Parts explained for non-parts management
Years ago someone gave me a book called ‘Windows for Dummies.’ It was not designed for ignorant people, but to explain Windows in layman’s terms so that the user could better understand how the system worked. A lot of my work is in training newly appointed Dealer Executives in the management of their Parts Operations. Since the majority of these folks come from the Sales side of our business I have been able to reach out to them through analogies relating common elements in the Parts world to those of Sales.
Like most Profit Centers in our business there are two main areas of concern; Net Working Capital and Personnel. Let’s discuss both of them in some detail.
Unlike the new and used vehicle inventories in most dealerships today the Parts Inventory is totally owned by the store and is usually the largest concentration of Net Working Capital. Let’s look at the similarities between Parts and Sales.
Months/Days of Supply – Much like Sales the size of the Investment is measured as a function of the current sales rate, either in days or months. Just like Sales this will vary tremendously depending on the rate of demand. A $500,000 inventory compared to a current sales rate of $250,000 (at cost) will be a two-month supply. The same investment at a demand rate of $300,000 will now have a 1.7 month supply with no change in value, so management has to be careful not to make snap judgments on the size of the Investment based on a short term demand rate.
True Turn – Much like the vehicle inventory, the parts investment has to be analyzed for which units are selling to see what portion of it is truly turning on a regular basis. True Turn is the measurement that isolates the sales from stock only, annualizes that value and divides it by the Investment. This removes the sales that were not from stock, such as Special Orders and Emergency/Customer Purchases. It also takes into account the level of Obsolescence which has no current movement. This is the measurement of the effectiveness of the Investment financially. The objective for this measurement is to be between 3.5 and 7.0 True Turns. Too low indicates Surplus Stock and Obsolescence; too high indicates an inadequate inventory which limits sales and Gross Profits.
Level of Service – This is the other measurement of the Investment only this time we are looking at what percentage of piece sales are coming from stocking part numbers. We take Actual Sales plus Lost Sales to arrive at Total Demand; then we deduct Emergency Purchases and Customer Orders which are parts we did not have in stock and had to acquire for the customers. The resulting value is then divided by the total pieces sold to determine what percentage came from parts we should have had on hand. The objective is to provide at least 85% of all piece demand from on hand stock.
Obsolescence – This is a term used to describe that portion of the Investment that is no longer selling regularly and needs to be removed. It is usually measured in terms of Months No Sale or Months No Receipt. There are many different opinions on what constitutes the point at which a part becomes obsolete, and the DMS systems are not always accurate in their measurement since they only measure one criteria or the other, not both. At M5 our standards are set with the following:
- Technical Obsolescence is parts that have been on hand for more than three months and have not had a completed sale in 9 to 12 months. These parts have a 15% probability of sale at 9MNS and less than 1% by the time they reach 12MNS. Unless they are protected by a manufacturer program such as RIM or ARO the process of disposal should be considered at this time.
- Absolute Obsolescence is parts that have been on hand for more than three months and have not had a sale in more than 12 months. The probability of sale here is nil and these parts should be disposed of as soon as possible. Unlike used vehicles you can’t simply wholesale the stale stock and move on. The use of Brokerages and Internet are effective, and similar to taking vehicles to auction you’re better off getting what you can for the dead stock and buying something you can sell now. We advise reserving funds to allow for this since Obsolescence is inevitable in every store no matter how well the Investment is managed.
Lost Sales – This is a tool to log demand for a part that you do not have on hand when a customer needs it. It serves the same value as Traffic Control in Sales, helping the store to develop an inventory that matches customer needs. This is one of the most underutilized tools I see in almost every dealership I visit for the first time. Every person who sells parts has at least 2 opportunities daily to post a Lost Sale or more, especially if they are selling to Wholesale customers.
Reconciliation – This is the monthly exercise of matching the value of the Physical Inventory (PAD) to the General Ledger (GL.) This is no different than Floorplan Checks and I’m constantly amazed at how many stores do not perform this basic check and balance. Adjustments are made to the PAD to account for Work in Process which is equivalent to Contracts In Transit, Returns and Credits Pending, Cores which are not in the PAD but are in the GL, and Appreciation and Depreciation since the manufacturers change some prices every month and as soon as the update is run the PAD value changes, but not the GL unless you report it and make the appropriate adjustments.
Daily Perpetual Inventory (DPI) – This is the procedure that counts all of the Investment three or four times annually, but on a daily basis just like your Lot Counts. It is designed to achieve 2 objectives;
- Ensure that parts are where they are supposed to be making your parts people more efficient.
- Provide accuracy in the PAD so the Reconciliation is accurate. As a side benefit if you do this properly you can probably avoid the Annual Physical Inventory or at least be prepared for it at any time.
Just like in Variable Operations you have to have enough people in place at any time to process the current business demands as well as develop growth for the dealership. All too often we simply count heads without taking into account the portion of their time that they are available to perform their duties.
Calendar Utilization – This term refers to days that a staff member is on hand during a work year. Elements that figure into it are:
- Vacation Days – how many working days are missed due to earned vacation days? This becomes a real issue when a store has a lot of senior employees who have earned multiple weeks off. It also begs the question of the dealership policy relating to whether employees can forgo the time off in return for compensation, or if they are required to take the time off or lose it.
- Sick Days – Much like vacation days a ‘Use it or lose it’ policy can have ramifications on employee attendance.
- Personal Days – A lot of stores will allow, or in some states are required to provide for days off for things like birthdays, anniversaries, death-in-the-family, and the like. These also come out of the annual total.
- Training – Whether the training is in-house or away at school it still amounts to time away from their position. Do you allow for this in your determination of total staff?
Hours in a Day – What constitutes a day in your store? Most dealerships are open 10 to 12 hours in Fixed Operations, some even longer. Things to take into consideration for coverage are:
- 6 or 7 Day Weeks – 6 days are almost mandatory now and we are starting to see seven days becoming more common in some markets. Scheduling starts to become a serious issue now.
- Extended or Multiple Shifts – Service Operations are often working four 10 Hour Shifts and some are even doing three 12’s. Parts have to be open to serve their needs too.
- New Overtime Laws – The new Federal OT laws, in addition to already existing ones in some states, may well require additional staff to provide cost effective coverage.
There are a lot of details involved in managing a profitable Parts Operations beyond just selling parts and controlling Gross profits, and I hope this has raised some questions in the minds of Dealer Executives as to what else they need to be aware of. There are many solutions and one size never fits all.
Author: Jim Richter
Jim Richter is a Fixed Operations Consultant and Performance Coach with M5 Management Services, Inc., an international company working with dealers, distributors, and manufacturers. He has spent over 45 years in the automotive, power sports and marine industries analyzing and assisting parts and service operations throughout North America and Europe. His work experience includes dealerships, field and management positions with major manufacturers, and his own consulting company.