How To Find & Deal With The Cancer In Your Parts Inventory

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.

The Unintended Consequences of Implementing 1.5 Month’s Supply on Parts Inventory

If you’re like most Parts Managers, at some point you’ve found yourself in a pickle with a mandate from upper management to cut physical parts inventory, or hit 1.5 Months Supply.

If upper management is focused on only one of these two numbers, it creates unintended consequences that cost the dealer substantially in the end.  But there is a way to reduce the total parts inventory value or hit 1.5 Months Supply of parts inventory without creating a bigger problem.

In this video, our resident parts expect talks about what actually happens when Parts Managers get this mandate, and also how to reduce the total parts inventory value without creating more problems than intended.

 

TRANSCRIPT:

Crystal N.: This is the time of year that dealers start to review and implement procedures moving forward for 2020, one of those being implementing 1.5 months supply in their parts inventory. Can you tell me a little bit about the unintended consequences that might come along with this, Shawn?

Shawn Larkin: When they implement 1.5 months supply, that’s actually industry guide across the board for parts inventory control. It is only one measurement, but typically, it’s a measurement known from dealer principles all the way down, even to parts managers.

Shawn Larkin: The problem is, that when you implement 1.5, generally speaking, a parts manager trying to hit 1.5 because he has more than that, he only has a few options to get rid of the parts inventory, or at least slim down the parts inventory to 1.5. But, before I get talking about that, let me really explain about what that number is and how it’s calculated.

Shawn Larkin: 1.5 months supply basically means having 45 days supply of parts inventory on hand. How we’re able to figure out how much that is and what the value should be, is we take last month’s financial statement, look at the total part sales, minus the gross profit we made, and that amount, once we do that, is called cost-of-sales. That’s the amount of parts, physically, that were sold in the parts firm.

Shawn Larkin: Here’s an example. This is not exact math, but if we sold $600,000 of parts, we’d have $100,000 of profit. We go $600,000 minus $100,000, it gives us $500,000. That $500,000 is cost-of-sales. If we do that by 1.5, that means $750,000 is what our inventory needs to be to hit 1.5.

Shawn Larkin: If a parts manager has a million dollars of parts, and he needs to get to 750, he has to figure out how to get from one million to 750. It’s a huge drop. What happens now is, a parts manager goes back to his desk and thinks of all the different ways that he can get rid of the parts inventory.

Shawn Larkin: The problem is that he’s already returning through his OEM, or at least he should be, returning all the parts he needs to or can through his OEM return program. What are, now, his other options? Of course, if you’re doing program orders, these large, every six months, doing these program orders, that’s the first thing to get cut. Right? So that we’re not ordering a supply that’s three, four, five, six months worth in inventory. That’s a no-brainer. That’s one of the ways to do it.

Shawn Larkin: But realistically, it doesn’t actually move the needle any. For a parts manager. What actually happens…from upstairs, they’re thinking, okay, so we’re going to get this number in line. We’re going to move from a million to 750, and the parts manager just makes it happen. What happens is, the parts manager is actually sitting at his desk, and he doesn’t have a way to make it happen. He’s already doing all he can. I’m going to talk about the ways to do it.

Shawn Larkin: What happens is, the unintended consequences of going or just using 1.5 as the only measurement of parts inventory and not really having a robust plan on how to implement it, what actually happens is, many parts managers are backed up against the wall. What other things can they do? They order parts. Right? They’re ordering special order parts for customers. They can’t cut that off. They can’t really tighten that up, although I’m going to talk about here in a minute. Or, the other parts that they’re ordering is at the parts inventory. So, guess what they have to cut?

Crystal N.: [crosstalk 00:03:42]. Obviously.

Shawn Larkin: What happens is, that’s actually the spinoff. Parts managers will then, depending on their background and their training, some of them will use their gut and just start picking off parts as they look at a stock order, right, start picking them off, parts that they usually don’t stock anymore.

Crystal N.: There’s an actual methodology of how you should be doing that. Correct?

Shawn Larkin: There absolutely needs to be and should be a methodology behind how you control inventory. If you don’t have that, and now you have this mandate to now trim your inventory, you’re using your gut, but now you’re using your gut even more.

Crystal N.: Yeah. It probably isn’t ever a good idea.

Shawn Larkin: Well, not at all, because here’s the spinoff, the fact is, when you cut off active inventory, yes, it makes sense that you can cut your days supply. I see some dealers that are running 45 day supply, 42, 40 day supply. Basically, the rule of thumb is running 30 days supply of active inventory, which makes sense.

Crystal N.: Right.

Shawn Larkin: How does a dealer have, if he’s only ordering, on average, back to parts, 30 day supply, but he has two months supply, and he needs to get to 1.5, why is there such a spread from 30 days, which he wants to stock, to two months? It’s all the difference, are all the parts he shouldn’t have. Right? But he doesn’t have a way to get rid of them.

Shawn Larkin: What happens now is, he’s trimming down his active parts. Now, it does make sense. The game plan would be to get down to 30 day supply, right? If you have more than that, then that is part of the game plan, by trimming that, going from whatever you’re at to 30 and keeping at 30. You don’t want any less than that for active parts.

Shawn Larkin: But, what happens is, now they start not ordering active parts inventory that they should have. They’ll come out with some phasing criteria, or use their gut, or phasing criteria that is either exotic that they just make up to try to choke that inventory from showing up on their stock order in ordering it, or what they’ll do is use ones that don’t have a proven statistic behind it to know what effect it does.

Shawn Larkin: I can tell you that nearly overnight, effectively 30 days, by making a couple of button presses, you can choke your inventory. I call it choke, because effectively, that’s what you’re doing. You can reduce your inventory 25-30% right away.

Crystal N.: That should make a huge difference when we’re talking about large numbers, like the $750,000, etc. Right?

Shawn Larkin: It makes a big difference, whether we’re talking about a small dealer inventory that has only $150,000 or we’re talking about a very large inventory, but what happens is, now when your fill rate or off-the-shelf level of service, whatever you want to call it, to supply your customers with the parts they need, drops dramatically. I have seen dealers who, their off the shelf fill rate is in the high 40s. Basically, they were doing exactly that. They were choking off the active parts because they had a mandate and a ceiling on their inventory.

Shawn Larkin: I’m not saying that having a ceiling on your inventory is a problem. I mean, it makes sense to have it, but it’s a measurement, but what’s actually inside of that inventory that makes that number. What happens now is, they’re trimming up the active parts that don’t sell frequently. So, they were active, but now they’re just not frequent enough. They have to do something, so they cut those first. Right? A part that they sell every single month, they’re obviously going to keep that.

Crystal N.: And month over month, those parts are going to change. Right?

Shawn Larkin: I mean, it could change day by day, right, or even transaction by transaction. But realistically, the bulk of the inventory gets reviewed across the board in its aging analysis and is really monthly, but what happens now is, about 25% to a third of a dealer’s inventory are those parts that sell bi-monthly to every third month, but that’s a huge portion of the inventory, that, actually feeds the shop and your customer. It doesn’t mean that they’re bad parts. That’s a huge population.

Shawn Larkin: When you cut that out, what happens now is, you think about the process to bring in a customer into the shop. Right? Because for most dealers, the shop is their biggest customer, right? What happens now is, the customer… I mean, for the customer, it’s a big process, and they hate it just to begin with. I mean, it’s just inconvenient. But internally, at the dealership, someone takes their call. Somebody looks it up, books an appointment. The customer comes in. Then an advisor handles it. If you have a porter, the porter is moving the car, and then the technician is handling it, driving in and out of the shop. Now they go to parts and don’t have the part, then they’re sending the vehicle outside.

Crystal N.: A lot of hands in the mix.

Shawn Larkin: There’s a lot of hands. It’s a lot of time, which means a lot of dollars.

Crystal N.: Totally.

Shawn Larkin: But then, think about it. They don’t have the part, or they don’t have all the parts to complete it. Guess what happens again? Parts department special orders the part, and we do the whole process all over again.

Crystal N.: Yeah, and that’s where the problem begins. Right?

Shawn Larkin: That’s the spinoff of the problem. What really happens is, you get paid by the customer once to finish the job, but you’ve handled the customer twice. That whole process. The same, likewise, happens. It’s just different when it’s wholesale or retail, or they just go elsewhere. These are hidden expenses, cause opportunities that you can’t measure, but what you’re measuring is, now we’re at 1.5 months supply. But I’ll tell you that the parts of sell bi-monthly or every third month, that’s 25% to a third of your inventory value in itself.

Crystal N.: That’s a lot.

Shawn Larkin: It’s active parts. It’s a lot. When your parts manager gets his back up against the wall, that’s the stuff that’s going first. Okay, so let me talk about, how should you fix it? The real problem for dealers, it’s not their active inventory, unless you’re going crazy with ordering these program orders or ordering a huge supply, and you don’t have a handle on day supply. If there’s not a strategy behind that, I mean, you could end up with problems. But generally speaking, that’s not the problem. Your problem is not active parts.

Shawn Larkin: Your real problem is your idle and obsolete parts inventory. Often, you’ll hear parts managers define an inventory, whether it’s good or bad, by whether or not… or how much he has of 12 months in older parts.

Crystal N.: But they’re not actually looking at the parts that are less than 12 months, right? What happens to those parts that are 9 months, or 10 months, or even say sometimes 6 months and see no movement? What happens to those parts?

Shawn Larkin: You’re exactly right. What happens is, the definition of, how much do I have in 12 months and older, is only a small window of what your parts inventory is like. What happens now is, of course, a parts manager gets rid of the oldest parts in inventory. Whatever oldest parts he has in inventory, at least that are eligible for return, that whole group means that’s where he’s applying all his return allowance.

Shawn Larkin: The question is, let’s say all his parts are all at 12 months older. There’s only a couple parts that are 13-14 months old, but they need to be written off that aren’t. Let’s just assume that. What happens, then, with the parts which are special order, unsold or return special-order parts now, which are on day 61?

Shawn Larkin: They have to sit there the entire duration until they become the oldest. Right? Only defining that your parts inventory is good or bad by looking at the value or the percentage of inventory that’s 12 months and older is only any number to look at. Right?

Crystal N.: Right, so what a dealer should actually be looking at for those parts, in specific, is different.

Shawn Larkin: It’s really about getting a handle on the inventory you shouldn’t have. For some, they can’t define this. Right? Or they don’t have any visibility into what this means, but really, what we need to do to implement properly so we don’t create the unintended consequences that you were talking about, really, what we need to do is a couple of things. This is a slow process. It doesn’t happen overnight. Let me just try to rattle them all off, the things that you need to do without affecting active inventory.

Shawn Larkin: First, I would say it’s to make sure that you actually have a proper methodology. We talk about that in various articles we have on our website.

Crystal N.: Lots.

Shawn Larkin: A lot, exactly. We have to have a proper methodology that actually you know the percentages of the probabilities and the risks associated with ordering a part, based off its prior sell history. Right?

Crystal N.: Not just going off your gut and just, “Well, I sold lots of them, but now it’s kind of trickled down, but I think I’ll sell more, so I’ll just order some more in.” That doesn’t work.

Shawn Larkin: Exactly. A way to know whether a guy has been trained, or knows enough to implement technical criteria and how he controls inventory, can be dialed in and filtered through his entire parts inventory on excel. If I have my inventory on Excel, and I can’t filter it to show you what I call active and what I call nonactive, idle and obsolete, if you can’t do that on Excel, it means you’re winging it. That’s what it is, right?

Shawn Larkin: Now, maybe you have the experience, but years of experience doesn’t necessarily always mean that you have the odds working for you because you don’t know what they are.

Crystal N.: No, and things change. Right? New procedures come into play. When you take that all into consideration, you have to take that back to your parts inventory and implement that properly.

Shawn Larkin: Exactly, and through your DMS. The first step is just knowing that we actually have a strategy or a methodology to handle inventory from the get-go. I mean, that’s number one by far, but that’s a little more complicated topic for another video, but we do have articles on our website specific on that.

Shawn Larkin: Then the next thing, so how do I get to 1.5 months supply, then, would be to look at your program orders and just stop ordering them. I’m not saying that that is the right thing to do, but if you have no other choice, then that is a thing to do. Because generally, you’re ordering these parts because you sell lots of them, anyway, but now you’re not getting the discount.

Crystal N.: Now, I know, Shawn, some dealers get themselves into a situation where they work for a specific brand where they are required to order a certain amount of parts or specific parts, I should say. What about those dealers? How do they handle it then?

Shawn Larkin: Well, you know what? That is a topic in itself. Let me spare that for another conversation. I’ll spend an hour on that, alone, in how to handle it and what you do. I mean, that gets pretty deep.

Crystal N.: Okay.

Shawn Larkin: Here’s the thing. You’re talking about manufacturer programs. You’ve got to think about why those are in place to begin with. They’re in place as to help your inventory, but anyone who’s selling you anything, who’s interest do they have first?

Crystal N.: Theirs.

Shawn Larkin: That’s something to consider. That’s why that becomes a whole conversation, itself.

Crystal N.: It’s a recommendation.

Shawn Larkin: Well, yeah. I mean, that’s the way you need to look at it, as a recommendation, not as the Bible.

Crystal N.: This is set in stone. This is what you need.

Shawn Larkin: You never want to do that. I’ll spare you for another conversation about that.

Shawn Larkin: Then the next thing is making sure that your day supply. What is your day supply, very specifically, and how do you ensure that that’s exactly what you’re following? Is it 30 day supply? I don’t recommend anything less than that for active inventory, because you start running out. That means you’re running to other dealers, picking them up. I mean, the list goes on and on. But basically, not having the part of active inventory is the worst.

Shawn Larkin: That’s the next thing, getting your day supply to 30, at least on your active inventory. As for the idle inventory, you’re not ordering them, unless a special order for a customer. Anyway, there is no day supply that you set on it, although it’s a blanket across your database, or should be.

Shawn Larkin: Okay, so then the next thing would be to implement, if you don’t already, a special order process where everybody, retail, internal, that’s a conversation, too, in itself, internal, prepay for the parts, whether it’s retail counter.

Crystal N.: Which is difficult, isn’t it? Because there’s a lot of pushback with that.

Shawn Larkin: Yeah. Well, there is. You know where a majority of the pushback is?

Crystal N.: It’s people ordering it.

Shawn Larkin: Yeah, it’s our own people. Our own people are the biggest pushback, but we wrote an article on that. You can Google it: Top Six Ways Dealers Can Get A Handle On Idle and Obsolete Parts Inventory. We list all these. Anyway, prepaid parts, implementing prepaid parts on the retail shop and internal and over the counter is a way to get a handle on it, because that’s where the problem starts.

Crystal N.: Then there’s security, right? It’s like you know the part is coming in. The part is already paid for. So, worst-case scenario, if it doesn’t get picked up, it doesn’t get used. It was misordered, whatever. It’s still paid for, so you have that security.

Shawn Larkin: Yeah. I mean, you de-risk the probability that the dealership owns the part. That’s where the problems come. There is a small… but depending if you’re running a proper methodology on your parts inventory, ordering them correctly, there’s a small percentage that actually fall off in a year that were active and now become idle and obsolete. It’s very small, but in comparison to the real problem is, these special orders, unsold and return special-order parts, and it’s easy to say that, “Well, we don’t have many.”

Shawn Larkin: But I can tell you that generally speaking, kind of a rule of thumb is, the value of parts that you have 10 months and older, you have approximately equal value that are nine months and less, that are idle. Well, they’re not obsolete, but they’re idle parts that you shouldn’t have. Kind of a rule of thumb if you have 10 months and older parts, and you have $100,000, effectively, you could almost bank on that you actually have $200,000 if you were to look at those unsold and return special-order parts, which are not aged out yet. Just because there’s no name on them doesn’t mean they’re not a problem.

Crystal N.: Doesn’t mean they belong there.

Shawn Larkin: We special ordered it. We hate special order parts, right? Until they sell, we love them, obviously, but when we go ahead, and the customer cancels or picks it up and returns it, we rip the name off it. It doesn’t mean they’re not a problem anymore. In fact, it’s a bigger problem.

Crystal N.: No.

Shawn Larkin: Right?

Crystal N.: Yeah, yeah.

Shawn Larkin: That’s the other thing, implementing prepaid is an absolute must. Then the other bit would be trying to get your special order bin in check so that there are no parts in your special order bin older than 30 days old, the next step, because if you let it sit, the longer we wait, the longer the problem gets.

Crystal N.: The worse the problem is. It just magnifies it.

Shawn Larkin: Yeah. The probability of the customer coming back gets worse by the day. The absolute worst-case scenario is not having anything older than 30 days old. 60 days, I mean, is a way to do it, but that’s too loose, in my opinion, so then the next strategy to implement would be to have pre-booking customers, retail customers, at least for the shop, pre-booking them before they leave on that initial visit, before they leave, pre-booking them. This includes warranty, too, pre-booking them their next appointment when the part actually lands. That’s important so that you’re getting a commitment from the customer to actually come back, rather than the part comes in a few days. Now you’re working with the customer over the phone.

Crystal N.: Trying to get ahold of them, yeah.

Shawn Larkin: Right. You want to do it right off the hop. This is very slow. There’s a lot of implementation of process.

Crystal N.: And it’s not just one person, either. It takes everybody to participate together, because everybody, as you’ve said, it’s that whole process in the beginning that you explained. Everybody kind of ties into another, and each position can help implement this, but it takes everybody to work together to implement it as a team, basically, right?

Shawn Larkin: Yeah.

Crystal N.: To kind of clean this up.

Shawn Larkin: It’s a coordinated effort, but the thing is that overnight, or even in 30 days, provided you can implement all this stuff and take some time just to implement this stuff and start checking them off, it’s slow. It’s slow to do that, but if you want immediate effect, I mean, you already know the answer. How can we have an impact on our inventory overnight to get to our number? The obvious answer is, well, that’s easy. Just stop ordering active parts, but I’ll tell you the cost of that is much bigger than trying to implement proper procedures in policy, try to get it under control. Here’s what I’ll leave you with. The real problem is not your active parts inventory. Of course, we all know that.

Shawn Larkin: The real problem is your idle inventory, and that’s what is ballooning. That’s what you can only get rid of so much. That’s the stuff that creates the problem. The looser your processes and policies are on idle parts inventory like you don’t have a prepaid process, you don’t have a methodology on inventory control, you’re not pre-booking customers. I mean, what happens is, it starts to get a bit sloppy. Which means that your idle parts inventory starts to balloon more than, of course, what you can get rid of back to the manufacturer. That just means that when you start to implement 1.5 months supply, the amount of active inventory you would have to scale back just to meet that number is even more, so the effect is even worse.

Crystal N.: Especially this time of year. I think dealers are really aware of what that number is. We’re coming to year-end. Dealers really know what they’re looking at, and what has been moving and what is not moving. That’s a big number for some dealers. Some, maybe not so much, but I think that this time of year is when, like I said in the beginning when they’re starting to implement and review and just looking at that number and making sure that they’re following these steps and starting that implementation now, so moving forward, then they have a plan in place, and they can start building, because if they don’t start, then it just keeps compounding.

Shawn Larkin: Yeah. I mean, there’s a bigger story. What happens is, if it’s month after month, year after year, the parts manager can’t get an in check because he really knows that I can only scale back active inventory so much. The problem is, what we would see is, we just keep trying to find a silver bullet, and replacing parts managers or finding parts managers or key leaves, he’s just like, “I can’t get this done,” because he can’t get it done, but what we’re really missing is, if you got the right guy, you just got to start with training and implement some processes. Yes, some of them are tough? Pre-paid’s are tough, not because it’s hard to implement, but you get a lot of push-back internally. How do we handle it? How does the DMS handle it? It’s all not hard. It’s all just in your head.

Crystal N.: Well, you and I, we’ve worked together for quite a while, and one thing that we’ve always been really firm and mutual on is to hire attitude. If they come with the right attitude, you can train them any skill you want, basically. Really making sure with your people in your department that everybody comes with that attitude, that we’re going to work at this together, and we’re going to make this better.

Shawn Larkin: Exactly. I mean, if you got the right guy, the right attitude, right morals, and ethics.

Crystal N.: Regardless of if he has 30 years, or 10 years experience, or five months’ experience. All those people, if they have the right attitude, then this is fixable, totally.

Shawn Larkin: Exactly. Let me wrap this up with this one last line. What dealers really need to do is, 1.5 is not a bad number. That supply is not a bad number. What happens is, how we get to it does matter. If you want to take the easy way out, it just costs you much more dollars. I mean, you can’t even count what the costs are, but it’s incredible.

Crystal N.: Yes, absolutely.

Shawn Larkin: It’s not about the easy way out. It’s about, okay, so how do we come up with a plan? I list off a ton of stuff. Go to our website. Look at the blog section. There’s a ton of articles on how to achieve that, and the list goes on, but…

Crystal N.: Absolutely.

Shawn Larkin: … I would say that’s all we have to add to these for this conversation. I could go on for another three hours but maybe don’t.

Crystal N.: Yeah. I think that we do this on a regular basis, though.

Shawn Larkin: Exactly. Very good.

Crystal N.: Okay.

Shawn Larkin: I appreciate it.

Crystal N.: Okay, thanks for your time.

Shawn Larkin: Thanks.

Crystal N.: Okay.

Shawn Larkin: Bye.

Why You Shouldn’t Sell Your Idle Parts at 50 Cents on the Dollar

On average, idle and obsolete parts inventory comprise 30% of inventory on the shelves of every dealer in North America. Idle parts include non-stocking and phased-out parts.

Non-stocking parts are those parts that were unsold or returned special order parts while phased-out parts are those parts that have lost their sales demand and haven’t sold in the last 9 months of the last 6 months for more progressive dealers.

It’s an industry rule-of-thumb that when some parts sit in stock for nine months with no sales, there is only a 15% chance that they will sell. After 12 months, the probability of selling them drops to 5%, which means that there is 95% they will not sell at all.

Unfortunately, dealerships only have a few options to recoup their lost for idle parts inventory such as selling them for scrap, toss them in the garbage, auctioning them, or selling them online.

Randy Buyers, Parts Manager at Ontario Chrysler, on the other hand, don’t see these as an option, “I’m not selling my obsolete parts inventory for 50 cents on the buck – when I have other avenues to get rid of them where I don’t have to discount them”.

While there’s a growing concern about obsolete, and idle parts inventory in every parts department, selling idle or obsolete parts inventory for 50 cents on a dollar or even less is no longer thought of as a great avenue.

Today there’s no need for dealers to sell their idle parts inventory through different avenues with major losses. NADPE has designed a parts exchange program that helps dealers prevent losing to half the value of their parts inventory.

NADPE’s Parts Exchange Program is a solution that allows dealers to exchange their slow-moving inventory for active, and fast-moving parts inventory. Through this program, parts managers can get the full dealer cost of their idle parts, no matter how long they’ve been on their shelves. Parts managers will no longer be forced to sell their idle parts in different avenues hoping to get one-half of their investment before tossing them, where they ultimately get zero.

“The parts exchange program turns inactive parts inventory into current and fast-moving parts without me having to lose my shirt by discounting them.  In other words, I’m really retaining and getting back what I got into my inactive parts”, says Buyers.

Learn more about the NADPE’s Parts Exchange Program by visiting NADPE.com

Through A Growing Problem For Dealers, A Much Needed Solution For Obsolete Parts Inventory Is Born

The parts exchange program tackles a growing epidemic that sees dealerships holding onto slow-moving, obsolete, and idle parts inventory. Unlike other parts marketplaces, NADPE offers dealers a way to swap the parts they don’t want for parts they do want – all at full dealer cost – so there’s no loss for the dealer.

Randy Buyers, Parts Manager at Ontario Chrysler, sums up the problem, “Most manufacturers have gone to an auto-replenishment order system and it has increased inventory amounts by hundreds of thousands of dollars. Where in the past I was able to keep idle parts at zero, I now have some parts that have had a birthday and a half, sometimes two birthdays, on the shelf. It’s unacceptable, but it’s a problem for every dealer.”

Parts departments have consistently been concerned about the prohibitive structure of manufacturer parts return allowances. Dealerships are typically finding that the allotted return allowance covers only a small percentage of parts that need to be returned. With slow-moving and obsolete parts comprising up to 30 percent of inventory on the shelves of the average dealer, this is a huge issue set to increase.

Buyers’ iterates that his manufacturer’s parts return accrual has been reduced in the past several years, what was once at 6.5% has now been slashed to 2%. “It’s just not enough to keep my inventory clean. There’s just no way to send back enough parts to stay current.”

Ford Motor Company has eliminated parts returns completely for dealerships operating in the United States, except within the first 60 days of purchasing with a tight return allowance percentage on those returns as well. Forcing parts departments to liquidate unneeded inventory in alternative ways with big losses. Other manufacturers are expected to follow suit in the coming years. In the last few years, many manufacturers have already slashed their parts return allowances leaving dealers scrambling for options.

Scott Campbell, Dealer Partner at Midtown Ford, echoed the importance of the weaning off return allowance, “Return allowance accruals are anywhere from two to five percent. It’s a necessary evil for manufacturers [to reduce return allowances].”

The inability to return slow-moving parts inventory, means dealerships need to be equipped to handle a steadily increasing parts inventory that takes up space or take massive losses when liquidating parts with insufficient sales demand.

 Few Options to Disperse Idle Parts Inventory

Parts Managers have very few avenues to recoup costs for their obsolete and idle parts inventory. Some have experimented with selling parts through online marketplaces such as eBay and Craigslist; however, selling on such platforms involves a significant time investment, initial and ongoing costs to maintain required software, and a small amount of profit (selling parts one at a time nearly at cost). Being a competitive marketplace, these sites provide little return if you’re not a large dealer with a long-term strategy capitalizing on deep manufacture discounts for volume purchases.

Auctions remain an option for dealers, although just 15% on average of dealer cost on parts is recouped this way. Another option is to salvage or simply just dispose which leads to virtually no monetary return.

 Exchange Program Solution

The Parts Managers concern about idle inventory has not been ignored. A startup tech company, led by industry expert, Shawn Larkin, has focused its services on this niche. Larkin’s, background as a Fixed Operations Director led to the creation of North American Dealer Parts Exchange (NADPE) the first of its kind, parts exchange program solving the idle inventory problem.

To combat financial losses of selling idle parts inventory through different avenues, NADPE is structured as an exchange program. Participating dealers upload a list of parts in idle or obsolescent status. The inventory in the NADPE platform actively cross matches dealer inventories looking for correlations and matches – facilitating bulk trades between dealers at full dealer cost and exchanging within a dollar of each other. NADPE virtualizes the OEM’s Parts Distribution Centers using data to find where to redistribute and reallocate parts in bulk based on each dealer’s sales demand and needs.

Campbell from Midtown Ford, says, “if parts managers are staying on top of it… it’s a sure-fire way to prevent losing up to half the value of the parts.” He remarks that NADPE’s exchange program lets parts managers focus on fill rates instead of idle and obsolete parts inventory, eliminating the spiraling effect throughout the dealership.

The exchange program mitigates hard-to-swallow losses by offering trades at dollar-for-dollar values. In turn, NADPE earns its revenue from a 5.99% transaction fee – making it a pay-for-performance model.

Shawn Larking, NADPE’s CEO, says, “We certainly don’t focus on the selling aspect. As a former parts manager myself, I understand how difficult it is to justify losses on slow-moving parts inventory, no matter how long they’ve been sitting idle on the shelf. We want to offer a premium program whereby parts managers can reduce their idle parts inventory with little to no damage to their bottom line, which is why the dealer-to-dealer exchange is our focus. The idle and obsolete parts dealers need to get rid of are normally still active parts inventory in the manufacturer’s parts warehouse, meaning they are still good selling parts, they’re just in the wrong dealership. So, to take losses, to get it in the right dealership makes no sense.  Hence the exchange program”

It’s a program that Buyer’s, from Ontario Chrysler, has used on several occasions, “We had some parts which had no-sales for 7 to 15 months. [With NADPE] we moved over $142,000 of parts. The effect for me now is I’m about a month away from having parts in the building no older than 6 months.”

The program has also made an impact for Cheryl Law from Go Dodge, “After 11 months with NADPE, I’ve moved $96,245 of idle and obsolete parts inventory with just under 50 trades. I moved all of those parts at dealer cost, exchanged them for parts I could use and sell often. The amount of parts I’ve moved through them has made a big dent in my idle parts inventory.”

The Future of Parts Management

Industry standards in the past have been twelve months before a part is considered obsolete. Today’s parts manager has much less time to turn inventory.

Scott’s, from Campbell Ford, parts inventory is more stringent, “Most dealers set phase-out at nine to twelve months. I believe that if a part hasn’t sold in three to five months, there’s no reason to keep it on the shelf. I’d rather eliminate that part from inventory and replace it with parts I’ll turn over regularly. That’s where NADPE really becomes effective.”

With idle parts inventory increasing as manufacturer parts return allowance are tightened, dealers are running out of options to recoup capital. It is clear that NADPE’s exchange platform is the solution.

Understanding Your Manufacturer Replenishment Program

Our friends at PartsEdge.com have recently released a Parts Manager educational video on your Manufacturer’s Replenishment Programs.  We couldn’t agree more with the expertise shared on this topic. In the series, you’ll hear from Chuck Hartle, PartsEdge’s resident parts expert.

In this particular video, we think you’ll find lots of value. Chuck discusses how knowing more about your specific program can help level up your parts department. He shares specific data that indicates manufacturer programs are not dealer driven but manufacturer driven.

It was once said that parts inventory management wasn’t rocket science.  That’s never been the case, especially in today’s environment.

“Dealer’s have nearly 15% more obsolescence than dealers not on a manufacturer program.”

 “In the 5 years, obsolescence has increased by 7%, that is effecting dealer’s pocketbook.”

If these few quotes haven’t got your attention, we don’t know what will.  This segment will cover the key points you need to know about manufacturer replenishment programs.

You’ve got to watch it for yourself. We look forward to hearing what you think.

Like All New Things, It Takes Time

Developing relationships with your customers is vital to your success. Understanding their standpoint, helps you better understand how you can help them. At NADPE, we believe that by developing these relationships, we become what we call “human”. Not just a voice at the other end of the telephone, an email thumbprint or signature, we are people that care.

We had a great discussion with one of our successful Chrysler Dealers, Jeremy Baratto the Parts Manager of Team Chrysler, about his experience with NADPE. If you missed it, be sure to check out our most recent articles for the depth in that conversation piece. Compounding from that article, was a discussion we seem to have regularly about the ease of use, and success of the online exchange platform and Jeremy hit the nail on the head, so we’d like to share his wisdom with you.

Almost daily we get asked how much time is expected of the parts manager and how hard the program is to use. We thought we’d take it from a customer standpoint and ask Jeremy. His response was: “Very easy. The first couple was a little overwhelming but in a good way. I see all the parts I potentially will be getting rid of. You have total control of what you want to move out and what you have agreed to have incoming.”

Okay, so that answers the difficult question…what about when it comes to trades? “Like all new things, it takes time to get comfortable”. Understanding the process and what is expected of you, doesn’t come overnight, but at NADPE our objective was to make it as hands-free for the parts manager as possible. When we asked Jeremy, he stated: “It did take some time, the first couple, but nothing too difficult to figure out. Now I can review and modify a trade in minutes.”

It’s always a concern that when you sign up for a program, you’re going to be bombarded with info, in the beginning, then have it almost immediately peter off and not be able to get anyone on the phone to help you when it comes time to use it. In understanding this, we asked how Jeremy felt about the learning curve with NADPE. We were flattered with his response: “The staff is amazing. These guys know what they are doing. They can modify the settings to your liking and change them again at any time. I can’t say enough good about Shawn and Jordan, Bravo!”

Fairness and cost-effectiveness are a top priority when it comes to trades on the exchange platform. To ensure we are upholding that promise to our customers, we asked Jeremy if he would agree that we are keeping to that promise. He said: “absolutely!” And continued to add: “I look at the big picture. How much inventory do you have to purchase from the Manufacturer to be able to return $1,000.00 of inactive inventory?” Very good point, Jeremy!

Customer retention and satisfaction seem to be a continuous uphill battle, in a competitive, always changing and thriving industry. The question of, “Why choose NADPE in the first place” and “what makes you stay” are always at the front of mind. When asked, Jason responded promptly with: “A local Dealer recommended you. They spoke very highly of you for some time, and as I said earlier, I was afraid of something “new”. I didn’t give you the chance you deserved for a long time. Only wish I had joined sooner. Simply, the results are what keeps me a member of this program. Thank you NADPE.”

Why Your Parts Manager Is A Money Manager

From the outside looking in, a parts manager’s job is viewed by some simply as an inventory clerk and a supervisor of people. This is a misconception by those who don’t understand the complexities of controlling parts inventory and making capital perform. Parts managers play a key role in converting capital the dealer principal puts into parts inventory into profit. Parts managers are really money managers. High performing progressive dealers understand this and treat the parts manager like they are managing an investment fund – because they are.

Just like a used car manager, a parts manager is responsible for taking the initial investment in the asset and turning a profit. Simply put, both the used car manager and parts manager need to make money perform. Both take the initial investment and turn a profit and reinvest the profits into the business to make it grow.

The difference between a used car manager and the parts manager is the complexities of ordering and returning parts inventory, and dealing with special order parts.

One truth for both is that the money invested must perform. Therefore, the product must sell, preferably as fast as possible, so the odds of a quick turnaround with a large profit are in favor.

So, the question is: “Why do we handle used car inventory so different than parts inventory?”

  • Depreciation: Used car inventory depreciates by the day. Parts inventory doesn’t unless it’s been in inventory over 12-months without sale, then it’s in write-off territory.
  • Plan B: Used car managers have an outlet to get rid of used car inventory after 90-days if they haven’t sold it yet. They can sell to a broker or even an auction. Parts managers don’t have that outlet – until recently.
  • Timelines Are Different: Probabilities to move car inventory for a profit exists within the first 90-days (the sooner the better of course).  Parts inventory probabilities are basically 3x longer (2x for more progressive dealers). Where used cars have a profit lifespan of 3-months compared to 9-months with parts inventory, provided there is sales demand for a unit or parts inventory to begin

Understanding how to manage parts inventory when you have a small manufacturer’s parts return allowance is the key to increasing profitability and lessening the likelihood you’ll sit on under-performing parts or write them off in 12-months.

The key to managing parts inventory is knowing the odds of selling parts inventory and then applying those odds with a methodology to control parts inventory. To help your parts manager be a true money manager, we listed the 3 different types of parts inventory, their odds, and how to best control them:

The 3 Different Classifications of Parts Inventory

Parts inventory is classified into three groups and each group has different odds of selling.  Parts inventory is filtered into each class based on sales demand (and lost sales) activity within the last 12 months. If initially set up by the parts manager, every DMS can qualify individual parts based on sales history automatically.

  • Active Parts Inventory: Inventory that has sold in at least 3 separate months, within the last 12 months rolling, and has sold at least once within the last 9 months (6 months for progressive dealers).

 

We call this 3-in-12, 4-in-12, and so on up to 12-in-12. We count the number of months an individual part has sold.  If a part sold in 3-months, within the last 12-months rolling, we would consider this part an active part.

 

  • Phased Out Parts Inventory: Inventory which once had lots of demand and was once classified as an active part, but since has not sold in the last 10-months (7 months for progressive dealers), and hasn’t sold in 2 or less months within the last 12-months rolling. We call this 2-in-12, 1-in-12, or worse, 0-in-12.

 

  • Non-Stocking Parts Inventory: These are special-order parts. These parts have never qualified for stock (using active parts method mentioned above), would never be seen on a stock order, and would never be purchased unless specifically ordered for a customer. Like phased out parts, these parts have a sales demand of 2-in-12 or less. These are the biggest offenders in any parts inventory because they would never regularly be ordered unless specifically asked for by a customer.

 

The Parts That Actually Make Money

Active parts inventory are the best performers. These parts have a 93% chance of selling again, which is incredible odds. In this case, the dealer makes a profit on 93% of the active inventory. Only 7% on an annual basis will become losers.  If managed correctly, this 7% won’t need to be written off and will be returned before they get to 12-months-no-sale – the danger zone where parts are normally writing off.

The Parts That Are Losing Momentum

Phased out parts inventory have lost sales demand. These parts were once ordered often on stock orders, but now are 10-months old since their last sales transaction (7-months old for more progressive dealers). At 10-months-no-sale, these parts have an 85% chance they’ll never sell again. Meaning only a 15% chance that they will until they hit 12-months-no-sale where the chance of sale becomes much worse. Phased out parts are not the biggest problems within a parts inventory, but they can become big problems when dealers lack return allowances to return them after they lose sales demand.

Your 2nd Worst Nightmare

Non-stocking parts inventory that is ordered in specifically for customers, and not sold, are a huge problem for parts managers. Dealers get stuck with these non-stocking parts for a variety of reasons: customer no-show, customer misdiagnosed, tech over-quoted, the customer wrote-off their, etc.

These non-stocking parts, depending on the demand, have between a 35%-65% chance of never selling again.

You may be wondering, “Why are non-stocking parts the second-worst nightmare for a parts manager if the odds of selling them are higher than phased-out parts inventory?” Well, there are a few reasons:

  • First: Non-stocking inventory represents the largest and the hardest parts to gain control over to minimize the impact to both the capital invested in inventory and the ability to return them in a timely manner.
  • Second: The biggest problem is that they represent the largest portion of under-performing inventory by an excessive amount. Usually, within the first 30-days, if these parts are not sold the odds are poor that they’ll be sold within the coming few months. Since they are not the oldest parts in inventory, they sit in inventory until they become the oldest, usually around 10 to 12-months before they are next to be returned because parts managers need to get rid of the oldest parts in inventory first due to an insufficient amount of return dollars.
  • Third: As non-stocking parts inventory gets older and sit on dealer’s shelves without selling, they have fewer odds of selling – compounding the problem.

Your Worst Nightmare

A parts manager and the dealer principal’s worst nightmare is when any parts, be it the phased-out parts or non-stocking part, hits 12-months-no-sale. This is because parts that haven’t sold in 12-months or longer have less than a 5% chance of selling again. That’s right – 95% of those parts will never get sold to a customer.

There are three separate studies on dealer’s inventory that show that at 12 months-no-sale if you sold one of these parts at retail price, you will break even with your holding costs. There are two other studies that suggest at 9-months and at 10-months-no-sale, IF you sell one of these parts, you will break even. This evidence shows that parts at 12-months-no-sale are a huge liability because dealers end up writing them off or tossing them into the garbage.

Finding A Solid Plan to Avoid Write-Offs

Although no dealer can get ahead of the curve, and have zero parts that are considered phased-out parts inventory or non-stocking inventory, they can definitely implement key strategies to slow down the amount of under-performing parts inventory. Progressive dealers implement processes so that they have very little to no parts write-offs and they have enough return allowance to keep parts inventory less than 12-months-no-sale.

Dealers on a manufacturer program might conclude that they have their hands tied and take what the manufacturer recommends – staying compliant. Although being compliant is something most dealers choose to do, parts managers can apply proper inventory control methodologies to try and keep out parts inventory that doesn’t have sales demand as much as possible, while staying at the lowest compliance percentage as possible. It’s a balancing act.

We talk a lot about parts inventory control methodologies in our Fixed Ops Magazine article here.

A Real Plan to Avoid Write-Offs

There are a few outlets that let dealers recapture some of the losses on parts inventory which ages out, of which most of those avenues require the dealer to take a 50% loss or more. Some dealers even refuse to take the loss and sit on parts inventory for years. Either way, dealers are stuck – until now.

Now there is an alternative way for dealers to unload underperforming parts inventory and get their full cost back. Using a parts trading program that basically swaps out parts inventory they don’t want for parts inventory they do want and can sell. You can find out more about the parts exchange program here.

It Takes Time

Managing parts inventory is no different than managing used car inventory. It’s a long process, but the best method is to start getting a handle on which parts are performing, which parts are not, and classifying them correctly to get the odds in your favor. In time, you’ll have a great parts inventory that is managed as well as your used car inventory.

If you’re feeling overwhelmed with your idle and obsolete parts inventory, you’re not alone.  If you’re looking for more in-depth support, feel free to contact us and book some time to get some help.

About the Author

Shawn Larkin is a feature article writer for Fixed Ops Magazine and the Founder and CEO of North American Dealer Parts Exchange Inc. (NADPE).  NADPE is a marketplace to help the parts department within new car dealerships move idle and obsolete parts inventory in bulk without any losses.

Shawn has spent his entire professional career in the dealer parts business.  Starting in shipping and working his way up to Director of Fixed Operations managing multiple locations with a staff of 75 and an annual turnover in excess of $17 Million.

Shawn brings a deep understanding of how parts departments work, their economics, and their needs and problems, as well as the psychology of parts managers and dealership owners.

To learn more about NADPE or Shawn Larkin, click the embedded links.

Getting Over The Fear of Trying Something “New”

In a recent conversation with Jeremy Baratto, the Parts Manager of Team Chrysler, we had the opportunity to get some invaluable feedback about our parts exchange program. It was interesting to find out what provoked him to sign up, his perspective on the benefits of using our program and hear his side of the story. We are grateful that Jeremy has allowed us to share some of his insight.

Initially, we wanted to know what problems Jeremy had in his parts department, prior to joining NADPE. His response was: “I always wanted, and believed, that I had a low percentage of inactive inventory. With the increased parts return limitations I was receiving over the years from the factory, I noticed an ongoing increase in my inactive inventory. I also have a problem with MSQ’s (minimum sales quantity) packaged parts…you know I need 1, but I have to buy 5 or 10.”

We asked if he thought this was an industry-wide problem. Jeremy responded: “I do, the OEM’s to me is saving money from every angle. The amount of return value the dealers can accrue is declining. Therefore, the dealer’s inventories are swelling. As well, the number of parts with MSQ’s have increased.” He later went on to mention: “with NADPE, you can even exchange parts that the Manufacturer won’t take back. You can exchange parts that have MSQ’s, rather than sitting on 9 of one part# because the MSQ is 10 and the Manufacturer will not take back 9. You have the potential to trade them for something that will sell off your shelf.” So all-in-all, NADPE came as a huge relief, enabling dealers to get rid of those parts and help reduce the swelling.

In many of our posts, we discuss the importance of how a Parts Manager is the “money manager”, in the parts department. In relating that to Jeremy, we asked if he thought this was a problem work solving. His response, which directly correlated with the opinions of NADPE, was: “I respect my Dealer Principal, after all, this is his money, and I am responsible for it. If I’m not treating his money like it was my own, then I’m not respecting him/her.” Great advice from a successful parts manager.

When presenting NADPE to potential new customers, a common question we get asked is: “Does it work?” If Jeremy could answer for us, he would leave no doubt in your mind that it does. In fact, he gave us some numbers, to prove that it does. “The amount of inactive inventory is reduced, my over 12 months on hand went from over $13,000.00 to as low as $3,500.00, and I still have return accrual available”, said Jeremy.

So, why then did it take him so long to get signed up? What was his hesitation? Jeremy’s response was: “To be honest, I really wasn’t aware of these programs. I had heard of them, just didn’t really focus my attention on them, for a long time. There is always the fear of trying something “new”. We are creatures of habit and are afraid of change. Also, of course, the question that everyone asks. How much is this going to cost me?” We then asked what it was that put his fears to rest. He answered: “The cost is reasonable, for what seems to be a large effort, that is put into this.  The process is simple and if there are any questions the staff is very knowledgeable and friendly to work with.’

Jeremy has been a great promoter of NADPE, so obviously, we wanted to know what he liked most about our program, and what ensued him to recommend NADPE to others. Jeremy’s rewarded us with this response: “The satisfaction of knowing inactive parts are going out the door in exchange for active parts. For what I consider a small fee, the results are impressive. If the Dealer Principal ever asks how much inactive inventory they have, you might as well be prepared with a low number.”

In closing, we asked Jeremy what he would say, should he recommend NADPE to another dealer who might have hesitated. He said: “Keep an open mind and remember what you’re doing for the dealership. $20,000.00 in stale inventory can be used to buy a couple used cars and sell them for a profit. So why have that kind of money sitting on the shelf in the parts department?”

 

Top 6 Ways Dealers Can Reduce Idle & Obsolete Parts Inventory

On average, every dealer in North America has 30% of their parts inventory classified as idle parts. This represents $88,000 for the average dealer with a $291,000 inventory. This includes both parts that are considered non-stocking, better known as unsold or returned special order parts, and phased-out parts- parts which once sold well but no longer sell and have aged-out.

Technically Trained Parts Managers

Often, you’ll hear the words “clean parts inventory”. A generic term that isn’t used by experienced, and technically trained parts managers to define an inventory’s performance or age. Technically trained parts managers would never refer to their parts inventory as “clean” unless they had less than 2% of their inventory value in 12+ months without sales activity (known as 12+ “months-no-sale”). Parts Managers who are trained on a technical level, use techniques like mathematical probabilities, and methodologies to qualify inventory as active or idle.

In place of using a generic term like “clean” inventory, a skilled parts manager would say something like:
“I have a $300,000 parts inventory, of which 2% or $6000 is over 12 months-no-sale, I have 10% ($30,000) that was active inventory but has ‘phased-out’ over 9 months-no-sale, and 20% ($60,000) that is non-stock parts.”

Meaning not just parts over 12 months old are a problem, but all parts that have aged over 9 months (6 months for some progressive dealers), or parts that would never qualify for a stock order are a problem.

Of course, this is a generic case, but you can see that the technically trained parts manager is technical in qualifying what is good and bad across the entire parts inventory. With a technical skill set, they can apply this understanding when handling the entire inventory and doing stock orders.

In my experience, there is no substitute for technical parts inventory control training.

# 1 Being Aware of Your Biggest Offender

Wholesale customers are by far the leading producer of idle and obsolete parts inventory. Many of these relationships don’t have a return policy in place to protect the dealer. Wholesale customers will normally return more parts inventory than the dealer can return.

Wholesale return percentages need to be monitored and measured monthly. The dealer needs to ensure that they are not taking more back than the return dollars the manufacturer has given them.

Before making a judgment on a particular wholesale account, ensure to consider core returns. Some DMS’ calculate core returns as part of the value of parts returned. Cores are charged on the part at the time of sale in addition to the part sale, with the idea that the old part (the core) needs to be returned to the dealer so that the manufacturer can rebuild it. Then the parts department does a credit to refund the core value charged at time of purchase. This affects those wholesale customers who do large volume diesel work for example, where core values exist on a lot of parts, and at a high dollar value. This affects the total value of credits processed and reported to the parts manager.

Normally, the retail front counter will have the next highest return rates, but usually are smaller in dollar size. Most sales are filled from the parts on-hand. The service department typically has a large dollar value in returns because they are normally the largest parts department customer. As a percentage, service department parts return sales are very low as a percentage, and respectable.

# 2 Getting Your Money Up Front

Prepaying all special-order parts is the only way to ensure a high likelihood that your customer will come back and that they won’t shop elsewhere while waiting their parts to arrive.

Dealerships should implement this process on the retail parts counter, retail service repair orders, and on internal invoices and work orders. In fact, the only place a dealership can’t repay special order parts is on warranty repair orders, where the repair order must be closed. If the repair order stays open, it doesn’t matter.

Applying this process is a big hurdle for parts managers because there is usually a lot of push back – from the parts counter staff. The main concern stems from fear that the customer will reject prepaying. Another fear is understanding how the DMS can handle prepaying special-order parts. Rest assured, both hurdles are all in the mind of the individual. Every DMS allows and handles prepaying special-order parts with ease; you just need to understand the process. It’s not complicated when you get advice from your DMS on the setup and process, and you trial a few parts and ensure accounting and physical inventory are working in sync with your new prepaid special-order parts process.

# 3 Parts Don’t Make Great Stools to Sit On

To ensure you don’t sit on special order parts until your next return, or for a lengthy amount of time, implement a process to pre-book all service customers next appointment before they leave the building.

The service department needs to implement a process where the service advisor pre-books your customer’s next appointment for installation of the special-order part.  This happens before the customer leaves the dealership on the original visit, and before the special-order part is ordered.  This is a simplistic process that involves parts department, noting the date that the part will arrive at the dealership, on all quotes issued on a Repair Order. This allows the service advisor to book accordingly without extra involvement or steps to follow through. The process is simplistic and ensures the customer comes back, and it applies to all repair orders waiting on special order parts to arrive.

# 4 Your Gut Digests Food – It’s Not Good at Making Decisions

The parts department gets the least amount of attention, the least amount of training dollars, and time. The best way to ensure that your parts inventory is being managed by a proper inventory control methodology is to train your parts manager. If you don’t train him, he’ll use his “gut” feeling to decide what should be inventoried and what shouldn’t.

Gut and experience help some, but it’s not a great method when dealing with an asset that dictates your level of service or fill-rate in the shop, the speed at which your used cars get reconditioned, and the performance of your capital. Parts Managers are not supervisors or inventory managers – they are money managers first and foremost.

A typical dealership will have thousands and thousands of unique parts numbers in stock, and tens of thousands of part numbers in the DMS – being “tested” to see if they qualify for inventory or not based on demand (sales and lost sales). If your parts manager doesn’t trust the DMS and/or have a very technical criterion to qualify parts for inventory – then they’re using their gut and experience.

There are proper and mathematical methodologies that exist, so that your parts manager only has to review a stock order to ensure it’s ok, rather than use his gut on each and every part number – one by one.

These industry standard methodologies that exist for parts departments ensure the best odds to move parts inventory and recommend which need to be ordered for stock. There are resources within the industry that outline proper inventory control and DMS setup, so you have the best odds. Training your parts manager on inventory control and then implementing it in the DMS must be priority #1 and #2 for any parts department – even if you’re on a manufacturer parts program.
A manufacturer parts program doesn’t exempt the parts manager from managing his inventory for the parts that come in for stock. As they try to work the program for the best return on investment from utilizing the manufacturer program while keeping close to the minimum compliance percentages, and knocking off parts, the manufacturer recommends you stock – but lack sales demand. That’s how you ensure your inventory is in the best shape possible even with a manufacturer program.

Resources to get your Parts Manager up to speed on inventory control methodologies can be found here in our Fixed Ops Magazine Article.

# 5 Stop the Bleeding

Besides taking year-end losses on your idle parts inventory that have aged out or selling them for pennies on the dollar, a new alternative is to exchange your idle and obsolete parts inventory dollar for dollar – not taking any discounts or losses.

This is a new way of handling idle parts inventory. According to a DrivingSales.com article, “there are only a few options for dealer parts exchanges currently available with the most comprehensive – by far – being North American Dealer Parts Exchange.”

There are few other consulting companies, who also do exchanges programs for their customers, that are on their consulting programs. As for an option available to every dealer, North American Dealer Parts Exchange (NADPE) is a viable option to move bulk idle inventory and exchange it for active inventory – dollar for dollar.

# 6 Last Resort

As a last resort, there are alternatives when your back is against the wall, and you’re ready to write off obsolete parts inventory, and toss them in the garbage. There companies that help you recover pennies to .50 cents on the dollar as a better alternative.

We’d never recommend tossing parts in the garbage until after you’ve exhausted all avenues to get rid of your obsolete parts, and only until they have 12 Months-No-Sale or greater.

We developed a list of options to move idle parts inventory here.

It Takes Time

Managing parts inventory is no different than managing used car inventory. The difference is the volume. For progressive dealers, they have all the items we listed – checked off. They still have idle parts inventory, but they never write off parts inventory, and they sit on a small amount of aged parts inventory over 6 months-no-sale.

It’s a long process, but the best method is to start implementing every mentioned in this article, right away. In time, you’ll have a great parts inventory that is managed as well as your used car inventory.

If you’re feeling overwhelmed with your idle and obsolete parts inventory, you’re not alone. If you’re looking for more in-depth support feel free to contact us and book some time to get some help.

About the Author

Shawn Larkin is a feature article writer for Fixed Ops Magazine and the Founder and CEO of North American Dealer Parts Exchange Inc. (NADPE). NADPE is a marketplace to help the parts department within new car dealerships move Idle and obsolete parts inventory in bulk without any losses.

Shawn has spent his entire professional career in the dealer parts business. Starting in shipping and working his way up to Director of Fixed Operations managing multiple locations with a staff of 75 and an annual turnover in excess of $17 Million.

Shawn brings a deep understanding of how parts departments work, their economics, and their needs and problems, as well as the psychology of parts managers and dealership owners.

To learn more about NADPE or Shawn Larkin, click the embedded links.

Parts Inventory Reconciliation – Variance Guide

Part 2: If you find yourself trying to find the problem in a bad Parts Inventory Reconciliation and have exhausted all common methods to find the error, here are other places to look;

Aftermarket parts value postings vs Parts value posting in DMS
Bulk Oil Adjustments (sell a full liter, but give customer a decimal liter)
Discounts Earned Postings – and how these are handled in both parts dept DMS and accounting
Freight Postings – it’s an expense, not parts inventory
Credits Posting – how both Parts and Accounting handle credits
Shop Tools Postings (when missing dollars in parts vs accounting)
Parts Returned (OEM and/or Aftermarket) – credit not received or posted
Credit Card or Prepaid Purchases
Inventory Appreciation/Depreciation – should be recorded monthly