Parts inventory that is 12 months old has a 95% chance of never selling again, and is in write off territory. Paying the heavy costs of writing off aged parts inventory is a spin-off of the root problem.
The root problem starts well before parts become 12+ Months old. NADA guide for the value of parts inventory that is 12+ Months old is 2%. Beyond that, a rule of thumb is the value of parts you have that are 10+ Months old, you have the similar dollar value of unsold & returned special order parts that are not aged-out yet.
In this video, we talk about where the cancer starts, and how to handle it both from the front-side to the back-side.
TRANSCRIPT:
Crystal: So, I want to talk about how to find and deal with the cancer in parts inventory. Can you tell me how and where it starts?
Shawn: So, parts inventory, the real cancer is the special-order parts that go unsold, or they’re returned parts inventory. So, some dealers just think that the cancer is the 12 months and older parts. You can consider them cancer, because, at 12 months, no sale and older, these parts are really in write-off territory, effectively. So they think that is the cancer. But the cancer really starts much sooner. And the 12 months and older parts are just a spinoff of the problem that started 12 months earlier.
Crystal: So it actually originates a lot earlier than that.
Shawn: Right. Exactly. So this cancer that exists is not… it’s aged cancer when you see it, but it really starts much sooner than that. So dealers think that one of the places that problem parts come from is, it’s not active inventory. We all know that. But they think that if they have too much active inventory, or when things start to slow down, what they actually do is they start trimming their stock orders, and start changing their phase-in criteria so that they don’t allow as much active parts inventory to come in.
Crystal: Try and be a little more proactive about it.
Shawn: Yeah, proactive, but proactive in terms of so that they’re trimming active inventory so it won’t become aged. Less probability, but it’s actually to their detriment. So we start trying these exotic, or different or some phase-in criteria. The thing is, is the problem is not your active parts inventory. It’s not. Not at all. That’s only a micro-percentage that active parts inventory actually falls off and doesn’t sell multiple times again next year. Where the root problem is, period, is your unsold and returned special order parts, by far. By far.
Crystal: Right. Okay. So what would the numbers be, do you think, to support this theory of yours?
Shawn: So it’s not actually my theory, but there is numbers that exist across, that have been run across thousands of dealerships over multiple years. Many brands, and so active parts inventory, using traditional inventory control, there’s much more on that, and other posts, blogs that we’ve done. But, using traditional inventory control criteria, 93% of your active parts inventory will go on another year, selling multiple times. So, that means if I only have 7% of the active inventory, those parts, 7% of those part numbers, not the value, but 7% of those part numbers, or SKUs, some guys will call them, will fall off in a year, and become what we call auto phase-out parts, right? Were active and now they’ve slowed down. It’s kind of like a bell curve.
Shawn: Active parts, they go from being non-stop, we sell a bunch, bunch, bunch, and then they start to slow down. That’s that bell curve, as they start to slow down, we call that phase-out parts, and then they become aged. Using traditional phase-in, phase-out criteria on active parts inventory, 7% won’t make it a following year. This is micro. There’s the other half of that, which is non-stock parts. Which is those unsold and returned special order parts. Depending on how much sales history it had before, it will have between, well, anything between 5%, or even less. A 5% to 65% chance they’ll never sell again.
Shawn: And then depending on sales history, some of them are 35% to 65% chance they’ll never sell again. That’s if they’re not aged out, keep in mind, I’m just talking about if they had one or two periods of demand, which is sales, and/or lost sales prior to, that might sound like great odds. So I have a 35 to 65% chance either that they will sell, or they won’t sell. Those numbers actually can be inverted to be the same thing, but a different way to structure that sentence. Those numbers are only good if you’re playing bingo, 50/50 draw, or the lottery. Because what happens is, in all those cases, your risk is small, so you put what five, 10 bucks in, and then the reward, the multiples are huge, right? With lottery ticket or bingo, right? You put in 20 bucks, you come out with a few hundred bucks.
Crystal: But when we’re gambling with parts, we’re not just gambling with parts, we’re actually dealing and gambling with the dealer’s money, basically.
Shawn: If we don’t have a strict process, phase-in criteria, or criteria at all for parts inventory, or if you have a lax special-order parts process, you are then gambling. So with parts inventory though, the stuff doesn’t start to age, this stuff becomes a problem. So let me tell you this. Unsold and return special-order parts, right? Dealers only define that they have a clean inventory on a generic basis, saying whatever my number is over 12 months old. And the smaller it is, the more proud they are of it. And of course, they should be, but that’s only a single measurement of the quality of a parts inventory. Here’s the thing though, on day 31, or day 61, whatever a dealer uses to define when a special order part, the customer’s not going to pick it up, right?
Shawn: Just because we rip a label off it, the customer’s name, that it’s reserved for them, rip the label off and put it in inventory somewhere else, doesn’t mean it’s not a problem anymore. That unsold or that returned special order part, as soon as we put it in stock, it now rides until it becomes the oldest parts in inventory, and gets returned next. Because the oldest return dollars that a dealer gets, he applies to his oldest parts. But that means that that part that’s now 61 days old for example, or 90 days old, whatever it happens to be, we rip the customer’s name off. He doesn’t want it. Or he returned it, it now sits in inventory until it becomes the oldest. It doesn’t mean it becomes a problem then, right?
Crystal: Nope. And I get that because if you think about why that part was ordered in the first place, it’s because it wasn’t a natural stocking part. It wasn’t called for on a stock order, so it wasn’t ordered. So to have it there in the first place was, A, it was a special order part, B, now it’s 31 or 61 days plus, and it hasn’t moved, and the customer hasn’t come for it, so now it goes into inventory. So I mean, there’s one spot of cancer right there. A very, very good example, right?
Shawn: Exactly. So just before you move on to your next question, let me talk about that aged parts inventory. So aged parts inventory, which is a combination, which could be, and is typically a combination of those phased out parts, right? Those active parts that lost sales demand, and those non-stocking special order parts that we talked about, when they hit, for example, nine months old, since they last sold, 15% of those will ever sell again. When they hit 12 months old, only 5% will ever sell at your dealership again.
Crystal: Those are not good odds.
Shawn: No. And they say that, well there are three separate studies, but one study says that if you sold a part at retail that is 12 months, no sales old, so it’s been there for 12 months, and you sell it at retail, with holding costs, you break even. There are two other studies that say that at 9 months, no sale if you sold a part at retail, another one says at 10 months no sale, if you sold it, you’re break-even. So that goes to show whether it was active or it is, non-stock. If we sold at retail, we’re still not good shape, especially with those percentages, those odds. I mean, we’re underwater, because some large majority we’re not going to sell. So, that’s what I’ve got to get on it beforehand before the problem is there.
Crystal: Right. Okay. So I guess my next question is, how do you deal with it from the front side then?
Shawn: We pay attention a lot from the backside, which is, how do we clean up the problem when they become the oldest? Because that’s when they’re on our radar. But when we’re dealing with one and two pieces at a time, or per parts person, or even as parts manager, we’re dealing with only a couple of pieces, maybe even a day, or that’s all we think about is that couple pieces. The volume is actually much larger than that. And the bigger the store you are, the more volume there is. But it’s all relative to your dealer size. If you happen to have a couple of parts a day, because you only have one parts guy, or you have 10 parts guys, I mean, the volumes that much greater, but so is your volume of selling and the volume of inventory. But as a percentage, it’s relatively similar. So from the front side really, it is, not choking on active parts inventory. That’s not your problem unless you don’t have a proper inventory control methodology. You talk about lots of that in another article. I’ll spare you for that.
Shawn: But the real problem is, controlling unsold and returned special order parts. So the issue is, that the moment that we order a special order part, which is a huge volume, a huge volume of special order parts. When we order that, the dealer owns the risk unless it’s prepaid. So we know that you can prepay absolutely everything in the dealership, and you should be, you need to be, including internal. I’ll save that for another conversation. I’ll have some haters right about now, but that’s okay. The only thing you can’t prepay is a warranty, a warranty work order. Otherwise, you can prepay absolutely everything.
Crystal: It’s just hard to implement with your people. We kind of discussed this in our last video. I think where the difficulty lies is not actually in getting it prepaid, it’s with your people, getting them to implement it with the customers that want to order those special order parts.
Shawn: Yeah. So it’s not the customer that gives a majority of the pushback. The problem is the employees themselves that don’t like to do it, they don’t know how to handle it or they’re not comfortable. And I understand that that’s your biggest hang-up. Even your DMS, we’ll talk about that in another video. But even setting up your DMS, and how the functionality, that’s all super easy. But really, what we’re trying to do is de-risk the dealership by owning these parts. So number one is getting it prepaid, even internally in the shop. You could arguably do it with wholesale too. There are some guys who would do that, some guys who absolutely won’t do that, but when these guys have charge accounts, they’ll return it anyway. But nonetheless, that’s a whole story in itself
Crystal: Well, we’re just basically trying to remove that risk for the dealer and for the parts manager and the parts department altogether, right? Let’s not even put ourselves there.
Shawn: Right. So that’s the first thing to do, is prepay. The next thing do for the shop is before a customer leaves, when we order the part, we make sure that the advisor books the next appointment before the customer leaves. That way, we already have customers locked down into a date when the parts are actually going to be here, so that it’s easier than trying to chase them a couple of days, or a week down the road, and you’re leaving voicemails. So how many times do you call somebody, a retail customer during the day, and you can’t get hold of them?
Crystal: Lots. I mean, people work, and people have lives. Maybe they’re sick, maybe they’re on holidays, you never know. But if you have that pre-booked like you said, then that customer’s aware, you’re aware, it’s in the system, then when that part comes in, it’s just a smooth process from there. And like you said, we’re not scrambling trying to chase down customers or taking the risk at that customer just not coming back.
Shawn: That’s exactly it. So, what happens is, when you’re in your customer’s calendar to come back, you are now, the customer now starts to build their days and their weeks around that, because it’s just like a doctor’s appointment. So they do that. But if you don’t, then you’re trying to fit yourself and the dealership into their schedule, which, it just becomes a problem. So we tried to de-risk everything. So then the next step would be from the front side trying to control a special order problem, would be to run a report on your wholesale customers, and see who your biggest offenders are.
Shawn: So parts returns from a wholesale customer that are 10% and less, I wouldn’t worry about. As it gets to 15%, they’re definitely on your radar. Anything over that is definitely a problem. And the larger the number, the problem. Of course, with your wholesale customers, a percentage of what they buy is filled from inventory, from active parts inventory. But in particular, the ones you’ve got to be really careful with is the guys, your body shops. And the reason is because usually when they return stuff, there’s only a small number of customers who can buy body shop parts. So a retail customer is not walking off the street looking for a fender, or a door.
Crystal: Not usually. Yeah. It’s not common, anyways.
Shawn: Yeah, exactly. So those guys, you got to be careful with, just because of the volume that, a single part could be a couple of hundred dollars. And then he’s up a lot of return allowance. So if we think about, think about this, I know that some Chrysler guys, for example, get a 2% return allowance. For them to return even a $2 part, they’ve got to buy $100. So the multiple, when you only get a return allowance of 2%, is 50 fold, right? So to return a part that’s $100, you’ve got to buy 50 times that from the manufacturer, just to return that one part.
Crystal: That’s just crazy.
Shawn: It definitely matters. Definitely.
Crystal: Oh yeah. Absolutely.
Shawn: So the math is still the same if you get a 5% return allowance from the manufacturer, the multiple then is 20 fold. So if you do the math on what it costs to get rid of $100 part, and it’s 20 fold, that you’ve got to buy from the manufacturer, it’s a big deal. So parts managers are trying to keep up with the problem of… return allowances by default are not enough, and they’re only going backward, and not in the dealer’s favor. So what happens is now you’re doing your best just to keep afloat, let alone the trying to deal with the excess that you got, the backlog. And if you’re any sloppy, like in terms of you don’t have tight policies and procedures, you’re just getting killed. You’re getting killed.
Crystal: Yeah. Yeah. You’re kind of getting swamped.
Shawn: Exactly.
Crystal: Yeah. Okay. So that covers the front end. On the backside, what are we doing there?
Shawn: So from the backside there are actually a couple of ways to do it. So the real cancer, of course, is the cancer where you go to die with, that is parts that are 12 months and older. That’s right off territory, right? Where that cancer starts from the front side with unsold and returned special order parts. But from the backside, how we deal with it is most common. That dealers kind of have, we deal with this stuff often. Of course, you’re using your manufacturer’s return allowance. We already talked about that, to its fullest extent. Believe me, that there are dealers who don’t use this all up, and there are also dealers who, when they have the opportunity to, they’re cashing in to take a cashback option, rather than return parts.
Shawn: I will tell you that if you are any dealership that’s taking cashback from the manufacturer, I could guarantee you that that’s the worst thing you can do. Because you’re only getting a small portion. But nonetheless, you still got parts that even if you look at your aged out inventory report, you still have parts in there that haven’t aged that are still like that unsold and returned special order part that is 120 days old, 160 days old, they haven’t aged-
Crystal: Right. The parts didn’t go anywhere. They’re still there, and they’re still a problem.
Shawn: Right, exactly. I can’t count how many times dealers have taken the cash, and only to end up with a big problem 12 months later. I can’t count how many times I’ve seen that. So, okay, so the manufacturer return program, make sure you’ve used absolutely every penny every single month. Then, of course, another way to clean up the problem, when these parts are aged, you can send them to auction. My experience has been when you send parts to auction, brand new parts by the pallet load, right? $10,000, $5,000, $20,000 worth of this stuff. You’re netting between 10 to 15% of dealer cost on these parts, right? So you’re getting fractions. Another way is D2DLink, their Parts Broker Direct is a program to get rid of them, where you get 50 cents on the dollar.
Crystal: Yeah.
Shawn: Dealermine is another way. The same program to get rid of your parts inventory at 50 cents on the dollar. Then, of course, eBay is another way to get rid of them.
Crystal: Very time-consuming.
Shawn: So if you do it one by one, I know some dealers that are selling parts one by one on eBay. Now you’ve got to keep in mind that something, it’s been probably a year or two since I’ve looked into this now, but the fees between the eBay selling fee, and the PayPal fee, it’s about 12 to 13% on the sale price that you have to pay in commissions just to sell a part.
Crystal: And obviously you’re not listing them at, you’d be listing them at cost, right? When you list them on eBay, or less, because why would somebody go on eBay and purchase a part for the price that a dealer’s trying to sell it for at their dealership? Because nobody’s going to go and do that. When we go to eBay or Amazon or wherever, we’re looking for a deal, from a consumer aspect. But on the flip side of that, the dealer is, I mean they’re not only not listing them at full price, which is what they would hope to get if they list them at cost, then you minus out your fees, and then you’d consider how much time did it take for that parts manager or parts person to list them one by one, or however they’re listing them. What is that really costing you at the end? Is it even worth your time?
Shawn: Well, there’s two segments of this conversation about eBay. The first conversation to clean this problem up on the backside is doing it manually. The second half is using automation, which I’ll talk about in a sec, but let me talk about the fees that you’re talking about. You’re absolutely right. So think of eBay as a global wholesale marketplace. So if you think about how tough your wholesale market is locally with other dealers and aftermarket, it’s the same on eBay, but exaggerated. So you’re right, there’s no incentive for a retail customer to go on eBay, and buy something from you when it’s the same price. So, of course, they won’t buy it at retail, or any sort of markup. So what happens though, is there are large dealers, or even dealers that you know have a problem, they’re selling parts on there that are deeply discounted.
Shawn: So the dealers that are selling volume, they’re mega dealers, or I wouldn’t even say mega, I mean you would include them, but there are large dealers that the only way you can sell on eBay is by getting into your discounts. So where you’re making your money after everything is paid, using a couple of pieces, small transactions of course at a time, is by you’re keeping the discounts. Now that is a strategy that can work if you’re looking to sell, but sell across the board. Lots of inventory. And that’s part of the strategy is to sell so much volume, that you’re keeping discounts. That’s a strategy. But in terms of dealing with the idle and obsolete parts inventory, doing it manually is super time-intensive. I don’t even know that I would recommend it, but at the point where you’re ready to write this stuff off, if you can get cost, or even 80 cents on the dollar, 70 cents on the dollar, you’re winning, rather than throwing it out in the garbage.
Shawn: Now the flip side of that, like we were talking about, these dealers that are selling on eBay in volume, which includes their obsolete and idle parts inventory. We’ll call it like $500, $800 at least a month, because you have a software cost, of course, and then you got manpower costs. But beyond that, so you’ve got to sell all your inventory. You’ve got to list like a majority of your inventory to make any money. But it does cost. There’s set up. I mean that is a whole segment of the business, parts wholesale is a business and parts retail is a business, eBay selling is a business if you’re going to go at it to make it make financial sense, where you start adding automation and stuff. I wouldn’t recommend it if you were looking to just get rid of your 12 months and older parts, For me at least, I wouldn’t recommend it to do it even manually. It’s not worth your time. I don’t think, it’s way too much work. There’s a spot for eBay where that works, and there’s a business.
Crystal: If you’ve only got a couple of parts or something, then I mean, that’s a completely different story. But the dealers that we’re seeing and we’re talking with, it’s not just one or two parts. We’re talking about pretty large amounts sometimes.
Shawn: Yeah. Oh absolutely. So then the next step would be to write the parts off, just 100% loss, throw them in the garbage. But that’s like the ultimate last step. And then of course now, through our program, of course, you can exchange your parts, get rid of parts you don’t want for parts you do want at full dealer cost. So it’s an exchange. Think of it as if the manufacturer called you as a parts manager, say, “Hey, you want to get rid of a couple of grand worth of parts you don’t want?” Could they do it? And would you do it get? Get rid of a couple of grand in exchange for the same value of parts you do sell, in exchange. Could you do it?
Crystal: And sell lots of every day, right? So it’s like here’s the stuff I don’t want, and I’ll take this stuff that I do want and I’m going to sell it right away, and come out in the end without a loss.
Shawn: Right, exactly. So for example, like the guys who were on the programs that sell at 50% off, they’re selling to other dealers because the other dealers have, those parts are active for them. So, what happens, what the selling dealer at 50 cents on the dollar doesn’t see is, well what is active at the other dealer store, or inactive at the other dealer store that I could use? Effectively, that’s what we figured out is looking at the cross-correlations of inventory, virtualizing the whole process of inventory. So those are the ways to deal with parts inventory from the backside. But really, the goal is to deal with it from the front side.
Crystal: Got you. Because that’s where it starts, right? It is on the front side.
Shawn: Our program, and all the other lists of programs that I talked about, it’s like radiation, right? For the cancer. Where does it start? What’s a root cause?
Crystal: Yeah, absolutely. Okay, well that was all the questions I had for you today, so thanks for your input, and your expertise, Shawn.
Shawn: Very good. Appreciate it. Thanks.
Crystal: Yeah, no problem.