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.

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

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Having a solid base to qualify parts inventory for stock starts with knowing which phase-in setup criteria has the best odds. Playing to the odds will help you:

• Reduce phased-out parts in write-off territory,
• Bring fast selling parts, and
• Create efficiencies in your parts-department

We think you’d agree that the article above are all things the Dealer Principal would like. Interested in learning how to play to the odds to your favour?

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.

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.

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.”

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 2^nd 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.

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?”