A little over four years ago we looked at the up and coming factory-based inventory management programs that were just coming online. The overall objectives, as stated by the vendors, were to improve the quality of dealer inventories and increase fill rates off the shelf.
Since that time the two primary players have both gone through some difficult times and their programs have been modified in response. I would have to say at this time that they have both been a ‘qualified’ success, with a few issues that still need to be worked out.
- The retention period for recommended parts is too long, as much as 15 months, causing dealers to keep parts in stock long after they have ended their useful life.
- Recommendations are overly biased toward PDC demand history as opposed to the dealerships specific history.
- Acceptance requirements are too high causing some parts to be approved just to “make the grade.”
- Relief for unsold special orders has virtually disappeared causing a swift and massive buildup of non stocking parts and early obsolescence.
Let’s take a closer look at each of these issues.
How long is too long?
Conventional thinking among parts experts puts the beginning of the obsolescence process at somewhere between six and nine months without a sale. At an average cost-of-ownership of almost 20% of cost annually, the requirement to hold recommended parts for 12 to 15 months without a sale is not statistically valid, nor does it make good fiscal sense for the dealership to pay stocking costs for this extended period. Furthermore, you really should sell three or more pieces per year to justify keeping a part on hand; yet one lonely sale will keep that part in stock for another 12 to 15 months under the current rules. A more realistic standard would be to base return eligibility on nine months-no-sales or less than three-piece sales in 12 months.
Why do they want me to buy these parts?
Almost every parts manager I speak with, who is on one of these programs, relates a laundry list of parts that they just can’t understand why they’re even on the list. Common statements such as, “Don’t they know I’m not in the crash business?” “I only had lost one sale on that part!” and “I just sent that part back last month!” tend to reduce the managers’ confidence in the recommendations. To be fair to them, it seems like it often only takes one demand to bring a part onto the daily list, and the only rationale I can see for it is that the PDC has a broad based call for that part and they are anticipating an eventual need at that store.
That’s all fine in theory, but who’s carrying the cost of the inventory? I now see some managers discouraging or even stopping lost sales for fear it will inflate their daily stock order requirements. That’s not good because it distorts their DMS calculations as well as the vendors. It would be better for the dealers to have more input into the “phase-in’ and “phase-out” sections of the DSO settings providing for a better tailored order for each store.
There should also be an exclusion for smaller dealerships which are not in the crash business and do not have their own collision center, allowing them to bypass sheet metal without penalty. That business is for those dealerships that are big players in crash wholesale.
Playing ‘The game’
Almost every day I see parts managers ordering small value parts they know they don’t need just to meet their minimum requirement. That’s just wrong! These are not stocking parts for the store; they’re stocking parts for the vendor. Because there are other ‘incentives’ tied to these programs they have to “play the game” in order to qualify for the financial rewards tied to them. It would be better to mesh the dealerships’ DMS generated orders with the vendors suggested orders, but that’s just not being done properly, by either side. I recommend to every dealer that they set their DMS up based on how they want to stock parts, and that they run their own stock order and compare it to the factory DSO as a basis for acceptance. Too many parts managers are adjusting the DSO and never look at their own suggested order; in fact they never even run it. They have the tools to do this but too many of them don’t bother or don’t take the time.
Solving the #1 cause of obsolescence
I think we all know by now that most of the obsolescence in dealerships is a self-inflicted wound caused by un-installed special orders and wholesale returns. So what do the DSO programs do to help keep that under control? In the beginning they were pretty liberal about ordered-in-error returns and most dealerships used those return options effectively. Now that those avenues have been largely shut down the growth of obsolescence is escalating at a rapid pace, tying up net working capital and reducing funds available for good selling stock.
Dealers need to have a very effective special order process both to protect themselves from obsolescence growth, but also to minimize lost revenue in the shop when customers don’t come back to get those parts installed. Unless you are a big wholesaler, cut down on wholesale returns by instituting restocking charges, cut off bad accounts, and reduce the discount for poor performing accounts. You’ll need that 20% restocking charge to cover the year or more that the parts will likely be sitting on your shelves.
Factory driven parts inventory programs are here to stay, and they serve a purpose in moving more saleable parts into dealership hands where they can be sold immediately. Are they ready for prime time” yet? I don’t think so. Until they deal with the above stated issues they will not be the effective tool that they can be. Having said that the burden of improvement lies with dealers as well as the factories. They’re both in this together and both will benefit greatly once the bugs are worked out, but it is not yet time to accept the DSO as gospel. Meanwhile, to keep obsolescence down get your special order processes working. If you need help with this contact me for assistance.