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How to become the Top 5 percent in Parts Management
It can feel like you’re the lone person on an island, being a Parts Manager. Many times, you get the feeling as though you’ve been stuck for 10 years, repeating year 1, without access or knowledge of outside consulting, training, or help. It can be tough, but you shouldn’t feel bad because this feeling is commonplace in the industry, whether you’re a new or long-time parts manager.
I like to say Parts is like Voodoo: no else in the dealership has a good handle on the parts department. Upper management typically only understand Parts Department from the financial statement from a high level and its need to provide great customer service. Outside of those given items, there are key technical components that both upper management, and new and existing Parts Managers must understand. Aside from the broad strokes, it’s widely seen that many managers are undertrained when it comes to Parts Department. What’s even worse is that a painful lack of resources is prevalent.
The climb as a Parts Manager to best-in-class can be done with the right resources. We have compiled some key actions to help get you started on your own, without the necessity of anyone above you to pitch in to make it happen. It’s about striving for professional growth; a key component of any manager worth their weight. Without any of the training below, you are essentially running a multi-million-dollar operation, blind.
In-Depth Parts Technical Training
From all appearances, there aren’t many places to turn to get valuable parts training. This is true. Resources are hard to come by. Most conferences just scratch the surface and are not technical enough. If you are lucky enough to be in a Dealer 20 performance group, there are still many holes that don’t cover the technical aspects of inventory control, and DMS settings.
There is one place where everything parts department-related is available: DealersEdge.com. Here you will find all the parts resources you could possibly need for self-study. It’s only $59/month, or $597/year to access their entire educational platform or you can buy 1 video, audio, or e-book at a time. This is of incredible value, and not available anywhere else.
There could be some of you who will have upper management opt not to pay for this, either discounting its value or think it’s up to you personally. My advice is: pay for it yourself if upper management doesn’t pitch in. This will likely be the greatest investment of your career, if you are in parts management.
Understanding Parts Inventory Management
Little is really known by most parts managers on the performance of parts inventory, aside from ‘months no-sales less than 12 is good, 12 months-plus is bad.’ Even that statement is pretty rough.
Parts inventory is something that takes a lot of training and understanding of its dynamic. The first resource you should pick up is Mike Nicholes’ book, Professional Inventory Management Guide. This book can add an incredible foundation to any parts manager, even if you only remember 10 percent of it. It’s an easy read, and for those who enjoy learning and numbers, it’s a great read. The book puts the entire parts operation in terms that anyone, with any level of experience, can understand. I’d recommend even upper dealer management read this book.
The book Mike wrote is aged somewhat, but the principles still stand. Don’t dismiss this book as too junior for even someone who has years of parts management experience. You can get a copy of this book at DealersEdge.com.
Managing Business and People
Several self-help seminars and conferences offer guidance on business management and people. There are key points to extract from them. However, if you are looking for a dealer-centric and very actionable management book, you must read Up Your Business by Dave Anderson.
This book will help you understand how to manage a business and people. It will also reaffirm some thoughts you might already have. It’s especially motivating – expect that when you get 10 pages deep, you will need a new highlighter.
Once you have read and completely understand inventory management book – in particular, phase in/phase out, and days supply – you should sit with your DMS trainer for at least half a day. They will help you pull all the current settings for parts inventory management.
Everything you have learned on how to manage parts can be entered into the DMS. This way, you not only stop “winging-it”, but you will also now have the DMS managing parts with the same control and mythology as you. It’s less work for you when doing a return and stock orders, and enables proper reporting as well. This is highly valuable as the DMS is really a parts manager’s ally. Learning to use it and understand it first starts with understanding parts inventory control technically. From there, learn with your DMS trainer how to navigate, since you now know what to do with the parts inventory.
Not using the DMS to manage your inventory on the same page as your technical training is a waste of time. It’s important to manage parts inventory with the DMS, and not question how the DMS is managing, or not managing your parts inventory. The DMS can be your friend or your enemy. It depends on what you put into it. The DMS can emulate every technical aspect you learn on inventory control after you set it up. Thereafter, you’re only reviewing and making small modifications to your inventory, and letting the DMS manage the rest.
The parts department, like every other department and business, has its own set of financial statements. If you have never seen them, you need to see your controller around mid-month, after a month closes. Request to see your parts financial statement and review it in depth with them enough to understand the particulars. Get very comfortable with it. It’s your lifeline.
For those who already get a financial statement, the fun doesn’t stop there. Simply looking at a few numbers and saying something is good, bad, or needs some work isn’t enough.
The next step in a financial statement study is printing out every expense line, with every entry. This isn’t as hard as it sounds. Your Controller can do this within about half an hour. Take those printouts and review each entry, line by line. You should understand most of it already. Highlight the ones you don’t comprehend and sit with your controller for an hour or two to decipher it. It will easily take two hours or more if it’s your first time through it. I promise you – there will be thousands of dollars you didn’t know about, thousands with more impact than you realize, and thousands that are misallocated. I guarantee you that.
If you are a financial statement hawk and have the entire department statement understood, I like to pull and print every account in detail twice a year, and you should too. There is always something out of place in the statement that needs your attention. Think of it much like your personal financial statement, and expenses – then multiple the volume 100X. You certainly wouldn’t want to just glance over a few high-level numbers. Without reviewing your financial statement to this depth is like managing your department with a blindfold on – yet you’re responsible for every line on the statement and its results.
Industry Guidelines, and Benchmarks
For every number in parts, there is a guideline for where it should be. Many don’t know that these exist, and even if they do, they don’t know where to find them. You can find most of them in the aforementioned Mike Nicholes’ inventory book. You can find more inside NADA’s guide. If you have someone at the dealership who has trained at NADA, or someone in your Group 20 who has, they can get you a copy.
The importance of these numbers is to allow you to compare where you should be, and what is possible. While it’s true that there will always be something that needs attention, it’s easy to dismiss some numbers as you might think you can’t achieve them. Don’t be too quick to point out the negatives. Many times, you just need to dig more on what is driving the number below guide and come up with a plan and think outside the box. They are guidelines or benchmarks because they are achievable.
Before dealing with the hardest numbers to move, looking at the benchmark numbers will have the most impact. Once you get a sense of where you are, you can dive into a particular line, and develop a strategy to correct it. There are hundreds of parts metrics, so it’s best to start one month with one set of metrics like Inventory, then Financials expense lines, and so on. It will take several months, or even a year, to address it all.
Consultants and NADA Training
Lastly, there are other resources to help you get trained. A small handful of parts consultants are available who can help. Prepare ahead to communicate exactly what you need help on and find a parts consultant that compliments that area. My suggestion is to first complete the above training before hiring a consultant. Their time is limited, you’ll need a budget for them, and you will definitely need to understand more than the basics to get the best value from their service.
NADA has training classes for Dealer Principals, General Managers, and Controllers. If someone from your dealership is going, you can get in on their Parts Class for one week as a sit-in. It’s cheap enough and very valuable.
Moving the Needle
There is a lot of content once you start going through all this material. If you are just starting out, or you’re a seasoned manager without formalized training, undoubtedly you will have a year’s worth of work to get things to a point where you are just optimizing. It’s a never-ending process.
The best way to get through all this is to make a monthly plan. Address three key items to attack, write out a plan and steps to achieve them, and what numbers and benchmarks must be hit to see success. If submissions of a monthly plan and forecast is not a requirement by your dealership yet, make it yours.
If you’re feeling overwhelmed with idle and obsolete parts inventory, you’re not alone. If you’re looking for more in-depth support, start by reading the resources within this article, or feel free to contact us and book some time to get some help.
About the Author
Shawn Larkin is 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.
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.
You may be asking, how can I get rid of my Idle Parts Inventory, or even your Obsolete Parts Inventory.
Here is a list of ways to get rid of slow-moving parts inventory in alphabetical order in bullet point form:
Auction: Easy solution to clear parts in bulk.. After all expense are paid, usually, 10-15% of the original parts cost is recovered.
Cash Discovery Program: A dealer to dealer network, where parts are sold at 50% of dealer cost. Parts moved in bulk.
D2D Link: A available for Dodge, GMC, and Ford dealers. A single part transactions platform native to these brands system. Manual process with various parts pricing.
Dealermine: A dealer to dealer network, where parts are sold at 50% of dealer cost. Parts moved in bulk.
eBay: An established audience. Listings are typically 1 part at a time with some time required per listing unless the dealer has signed with a digital software company to provide this service – typically the majority of a dealers inventory is listed on eBay with this software.
NADPE – Parts Exchange Program: A dealer to dealer network, and an emerging technology, where parts are exchanged evenly at dealer cost, in bulk. No write-down of parts cost.
Write Off: Write off, and toss in the garbage. 100% loss.
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
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.
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.
A step to take when reviewing a bad physical inventory/reconciliation, is to review accounting when all else is exhausted (see prior posts). Start with the last 30 days, and pull all accounts which effect physical inventory in Accounting. Then sort by largest to smallest, and review if the postings are correct.
When an inventory reconciliation goes bad, it’s a long drawn out process that requires many weeks of review. Normally, after your review, large postings within Accounting that effect Physical Inventory from the last 90 days, you’ll see trends – good (reaffirming proper postings) or bad; where it affects parts physical inventory.
When things go bad in a physical inventory count, the automatic presumption is that the physical count was bad. More often then not, a “recount” doesn’t find or fix the problem. If the problem is big enough, to rule out the physical inventory count isn’t a problem, it is a good idea to recount. In many cases you’ll find the problem within the numbers on the reconciliation.
Remember, what is counted physically, and what is in the parts dept physically, is the foundation for the entire Inventory Reconciliation process. Not liking the number found in physical count doesn’t mean that it’s the root of the problem. Commonly when there are inventory reconciliation problems, you’ll find the problem/solution in accounting numbers, as much as you could find it in parts dept numbers.
If you’ve tried making your reconciliation match, and you just can’t get the numbers to line up, keep in mind, there are 2 places you have to investigate to find the problem. It could exist in Parts or Accounting.
Yes, much as the problem could exist in Parts, it could also exist in Accounting. Don’t assume that the problem can only exist in Parts. Parts is 1 of 2 area’s to look.