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

Parts Inventory Reconciliation – Variance Guide Part

1: After a Parts inventory physical count, the inventory reconciliation should be within +/- 1-3% of each other. Anything much further beyond this needs to be investigated and corrected. This includes having a major surplus in Parts Physical vs Accounting.
Any accountant will tell you that parts inventory and accounting inventory match dollar for dollar in and out. So to have a large surplus means there is an underlying problem where accounting isn’t matching parts physical. Concrete doesn’t grow parts – I assure you.

Parts Inventory Reconciliation – When Things Go Bad

Part 5: Reviewing Accounting inventory, after looking at large value postings. The next step is to review manual entries effecting Parts Physical Inventory, and then look at aftermarket parts postings. There are cases (at least at this point in the process of a bad reconciliation) where you could find shop tools and other non-parts inventoried items posted within parts inventory.