Traditionally obsolescence has been defined as parts that have not had a sale in anywhere from six months onward, the time frame dependent on the source defining the term.
Over the last few years the manufacturers and importer/distributors have reduced the amounts they have been willing to absorb to relieve their dealers of parts that go into obsolete status naturally; typically about 8% to 10% annually assuming that the dealers are all practicing good inventory controls. The reality is they are not, and that most return allowances are now falling below the 5% level which requires dealers to find new sources of relief including brokers and referral programs, all of which can cost over 50% of inventory value.
Where does this obsolescence come from?
Aside from ordering errors, incorrect DMS settings, and excessive purchases of parts that go “on sale”, most obsolescence is a self-inflicted wound driven primarily by an ineffective service special order process and wholesale returns.
As an example I am currently involved in a buy-sell return for a client. The franchisor allowed that they had about $55,000 in 12 months-no-sale (MNS) and older parts and gave us permission to return them. I also found almost $75,000 in unsold non-stock and auto phase-out parts that were less than 12 MNS and greater than two months-no-receipt (MNR). When we broke them out using the report generator the story of how they got there was pretty clear.
- One group had an initial bin location of SPO followed by a second one that indicated they had been put into stock after not being installed. Some had been issued to a repair order and taken off, probably due to an incorrect part, but many others just aged in the first bin location and then got moved later on. The fact that this franchisor had no allowance for Ordered in Error returns made this accumulation easy to understand; the fact that the parts and service managers were unaware of their accumulation was not.
- The second group of parts was clearly crash related. Some had gone to our own collision center and the rest to outside customers. Inspection showed that most had open packages, many of which were damaged beyond returnable condition, and some actually contained used parts that had been substituted and falsified for return credit. These were instant scrap.
I’d like to say that this was an isolated incident, but over the last 40 years I’ve seen it time and time again. To make a long story shorter we appealed the original return allowance to the franchisor and they agreed to take back most of the “Hidden Obsolescence” as well, but if we hadn’t known where to look we would have been stuck for almost $75,000, all of which would have started showing up within a few months of the special return.
The first thing every dealership should do is be sure that your special order process is really working. In our current environment we can’t afford to allow any SPO part to go uninstalled, especially when it has labor tied to it. Some things you can do to reduce the backflow of these parts:
- Parts are not ordered unless the vehicle is remaining on premises or the customer commits to a return appointment. If the customer is not ready to make the appointment hold off ordering the part until they are.
- Parts and service both contact the customer when the parts come in. It’s in everyone’s best interest to be sure the job gets finished.
- Don’t take ‘no’ for an answer. If necessary pick up the car, schedule a specific time for the repair since no diagnosis is involved, or even send a tech and the part to the customer’s home or office. You’ll be amazed at the positive reaction this gets.
- Take advantage of every return option the franchisor provides. It’s better to send it back then sit on it for a year or more with an average cost-of-ownership approaching 20% of dealer net.
The second thing every dealership should be doing is monitoring and controlling all Wholesale Returns.
- Pre-authorize returns. Your franchisor doesn’t allow you to send back whatever you want, and whenever you want do they? Why should you expose yourself this way? Good customers have less than a 10% return rate; the rest will require training or reduced discounts until they comply. Control it up front.
- Inspect all returns when they are picked up at the customer’s shop, not when they arrive in yours. Catch the used parts at the source and stop it cold when you do.
- Charge a re-stocking fee to all but your best customers. Remember that 20% carrying cost? Share it with those who create the problem.
- Tie the purchase discount to the return rate. Reward your good customers and cull out the bad ones; you aren’t making any money on them anyway.
If you’re not sure just how much of this “Hidden Obsolescence” you have contact me at email@example.com and I’ll help you set up a report generator report to find out, then we can discuss ways to fix your problem.