts that have not met the recommended overall demand are all examples Non-Stock Parts.

Outside of Parts Manager Training, Non-Stock Parts in inventory is the biggest obsolescence contributor. NADA Guide on Non-Stock parts in inventory should be 10% or less, but in many parts departments, especially those I have been affiliated with, the percentage of Non-Stock parts in inventory exceeds 50% and even more.

In my opinion, this huge rise in Non-Stock parts in inventory over recent years is definitely due to Parts Managers diving too deep into their manufacturers Vendor Managed Inventory, (V.M.I.) Stock Replenishment Programs, which we will review further as we continue through our obsolescence "contributing factors".

Speaking of which, our third "contributing factor" are the Parts Phase-In Parameters. If we don't have the proper Phase-In Parameters, we could be actually "phasing in" an obsolete part right from the beginning. I have personally witnessed many dealers' Parts Phase-In Parameters that will phase-in a part after only one or two demands in a twelve month period.

The Phase-In Parameters need to be consistent over a shorter period of time with more demand over a shorter period of time, far less than twelve months, and if possible, measuring both total demand and demand within a given month.

Some D.M.S. (Dealer Management Systems) software systems can actually measure phase-in demand over a period of days, instead of months and can be "weighed" over the a shorter, more recent time period.

Our fourth "contributing factor" to obsolescence is Parts Days Supply criteria. Once a part has met phase-in criteria, the Days Supply criteria takes over the parts life cycle, stocking levels and best reorder points.

During the part's life cycle, the stocking levels can vary extensively and if not managed properly, high quantities of a part can remain, long after a part has phased-out, ultimately becoming obsolete.

Calculating the proper Days Supply is a simple math equation that unfortunately, many Parts Managers don't even know how to figure out.

Many Parts Managers confuse Days Supply with parts quantity. A single Days Supply of a given part could be a quantity of one or a hundred, both equate to a given part's Days Supply.

Calculating Days Supply is simply math as I just mentioned. For example; if a part sells twelve times a year, or annually, this means the part sells on average, once every thirty days. The "Low Days" Supply, or "Best Reorder Point", (BRP) would then be thirty days.

Calculating the "High Days" Supply, or "Best Stocking Level", (BSL) is simply multiplying the "Low Days" Supply by 50% - 150%, pending demand according to the Mike Nicoles Group.

The more a part sells, the lower the "Days Supply", or "Best Reorder Point", (BRP) number. The "Low Days" Supply, or "Best Reorder Point", (BRP) is as follows;

Total Annual Parts Piece Sales Divided By 365 Days A Year 

Number five on our list are the Parts Phase-Out Parameters, which often go unnoticed as Parts Phase-In Parameters are usually the primary concern for Parts Managers. Although, the Parts Phase-Out Parameters are just as important.

Once again, I have witnessed many dealers' Parts Phase-Out Parameters set to far out. It is not unusual for me to see these parameters set at twelve months or even higher.

With today's parts life cycle far shorter than they were as little as twenty years ago, these Parts Phase-Out Parameters should be set at nine months or even less. Parts reaching phase-out status at nine months or less can send a trigger to the Parts Manager and will have less of a chance of hitting the "over 12 Month" category as the three month "buffer" allows the Parts Manager to act quicker to make sure those parts are not reordered for stock replenishment.

Up to number six on our list of obsolescence "contributing factors" with Lost Sales Reporting. Now, one might ask why we would have Lost Sales Reporting on our list and of course, there is a valid reason. If we are not posting Lost Sales, we are missing out on all the "true demand" available to us.

Parts demand is defined as the combined total of Sales and Lost Sales and if we miss those demands from Lost Sales Reporting, we risk the chances of more outside purchases, manual orders, special orders and Yes...more risk of building obsolescence. Total demand helps the "Smart Parts" Manager in stocking only "qualified" parts at phase-in.

Number seven on our list of "contributing factors" to obsolescence is our Parts Special Order Policies, as this one should be obvious to most Parts Managers. If we don't have a Parts Special Order Policy, it is a sure recipe to accumulating parts obsolescence.

Special Order Policies should include deposits and/or prepayments for all Special Orders Parts that fall into the "customer pay" category. Special Order Parts that fall into the "warranty" category should only be ordered if the vehicle is in the shop or has a "future appointment" set by the Service Department BEFORE the customer leaves.

All Parts Special Orders should be approved and signed to maintain accountability and follow up. They should also be accompanied with consequences, cost and a time limit to complete the sale of the Parts Special Orders. Parts returned to the manufacturer must carry a return fee to either the customer, or department responsible for returning Parts Special Orders.

Also, as weird as it sounds, technicians DO NOT ORDER parts!...they REQUEST parts, as the Service Advisor and Manager authorizes the Parts Special Order. They are also responsible for getting the authorization and parts order priority from the customer. The Service Manager and Advisors are also responsible and held accountable the completion of the repairs.

Our last obsolescence "contributing factor" probably impacts our obsolescence today more than any of our other "contributing factors", even though all the previous are ranked above this one. Our number eight obsolescence "contributing factor" is the manufacturers' Vendor Managed Inventory Programs, (V.M.I.).

Ever since the manufacturer got into the game, parts obsolescence has exploded in many dealerships that have a manufacturers' V.M.I. Stock Replenishment Programs. Even though there are benefits to all V.M.I. Programs, there are many risks and high potential for excessive obsolescence and even overstocked inventory amounts of active parts.

Many Parts Managers are not even creating their own stock orders utilizing their own D.M.S. and relying on the manufacturer to determine what their stock replenishment needs are. These V.M.I. Programs can determine what a "select group" of dealer parts demands are, but not all the "individual" dealers parts demands, and what qualifies as a V.M.I. controlled part.

So what ends up happening very often is the Parts Manager may be stocking V.M.I. "qualified" parts that don't even sell, or even meet their own individual stocking requirements and phase-in parameters. Even though they may be protected, often times they still end up in the obsolescence category.

These parts that are so called "protected" still costs the dealer in acquisition and holding costs along with return fees. The other "unseen" cost of holding parts inventory is the lost revenue and gross by these parts occupying shelf space of parts that may turn several times annually.

On the other side of that, many parts that have met their own individual store's stocking requirements and phase-in parameters are not stocked or replenished on a normal basis because they haven't met the overall V.M.I. Program qualification standards in the group as a collective. 

The "art" of managing a parts inventory seems to be slowly slipping away from many Parts Managers as they don't even utilize their own D.M.S. as intended. Creating a D.M.S. Stock Order is still as crucial as it's always been to determine individual store's stock replenishment needs. There is more out there than just the manufacturer's V.M.I. Program.

One thing I have always maintained and believed is that I have never been one to stock inventory to "protect" and to be the manufacturer's second warehouse. I have always purchased and stocked parts to sell, not to hold and protect. That's a definite recipe for accrued obsolescence and overstocked inventories that will repeat itself year after year....

"Are you carrying too much obsolescence?....just remember, you have to stop the bleeding first, then you have to know the factors that cause obsolescence in order to eliminate it completely."

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 2018: Issue 100: "The Best Of The Best"

For over eight years and counting, ACG "Smart Parts" is and has been a monthly blog post dedicated and devoted to today's "Smart Parts" Manager. Our mission in the beginning and still today is to provide the latest information, ideas, insight and training tips for the Automotive Dealer Parts Manager.

We have also provided many Parts Managers our FREE "TakeAways" over the years. These "TakeAways" consisted of what I call "tools of the trade", Excel Report Calculators designed to help Parts Managers sharpen their skills in many various areas of inventory, financial and personnel management.

As we hit this month's 100th issue of ACG "Smart Parts", we wanted to take a look back at some of our most popular, or as they say in the blogger world, most "clicked on" blog articles by our "Smart Parts" Managers. We will briefly revisit these blog posts in descending order from the most recent, all the way back to the beginning.

Each of our monthly blogs dating all the way back to the beginning are still readily available today, just in case you may have missed them, or perhaps you just starting following us at;

http://smartpartstraining.blogspot.com

Many Parts Managers today still tell me that they will often times go back over the years to revisit previous issues that provided them vital information and training from Dealer Management Systems, (D.M.S.) issues, Definition of Terms, Parts Goals and Guidelines, Industry Updates, Leadership and Management Training, etc.

So, "Smart Parts" Readers, let's take a look back to some of our most popular "Smart Parts" blogs and let's see if any may be some of your favorites! You never know....we may rediscover some information that may be useful today as we take a "descending" look back over the years!

March 2018: The Top 5 "Unseen Costs" Of Managing The Parts Inventory

This popular blog illustrated some of the costs of managing the parts inventory that most, or at least many Parts Managers never even considered because for the most part...they go "unseen". We answered questions such as;

• How much does  "overstocked" inventory really cost?
• What are "false profits" in the area of Discounts and Allowances?
• What are, and how do I calculate Inventory Acquisition & Holding Costs?
• How much do low "First Time Off Shelf Fill Rates" cost in Lost Service Productivity?
• What is the actual cost of Obsolescence versus Active Parts with Higher Turn Rates?

For most of us, we never review these "unseen costs" because they don't stick out on any reports, other than maybe obsolescence, but we hardly ever think about what it REALLY costs if we carry too much obsolescence.

February 2018: Vendor Managed Inventories: "Compliance Or Obedience?"

This "Smart Parts" blog realy drew some attention as we looked at various manufacturers Vendor Managed Inventory Programs, (V.M.I.). We looked at how many Parts Managers today are TOTALLY relying on the manufacturer to replenish their stocking inventory and the dangers that may lie within when relying solely on the manufacturer.

My first question to Parts Managers who rely solely on the manufacturer has always been;

"What did you do before there was a V.M.I. Program offered by the manufacturer and how did you replenish your stocking inventory?"

It just seems that more and more Parts Managers today are being more "obedient" to the manufacturer, but calling it "compliance". Whatever happened to creating your OWN stock order on your OWN D.M.S.?

The end result in most of these situations is that the manufacturer is happy, but the individual dealers' "First Time Off Shelf Fill Rate" suffers. Have you ever asked yourself one or both of these questions;

• "Why is the manufacturer telling me that I should stock this part when I've only sold one in the last year and a half?"
• "Why isn't this part number qualified on my V.M.I. Program?....I sell a ton of them!"

Inventory Protection and Automated Stock Orders are the two top "selling points" by these manufacturers, along with more earned discounts, allowances and return accruals following right behind. Even though these are great benefits, we need to use the V.M.I in addition to our own D.M.S.

As a Parts Manager, my goal in buying parts was to "sell them", not "hold and protect them" over a period of time. At least, that's what we did "back in the day" well before these V.M.I. Programs were introduced.

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

Another popular issue really addressed a simple topic, but one that also seems to go unnoticed today. When was, or have you ever calculated your individual store's Gross or True Turn Rate? Believe it or not, there are still many Parts Managers that don't even know how to calculate Gross Retention Percentage.

With the on-going advancements in Dealer Management Systems, (D.M.S.), Computers and Software in general, it seems that we have gotten away from the basics. Knowing and doing the math is less popular today because we don't have to!

The problem is with all these calculations and math being done for us is that we end up not even knowing if the numbers, percentages and results are even accurate in the first place because no one knows how to recheck them for accuracy. This month's issue is definitely a "reread", unless you missed it!

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

This article was also very popular because it touched on a topic that many Parts Managers are concerned about today. With the quality of new vehicles getting better and better each year, where is our parts profits going to come from?

Back in the day, maintenance intervals were every three months and/or 3,000 miles and today, we are lucky to see our customers coming back into our dealerships at least twice a year as maintenance intervals get longer and longer.

On the other hand, in this article, we provided lots of research and information on the "Recall Boom" in the country with air bags leading the charge to our newly expanded parts profit area. Recall parts sales and profits were hitting an all time high and in many dealerships, the number one single parts profit area.

This one was back in June of 2017....Where will our future of parts profits take us in 2018 and beyond?...keep reading and we will address that one in the future!

April 2016: "Is Wholesale Really Worth It?"

In this article back in April of 2016, we touched on this age old question that still haunts many Parts Managers today. The only thing different with this article was that we actually provided a "FREE TakeAway" which was an Excel Calculator that would answer this question for each individual automotive dealership today.

This Excel Calculator brought in all the indicators, factors, costs and benefits to all the areas that affect the overall net, net profit of the parts wholesale business. In many cases, there are a LOT of dealers out there that are actually losing money in wholesale after everything is factored into the equation and they don't even know it.

Even though many Parts Managers and Dealers like the benefits of all the discounts, allowances, return accruals and "cash flow that is generated by the extreme volume, many "unseen" costs go far beyond the benefits that are "seen".

August 2014 - October 2014: A Three Part Series: "The Ultimate Parts Manager" 

This three part series on what I referred to as "The Ultimate Parts Manager" covered all the ingredients of what it takes to be the "Best Of The Best". We took a detailed look at each individual ingredient listed as follows;

• Education and Personal Background
• The Right "Belief System"
• The Right Personality and Personality Profile
• Leadership Skills
• Goal Orientation
• Having The Proper Business "Ethics"
• Salesmanship
• Having The Right People
• Having The Right Process

Having the right ingredients is the key to being "The Ultimate Parts Manager"

April 2014: "Are You Hiding From Your Customers?"

Now, this one caused a little stir back in April of 2014 for sure! For many years, the Parts Manager is pretty much in the background, especially when it comes down to customer service in the Service Department.

I've witnessed and seen many disputes over the years between Service Advisors, Service Managers with the Parts Department in general, with the Parts Manager when there are issues over pricing, parts not in stock, or special order parts that didn't arrive in time for a scheduled customer appointment.

The communication between the Parts and Service Departments is crucial in my opinion and the Parts Manager should be a key player in customer satisfaction. Many Parts Managers that I have met over the years do not even engage the Service Customer.

In my opinion, it's time that Parts Managers take an active role, right along side of the Service Manager when it comes down to pricing policies, CSI, and selling skills, much like the Service Advisors and should be trained to be a "partner" in all Fixed Operation capacities.

It's time for Parts Managers to "get out of the closet" and experience what the customer experiences, along with helping the Service Department work on it's number one goal and that is Customer Retention.

After all, in most dealerships today, 65% - 70% of the Parts Department Gross Profit is generated in the Service Department. Another great "reread" and reality check for sure!

February 2013 - December 2014: "The Parts Department's Top 10 Indicators"

This ten part series, in my opinion, really boosted ACG "Smart Parts" back in 2013 as we devoted almost a whole year in training new Parts Managers and perhaps, re-educating Parts Managers on Parts Manager basics, which I call "Parts 101"...

Each month, we focused on one top ten indicator which we counted down from number ten, all the way to number one. In order, we took, in my opinion,, the most important indicators, or "topics" that a Parts Manager really needs to be educated on and know the terms, definitions and most importantly, how to manage these top ten indicators.

Without taking anything for granted, we defined and detailed each indicator without exception and to educate and inform Parts Managers the importance in understanding each indicator. Believe it or not, we had a lot of positive comments from Parts Managers out there, with the top comment being;

"I never knew this stuff before...I've been a Parts Manager for years, but no one has ever explained any of this stuff to me before now....Thanks!"

Here are the top ten indicators from number ten down to number one in my opinion;

10.) Parts Department Net Profit

  9.) Parts Gross Profit & Parts Gros To Sales

  8.) Expense Management

  7.) Inventory Gross & True Turns

  6.) Sales Activity 0 - 3 Months

  5.) Controlling Obsolescence & Managing Special Order Parts

  4.) Lost Sales & Emergency Purchases Reporting

  3.) Sales & Gross Per Employee

  2.) Level Of Service, (Overall Off Shelf Fill Rates)

  1.) "First Time Off Shelf Fill Rates"

Number One is number one for a reason because it covers all aspects of the other nine "Top Ten Indicators." If we are selling parts, "The First Time" at a rate that is 80% or higher, we are then maximizing our sales and profits, maximizing the dealers' investment and providing the best customer service that keeps the customer coming back.

These are just a few of the "Best Of The Best" as we had many more that date back to the beginning in April of 2010. We are just getting started here at ACG "Smart Parts" with many more months of information, insight, opinion and training tips as we move on to the next 100 issues!

As mentioned earlier, all of our monthly ACG "Smart Parts" blogs are readily available and this "library" of parts blogs are timeless and may come in handy as your reference source for many years to come!

As my Service Partner, Guy Salkeld always says;

"Training is the Key to Knowledge and Skill, but Desire is the Key to Success!" 

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 2018: Getting Rid Of Obsolescence Forever: "Is It Possible?

If anyone were to ask me what has changed in our parts industry over my last 38+ years, particularly in automotive dealerships, I would have so many to list that I could spend one whole blog on the changes. But, there is one topic that would never make this list and that is parts obsolescence.

One might think with all the technology, innovations and manufacturer assistance with Vendor Managed Inventories, that we would have this "Monkey On Our Back" issue called parts obsolescence issue put to bed by now.

Even though we hear new terms like inventory protection and idle inventory management along with all these new fancy Dealer Management Systems, (D.M.S.), obsolescence is still a major concern for many dealer owners and parts managers. In my opinion, it has actually gotten worse over the last several years.

There are many logical reasons for these increases in obsolescence, such as increased part numbers per manufacturer due to the increase of vehicle models, increased vehicle components, and shorter part coverage lifespan just to name a few.

All that being said, we are basically talking about part numbers that have to follow the same guidelines and parameters today as they did years ago.

Parts still have to be tracked by demand, phased-in to the D.M.S, carry the proper, mathematical days supply, and phase-out when demand diminishes, then they are returned to the manufacturer or scrapped.

So, why are we still dealing with this "Monkey On Our Backs" called Obsolescence? 

In order to come up with the right solution(s) to any problem,  we need to begin by identifying how the problem got there in the first place. In the area of parts obsolescence, as we mentioned, there are many reasons, or causes that can lead to unacceptable obsolescence amounts.

To me, we have to define what obsolescence is in the first place, and not to be confused with the term "idle inventory".

Quite simply, all parts are idle until they sell and in my opinion, we should be more concerned with what has not sold over a period of time, which, for the most part has been set at 12 months no sale.

In order to get rid of obsolescence forever, we will need to have an action plan, which consists of four basic steps;

1.) Identify The Obsolescence: "How Did It Get There?"

2.) Make The Appropriate Adjustments: "Stop The Bleeding!"

3.) Make A Decision: "Get Rid Of It!"

4.) Maintain Control: "No More Obsolescence!"

We will walk through each one of these steps individually, in detail in order to accomplish the mission of getting rid of this "Monkey On Our Back" forever. We will also provide the proper sources and resources needed to staying obsolescence free.

Let's get started...

1.) Identify The Obsolescence: "How Did It Get There?"

Believe it or not, identifying obsolescence can't go understated even though one would think that this should be obvious to most parts managers. I mentioned earlier that obsolescence is sometimes referred to as "idle inventory" and that alone can be confusing.

I have always followed my mentor's guidelines as Mike Nicoles has always defined obsolescence with these simple truths about parts with no sales over the course of a year and beyond;

• Parts With No Sales After 6 Months = 49% Chance Of No Future Sales
• Parts With No Sales After 9 Months = 67% Chance Of No Future Sales
• Parts With No Sales After 12 Months = 98% Chance Of No Future Sales

These numbers and percentages have held true for years and to me, should be where we set the bar on what is truly obsolete in our inventory. The chance of selling parts over twelve months is minimized to just 2% and with those odds, I would consider all parts over twelve months obsolete and should be dealt with.

As far as how these parts got to this point of being obsolete in the first place, in my opinion, is more of a problem today than it was years ago.

Many parts managers today have "given up the reigns" of controlling their parts inventories to the manufacturers, and some, unfortunately have never learned, or forgotten how to make the appropriate adjustments in their Dealer Management Systems, (D.M.S.)

Phasing parts into the D.M.S. is one thing, but if the Phase-Out parameters are set beyond 10 months, obsolescence can be pretty much guaranteed. The idea should be to stay ahead of obsolescence game by keeping these parts OUT of the 12 months no sales category.

Another added "obsolescence contributor", if you are a parts manager that utilizes a manufacturers Vendor Managed Inventory, (V.M.I.), are these parts that we comply, or "obey" to stock, even if they may have not met phase-in criteria in your dealership.

The most often asked question that I receive is..."How do I get rid of my obsolescence?" and I always have to respond with..."I can help you with that, but...we have to Stop The Bleeding first"...

Let's move on to Number Two....

2.) Make The Appropriate Adjustments: "Stop The Bleeding!"

"Stopping The Bleeding" is probably the most important step in becoming obsolescence free forever. Believe it or not, obsolescence starts even before any part hits the shelf. There are several questions that we need to ask ourselves before we even "shelf" any part that could become a high obsolescence risk....

• Should we even be stocking this part in the first place?
• Have these parts met my own phase-in and stocking criteria?
• Are my phase-out parameters aggressive enough?
• Are we being "compliant" or are we being "obedient" to my Manufacturer's V.M.I.?
• Are we more concerned about inventory protection than actual parts sales?
• Are we relying on the manufacturers' stocking recommendations more than what our own Dealer Management System, (D.M.S.) recommends?

In order to "Stop The Bleeding", we need to have the right answers to all of the above questions and more. We  also need to have strong policies and procedures to stop the build up of obsolescence coming from improperly ordered parts and special order parts not picked up, etc.

In addition to having the right phase-in and phase-out parameters, we also need to have the proper days supply in all annual piece sales ranges to minimize overstocking, which could eventually increase obsolete amounts once these overstocked parts hit the 12 months no sales category.

3.) Make A Decision: "Get Rid Of It!"

Once we have "Stopped The Bleeding", we can now move on a make some decisions on just how we get rid of these obsolete parts that are in the 12 months no sales category. There are many options that are available to us, including some new options that some "Smart Parts" Managers may not be aware of.

With several options available to us, I feel we should list these options in the order of priority as well as which of these options will give the dealer the best return on investment on the obsolescence while minimizing the losses.

a.) Utilize all manufacturer return allowances and return policies available. Even though there are very few dealers that can accrue enough return allowances to match their obsolescence, maximizing the "dollar-for-dollar" return is 100%, or perhaps even more with price increases over time.

b.) My second choice for ridding the obsolescence would be networking the inventory through various websites such as OEConnect, Cash Discovery Programs, Cobalt, Parts Voice and Ebay to name a few. 

One of the latest and most successful programs out there is the "North American Dealer Parts Exchange", (nadpe.com). As their website explains, this program works much like match.com, where your inventory is matched up with dealers that would purchase your obsolescence in exchange for purchasing fast moving parts that may be considered obsolete in someone else's inventory.

Here's a clip and some quotes from their website;

"WHAT WE DO FOR PARTS MANAGERS"

"NADPE is a Dealer-To-Dealer cloud-based marketplace that allows you as the Parts Manager to trade away your Slow-Moving, Idle, and Obsolete parts inventory, for Fast-Moving, Active parts inventory you sell everyday.  The trades are done between dealers of the same brand within your region, using the massive data we collect from each dealership.  We effectively present bulk matches for your Slow-Moving Parts to be reallocated, and redistributed to the right dealers – but not without your review and approval first.  Imagine if you only knew what you could move between other dealers in volume, and without the work of collecting the data to find out."

"HOW IT WORKS"

"We take all the dealers within our network, and cross-match your Slow-Moving inventory with the Fast-Moving inventory data of every dealer in our database – finding bulks matches.  We are similar to Match.com – but for Parts Inventory."

"All the parts you wish you could return to the manufacturer, and can’t, with the lack of Parts Return Allowance, NADPE supplements your ability to move just as much with other dealers in your region.  Many dealers use NADPE to essentially double their return dollars, and use NADPE in tandem with their Manufacturer’s return program."

"Unlike any other option available to Parts Manager’s in the industry, NADPE allows you to exchange those Idle Parts for dealer cost, without losing a single penny."

c.) My third choice would be selling off the obsolescence for "pennies on the dollar" with either other dealers that have accrued more return dollars than they need as they may be very big into wholesale and can afford to buy up other dealers' inventories.

There are also companies out there such as Dealermine that will evaluate and buyout dealers' parts obsolescence for approximately half the actual value, thus providing "dealer cash" that can be turned into fast moving inventory which will eventually yield higher return on investment for the dealer at several inventory annual turns.

d.) Lastly, if the dealers' parts inventory has a lot of "blue sky", meaning that the "controlled inventory" reported on the Dealer Management System, (D.M.S.) is at a higher value than what is reported on the front page of the financial, then the obsolescence can simply be "written off" and scrapped up to the "blue sky" amount.

4.) Maintain Control: "No More Obsolescence!"

After we have identified our obsolescence and how it got there in the first place, "stopped the bleeding" and finally gotten rid of our obsolescence with the best return on investment, it's now time to keep it from ever happening again.

I do believe that we will always have parts that slide down into the 12 months no sales category, whether it's parts that are non-returnable when we purchase them, low cost parts below manufacturer return limits, accessories, etc.

With that said, we will need to implement a program and set up what I call a "Scrapping Account" each month where we can set aside funds that will be there to scrap those parts once they hit that fateful 12th month.

This "Scrapping Account" can be set up quite easily in Accounting in the "Parts Inventory Adjustment" account. Each month, a set percentage of the parts total cost of sales is credited to the parts inventory adjustment account and charged back to the parts department monthly gross.

To offset this reduction in gross profit, we will adjust and increase our parts "cost plus" escalation matrix on "captive parts" in the $10.00 - $30.00 parts cost range by 10%.

The realized net profit from the increase of 10% will result in an approximate 3% net to gross number. Approximately 80% of our total parts sales comes from this $10.00 - $30.00 cost range.

For example, if I wanted to get rid of $30,000.00 in obsolescence and I've exhausted all my options in Step 3., I can could set up and utilize my scrapping account. The breakdown on how this all works is as follows;

Average Month's Parts Cost Of Sales: $100,000.00

Inventory Adjustment Amount Credit: $3,000.00 (3%)

Additional Gross Profit From 10% Escalation Matrix Adjustment: 3%

Gross Profit Debit Amount: $3,000.00

Total Amount Of Obsolescence: $30,000.00

Months To Eliminate and Scrap Obsolescence: 10

In my opinion, parts obsolescence should be a "thing of the past" and never be allowed to happen if we utilize all of our options and a "mind set" that it can be done.

We will even provide our ACG "Smart Parts" Excel Scrapping Calculator to help those "Smart Parts" Managers calculate the right percentage to use in your "Parts Inventory Adjustment" account based on your individual obsolescence amounts. 

Email Us Today To Request and Receive Our FREE "Smart Parts" Take Away!

ACG "Smart Parts" Excel Scrapping Calculator

dave@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

  

April 2018: "Are We Getting The Right Gross Profit On The Right Parts?"

Opportunity comes in all shapes and sizes, or in this case, all parts gross retention ranges, and in my opinion, capitalizing on our gross profit opportunities can only be measured by one's ability to recognize it even exists in the first place.

Most "Smart Parts" Managers have their own pricing strategies and expectations on parts gross profit, whether we are talking about overall parts gross in dollars, or parts gross retention in general. In my opinion, this is where the problem begins for many parts managers.

We have grown so accustomed to accepting "the way it's always been" when it comes down to gross profit dollars and gross profit retention. Certain parts are priced to bring certain gross retention and that's been our expectation for years.

Here's where I believe we have been "missing the boat" as we haven't taken into consideration for the most part the "separation" that needs to exist between actual gross profit dollars and gross profit retention.

In other words, would we rather have a 40% parts gross retention on $200,000.00 in parts sales, or would we rather have a 20% parts gross retention on $1,000,000.00? I think the answer is quite simple, but this is what I'm referring to.

So, here's the question.....

"Are we capitalizing on ALL our parts sales opportunities by getting the right gross profit on the right parts?"

The key word in the above phrase is "ALL", as none of us really know how much opportunity from lost sales are missed due to overpricing certain parts. We can't know what we don't know as many lost sales go unknown and undetected. 

Maybe the customer calls another dealer, or another parts vendor to acquire a part because our part may be priced too high, or maybe just the reputation causes the lack of opportunity and no one would know the difference because the call didn't happen in the first place.

This is why I felt the need to "drill down" ALL of parts gross profit retention percentage ranges to see if we are actually getting the "Right Gross On The Right Parts". This is where it all starts as setting and getting the right gross profit retention determines the actual overall gross profit dollars.

We will also take into consideration where our parts sales sources come from, ranging from repair order sales to wholesale and retail sales within our dealerships and all outside dealership sales on all ranges of parts.

The most important part of this exercise, in my opinion, will be "where we draw the line", and make the separation from gross retention percentage to actual gross dollars as I referred to in my example earlier between 20% and 40% gross retention.

We will start out with parts sales that we would expect to retain a lower gross percentage all the way up to the parts sales that we have more opportunity to retain more parts gross. Determining these parts gross ranges is what will ultimately determine how much opportunity and overall gross profit dollars we can capitalize on.

Here We Go!....

Negative to Zero Gross Profit Retention Range:

That's Right!...who would ever think that we would have a category of "gross profit" that doesn't have any gross profit built in to begin with? Quite simply, if you are a "Smart Parts" Manager that deals in high volume parts sales that requires high volume purchases, there is a LOT of gross profit to be made from high volume purchase from the manufacturers.

Much like in new vehicle sales, high volume purchases incur high volume discounts which are 100% profit. So, in other words, the parts manager can sell parts at, or below cost just to gain the purchase discounts from the manufacturer and often times, these "monies" generated from purchases can be the difference of making or breaking the "bottom line".

Parts Sales In This Category:

Major components such as engines, transmissions, differentials and transaxles. Collision parts sold either at wholesale, or if the manufacturer offers wholesale compensation, and parts sold at cost to outside packaging vendors to be resold in the aftermarket, etc.

Note: High inventory turns, both gross and true are necessary and crucial in this category in order to realize overall gross profits retained.

0% - 15% Gross Profit Retention Range:

This gross profit retention range incorporates some of the above categories as it pertains to high sales volumes as well as some other parts sales that any size dealership parts department. It also incorporates parts sales that have a "required" low gross profit retention just to remain competitive. 

One example could be some highly competitive "lost sales leaders" such as "Lube, Oil & Filter" Services and others that even though a low gross profit is initially realized, the overall gross dollars retained could be substantial.

In the case of "Lube, Oil & Filter" services alone, as much as 10% - 15% of the parts department's monthly overall gross profit "dollars" are generated from this one single service operation in some dealerships. Low gross retention, but very high sales volume.

Even with a combined average of $7.00 to $15.00 gross profit dollars that are realized from the oil filter and oil sold from each "Lube, Oil & Filter" Service, it all adds up at the end of the month as this service is the number one "elective" vehicle service in the Service Department.

After all, there wouldn't be all those aftermarket lube shops out there if they weren't making money doing this primary service in the first place, and we can also include tires as I don't believe there is a shortage of aftermarket tire stores out there either.

Parts Sales In This Category:

Competitive parts, such as oil and air filters, oil, tires, batteries, wholesale collision parts, some major component parts such as engines, transmissions, transaxles, differentials, etc., including manufacturer controlled gross profit major components sold under vehicle warranty.

15% - 30% Gross Profit Retention Range:

Even though competitive and wholesale parts sales still fall in this category, we can start to "dial up" the gross profit retention percentage a little bit more. Some service specials still fall into this category, but they may have a little more profit opportunity as well.

Wholesale parts sales are of their own breed and in my opinion. Achieving the proper gross profit retention, while maximizing all sales opportunities can be determined by insurance companies, the market and the competition in a given market. 

Many studies and calculations have been done, including my own, on the actual cost of venturing into the wholesale business in the first place, so many other cost considerations need to be understood. Gross profit retention in wholesale parts sales is a whole other ball game.

Other examples in this category would perhaps be brake pads and rotors, packaged interval maintenance services and "a la carte" services such as coolant, brake fluid, transmission fluid exchanges, power steering fluid exchanges, etc.

The determining gross retention percentage factor in this range, along with the next gross profit range coming up are, in my opinion, the most crucial to the overall parts gross profit dollars. By their numbers, they are by far the leaders in overall parts sales opportunities. 

The problem is that many parts and service managers "overprice" these parts and services, trying to get, believe it or not, too much gross from these competitive areas resulting in lost sales due to outpricing themselves out of the market.

If this were not true, we wouldn't have all the competition from aftermarket service facilities and aftermarket parts stores. We seemed to have been geared to a "set gross profit retention" range and we end up losing business due to this fact.

There are many other parts gross profit retention ranges yet to come where we can achieve our overall goals in gross profit dollars and overall parts gross retention. 

Parts Sales In This Category:

Brake pads and rotors, cabin and air filters, batteries, wiper blades, coolant, brake fluid, power steering fluid, differential fluids, spark plugs, A/C coolant or freon, accessories, wholesale parts, (collision and mechanical), etc.

30% - 40% Gross Profit Retention Range:

As I mentioned above, many parts sales in this gross profit retention range can be categorized as some of the parts above along with some additional parts sales. As we move closer to the 40% parts gross retention range, we can now start to expand our gross profit opportunities.

These opportunities may require a higher skill level technician to perform some "captive" services and/or repairs such as steering, suspension and frame repairs, transmission and engine overhaul or replacement, air conditioning repairs, electrical repairs, etc.

The difference from the parts gross retention range of 30% to 40% is determined by the nature of these above services and/or repairs as being minor or major in nature. Minor services and/or repairs such as ball joint replacement, shocks and struts, some steering components, etc. would fall into the "minor" category.

Parts gross retention ranges on these "minor" component replacement parts would lean to the 30% - 35% gross retention range. The reason for the slightly lower gross retention range for "minor" component replacement is that we still have to "stay in the ballpark" with our pricing to remain competitive. 

The "major" parts component replacement parts would carry the higher parts gross retention, inching closer to the 35% - 40% range. These "major" component parts replacements tend to require a higher skill level to complete the repairs, thus, the parts retention range can move closer to the 40% range.

Parts Sales In This Category:

Engine mechanical and engine electrical components, transmission overhaul parts components, steering gears and racks, major suspension, wheel bearings, ABS parts and components, differential and transaxle parts, fuel injection and fuel induction parts, etc. These are what I call the "meaty parts".

                     40% Gross Profit Retention Range and Above:

We are now in the sales and gross range where we can make up our overall gross profit retention. These parts sales tend to be more "captive" and more "factory specific" giving us more opportunity in all parts cost of sales ranges. This is also where a parts escalation matrix can be applied.

Creating the right "cost plus" matrix is key to just how much parts gross retention can be achieved, anywhere from just above 40% all the way up to 100% or more, depending on the parts cost of sales range. The most important thing we have to keep in mind with this matrix is to understand customer perception, while utilizing basic, common sense.

We all know that we can get quite a bit more parts gross retention from "captive parts" that cost less than $5.00, but we still can't go overboard to the point that too much is too much. We also have to know where our biggest "opportunity range" lies by creating a Parts Ranking Report on our Dealer Management System, (D.M.S.)

This Parts Ranking Report can be generated on most, if not all Dealer Management Systems. The report should be generated in total piece sales and gross profit in a descending format, highest piece sales and highest gross retention down.

Generally, the biggest "cost of sales" range where up to 80% of our overall sales comes from the $10.00 - $30.00 parts "cost of sales" range. Once we determine the largest percentages of parts piece sales and gross profit retention, we can than structure the parts escalation matrix to maximize the highest opportunity ranges.

Another important factor for creating the "right escalation matrix" is that it has to be set up with a descending percentage, starting with the lowest parts cost range, with the highest percentage on the lower cost parts, with descending percentages as the cost ranges climb. 

Most importantly, the percentage needs to be "capped off" with one defaulting percentage at a cost of sales range of approximately $250.00. At which point, the matrix should reflect close to Manufacturer's Suggested List Price, which is usually cost plus 67%, which will result in a 40% parts retained gross profit.

Where many parts managers fail is they tend to include ALL parts in a particular "cost of sales" range, including some competitive parts along with "captive parts". Fast moving parts and even some medium movement parts need to be excluded from the matrix to remove the risk of lost sales and a negative customer perception.

This separation is usually done by creating different parts sources by annual piece sales. Many Dealer Management Systems have the ability to rank and separate parts in various annual piece sales ranges in order to keep the more "captive parts" separate from the faster moving, competitive parts.

Parts Sales In This Category:

Engine, Body Control, ABS modules, switches, relays, wiring harnesses and connectors, fuel pumps and fuel sending units, head bolts, front engine timing covers, pulleys and tensioners, certain engine and transmission "hard parts" and gaskets, driveline components, A/C compressors and clutches, manual transmission components, etc.

So, by these examples given, I think most "Smart Parts" Managers get the idea of what parts we need to "stay in the ballpark" on and what parts we can "hit it out of the ballpark" on. The most important thing that we all need to remember is....

"We can't spend a percentage, but we can spend overall gross profit, and in most dealerships that I know, it's the gross that pays the bills."

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 2018: The Top 5 "Unseen" Costs Of Managing The Parts Inventory

In most automotive dealerships, the success, or demise of how well the overall profitability and performance can be determined each month in the dealers' financial statement. Profit and Loss Statements are the clear facts and the overall evidence that is used to manage the successes and failures month to month.

Each month, most dealers hit their peaks of anxiety in the first ten days as office managers and comptrollers prepare the numbers each month to meet their deadline by the 10th of each month. Once revealed, the "dissecting" begins with the dealer reading the profit and loss statement from the bottom up.

For the most part, the facts are the facts as the financial statement reveals whether they can keep the doors open, or advance to the next level of financial achievement. Along with soaking in all the information in the financial, most dealers are also carrying the burdens of many families employed at their dealerships.

So, with all this said and revealed about the dealer financial statements, shouldn't we also be looking at ALL the opportunities in sales and profits as well as expense controls that may NOT be revealed in the monthly dealer financials?

Dealers often look at the opportunities in all departments based on their potential, but when it comes to expenses, if it isn't right in front of them, the "unseen" expenses and opportunities go by the wayside and never even come up in any discussion or meeting.

These "unseen" expenses and potential opportunities can not be more evident in the dealership then they are in the parts department. 

The parts department is also the one dealer department that most dealer owners are least familiar. In fact, many dealers are only concerned with the parts department profitability and perhaps inventory obsolescence amounts.

I believe it's time to expose these "unseen" expenses and potential opportunities in the parts department as we will break down the actual cost of "The Top 5 Unseen Costs Of Managing The Parts Department". 

Keep in mind that after we review these "unseen" costs, they are real as we will use a "real life" dealer scenario to determine these newly found "seen" costs of managing the parts department. 

We can also view these "opportunities" as a potential "cost" to the dealer because there is a cost for not capitalizing on potential missed opportunities in my opinion. 

First, lets list all important information that we will need to drill down this scenario in this example dealership which I will refer to ABC Motors, Inc. in Anytown, USA....

• Parts Inventory Value: $200,000.00, (Desired Inventory Level: $150,000.00 Based on Average Monthly Cost of Sales and NADA Guide of 8 Gross Turns Annually)
• Average Months Parts Cost of Sales: $100,000.00
• Average Months Financial "Discounts & Allowances": $3000.00
• Obsolete Inventory, (No Sales Over 12 Months): $25,000.00
• Overstocked/Excessive Parts Inventory: $25,000.00
• Parts Inventory Gross Turns: 6
• Parts Inventory True Turns: 3.5
• Overall Off Shelf Fill Rate: 95%
• Overall "First Time Off Shelf Fill Rate": 45% (Sales of Normal Stocking Parts)
• Number of Technicians: 10
• Combined Overall Shop Effective Labor Rate: $95.00
• Parts to Labor Ratio: 85%
• Total Average Number of Repair Orders Monthly: 1000
• Overall Labor Gross Profit Retention: 70%

This information will be needed when we start to analyze these actual "unseen" costs when we drill down the at least three of our "Top 5 Unseen Costs Of Managing The Parts Department".

Number 5: "Overstock/Excessive Inventory Amounts"

Once again, based on what we see here at ABC Motors, the dealers value of overstocked/excessive inventory totals $25,000.00. 

As we will learn when we get closer to our number one "unseen" parts department expense, annual parts "holding costs" average 29% annually, (excluding obsolescence holding costs of 7%). This percentage does not even include obsolete parts as we will also see when we get closer to number one.

Net "Unseen" Annual Expense From Holding Costs On Additional Inventory: $7,250.00

Number 4: "False Profits"

Number 4 in our countdown in "unseen" parts department expense is "False Profits". Even though a profit account is not really an expense, but by inflating fictitious gross profit, it will lead to false bottom line. This category of "False Profits" refers to the parts monthly "Discounts & Allowances" account on the dealers financial.

We also have to remember that the "Discounts & Allowances" account is for the most part "paper money" and not tangible unless the parts inventory meets annual gross turn guidelines set by NADA of at least 8 annual gross turns.

Based on the above information from ABC Motors, the dealer is realizing an average of $3000.00 per month in "Discounts & Allowances", but only achieves an annual gross turn number of six turns. 

NADA Guideline for annual parts gross turns is eight. This money in the "Discounts & Allowances" account is only real if expected annual parts gross turn numbers are at or above NADA Guide.

Net "Unrealized" and "Unseen" Annual Profit From 6 to 8 Gross Turns: $9000.00

Number 3: "Inventory Holding Cost"

Inventory Holding Costs is probably one of the most "unseen" expenses in the parts department. "Investopedia.com" defines Inventory Holding Costs as follows;

"Holding Costs are the costs associated with storing inventory that remains unsold, and these costs are one component of the total inventory costs, along with ordering costs and shortage costs. A firm's Holding Costs include the costs of goods damaged or spoiled, as well as cost of storage space, labor and insurance."

Determining the actual cost of holding inventory is defined and detailed by "driveyoursuccess.com" where they determine that annual inventory holding costs are a staggering 36% annually. 

This annual percentage is broken down as follows:

• Cost of Money: 3% - 5% (Difference From Interest Gains On Monies Invested In Inventory)
• Ruined Inventory: 3%
• Electricity Costs: 3%
• Lost Customers: 3% (Due To Inventory Not Available)
• Freight Costs: 7%
• Employee Overtime: 3%
• Damaged Inventory: 7%
• Obsolete Inventory: 7% (Includes Theft)

Total Estimated Annual Parts Inventory Holding Cost Percentage: 36%

Even if these stated Annual Inventory Holding Costs are higher than actual costs as I have always estimated them to factor in around 25% - 30%, they are real and as we can see, they can add up to a substantial amount in the area of "unseen" dealer cost.

So, in the case of ABC Motors, if we just calculate the parts inventory annual Holding Costs, not including their obsolescence and overstocked/excessive amounts, the number is still quite staggering.

  ABC Motors has $200,000.00 in inventory, even if we exclude the obsolescence, ($25,000.00) and their overstock/excessive inventory amount, ($25,000.00), the results are as follows...

Net "Unseen" Annual Holding Costs Expense From Active Inventory: $43,500.00

Number 2: "Lost Service Productivity"

I would have guessed that most "Smart Parts" Managers out there would have thought that Lost Service Productivity due to low "First Time Off Shelf Fill Rates" might just be our number one, but not quite. Even though these numbers that we will drill down are also staggering, we still have an even bigger number one.

In order to calculate and put the "unseen" expense, or in this case lost profits opportunities, we have to rely on excel calculators to come up with a feasible number in this category. 

Using the initial information that we started with in ABC Motors, we are actually able to put a number on what low "First Time Off Shelf Fill Rates" actually costs. 

Lost Service Productivity due to not having the right percentage of stocking parts on the shelf on the technicians' first visit can add up quickly. Keep in mind that contrary to the parts inventory, or even the new and used vehicle inventory for that matter...the technicians' time is a perishable inventory that we can never get back.

Based on ABC Motors "First Time Off Shelf Fill Rate" of just 45%, which is about the average in most automotive dealerships today, falls far short of NADA's recommended guideline of 85% - 90% in the area of "First Time Off Shelf Fill Rates".

A recent survey study revealed that the average technician, (excluding Express) works on an average of 4.5 to 5.5 vehicles per day, or repair orders per day. We also learned in this study that the average technician spends at least 25 - 30 minutes at the back parts counter each day.

Excluding those dealers who have a parts delivery system to their technicians, this time spent at the parts department is in my opinion, pretty respectable, even though I have met many service managers say that this number is much higher. 

Even still, for the sake of coming up with a valid "Lost Productivity" number due to low "First Time Off Shelf Rates", I'm okay with using this latest information from the study. 

The basis of my calculations will be based on the additional time spent at the parts counter due to ABC Motors "First Time Off Shelf Fill Rate" at almost half, (45%) of the recommended NADA Guideline.

After putting the excel calculator to work, the result of the added time at the parts counter, extra technician steps, moving vehicles in and out of the shop, or waiting additional time for parts to track down the parts from outside sources added up to 3.2 hours of lost productivity each day for the 10 technicians on staff.

Once we added up the lost productive hours each day and the lost parts sales based on current ABC Motors parts to labor ratios, current parts and labor gross margins, and an average overall effective labor rate of $95.00, it didn't take long before the overall lost gross profit was finally revealed.

Total Net "Unseen" Cost To The Dealer In Unrealized Profits: 
Monthly: $8,299.00  Annually: $99,593.50

At last, we arrive at our number one "Unseen" Cost Of Managing The Parts Department. Actually, our number one should not be a surprise to "Smart Parts" Managers. What may be a surprise is the actual net "unseen" cost AND missed opportunity that really costs the dealer due to simply "not knowing"....

Number 1: "Obsolete Inventory"

So!...how could "Obsolete Inventory" be numero uno when ABC Motors only has $25,000.00 in obsolete inventory over twelve months?

First of all, based on the information from "driveyoursuccess.com." we already know that we have annual holding costs of 36%, so that cost alone represents an annual holding cost of approximately $9,000.00, but that's not nearly enough to surpass our number two sitting at over $99,000.00.

Well, we've saved our best and biggest "unseen" net cost to managing the parts department for last. This $25,000.00 sitting in obsolete status not only costs ABC Motors annual holding costs. This $25,000.00, if reinvested in parts with active movement is where the lost opportunity lies.

If reinvested, this $25,000.00, with annual gross turns at NADA Guide, (8 Gross Turns) would actually produce an additional $100,000.00 in parts gross profit at an overall retained gross percentage of 33%.

This lost net gross gain, or cost to the dealer, doesn't even include potential Lost Service Productivity. Definitely the number one "unseen" cost to the dealer, even though $25,000.00 may not seem that bad....

Total Annual Net "Unseen" Cost To The Dealer In Holding Costs And Unrealized Profits: $109,000.00

Net Annual Total Of All Of Our Top 5 "Unseen" Costs To The Dealer: $268,343.50!!!

"I guess the old saying that what you can't see can't really hurt you doesn't hold true in this case because that missed opportunity of $22,362.00 at ABC Motors each month can really hurt the dealer and could even be the difference between a positive or negative bottom line for the whole dealership."

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