Know The Odds & Return On Your Dealer’s Capital Investment In Parts Inventory

For every dealer, the investment of capital into assets, like used vehicles and parts inventory, is large, let alone the investment in the real estate itself.

The job of the car department managers and the parts manager is to take the investment of capital in those assets and convert them into profit.  Turning over your inventory and capital as many times as possible so your money can be put to work, and make new profit, is key.  The job of a parts manager and used car manager are no different – make money perform.

Lots is known by the dealer principal, controller, and new and used car department managers on inventory control when it comes to vehicles.  When it comes to parts inventory, little is understood by most of the management in the dealership, except – anything over 12 months-no-sale is bad.

A lot goes into understanding what needs to be ordered and what shouldn’t when it comes to parts.  There is already a large amount of data out there to know what you should and shouldn’t stock based on sales history and the probabilities of selling them again, but few people know about where these resources are.

The key with parts inventory is to not only know what has the best odds and greatest fill rates but what the processes are, that need to be implemented to de-risk the dealer’s exposure to underperforming parts inventory…like being stuck with special-order parts that become idle parts inventory, or worst – obsolete parts inventory — more on that in this article here, called Top 6 Ways Dealers Can Reduce Idle & Obsolete Parts Inventory.

In this article, we’ll lay out what the statistics are when it comes to parts inventory control.  As for the implementation and understanding of these parts inventory control methodologies, you can review that article here, on Inventory Control Phase-In – A Good Method Improves Your Parts Operation.

12 Month No Sale Parts – The Herpes Of Parts Inventory

Parts which haven’t sold in the last 12 months are called a few things; from idle parts inventory to non-stocking parts inventory, or obsolete parts inventory. It’s true that they fall into all three of these definitions.  Idle parts inventory and non-stocking parts inventory simply mean they are parts which shouldn’t be stocked and don’t fall into your stocking criteria.  But after 12 months-no-sale, they are for certain defined as obsolete parts inventory.

Obsolete parts inventory has less than a 5% chance of ever selling again at your dealership, meaning 95% will be there for a long, long time.  That’s why many dealers write parts inventory off when they hit 12 months-no-sale.  A large portion of this obsolete parts inventory is from unsold special-order parts and returned special order parts, which have been in inventory for a year, and now are a huge problem.

These obsolete parts in inventory were a problem on day 1 when the parts department knew they now own the special-order part. It now just becomes most apparent 12 months later when it’s in write-off territory, and shows up clearly on the parts manager’s aging parts report.

Non-Stocking Parts Inventory / Idle Parts Inventory

Parts which would never be seen on a stock order to begin with, are known as non-stocking parts, or idle parts inventory.  Or better yet understood as unsold special-order parts or returned special-order parts.

Idle inventory parts have between a 35%-65% chance they will never sell again at your dealership, depending on prior sales history.  The probabilities are much less as they start to age-out past 6 months-no-sale and greater.  The odds of not selling then begin compounding.  These parts, on a technical level, are known as “2-in-12”, or less.  More on what that means here.

Now, you might think that before these parts age-out, 35%-65% isn’t bad odds. You’d be right if you were playing bingo, the lottery, or a 50/50 draw as the investment is low, and the rewards are incredibly high.  But with parts inventory, the investment is incredibly high, but the profit returned from a sale, even at full retail, is much less than the cost of the part itself.

Three different studies show parts which haven’t sold between 9-12 months, if (keyword) sold at retail, you’d break even at best, when carrying costs are calculated.  Typically, we see that a large percentage of idle parts inventory won’t sell, especially as they age, meaning a large portion will carry losses.  These parts are the least known about, the least talked about, and go under the radar for upwards of 12 months yet have the biggest impact on the performance of the capital invested by the dealer principal.

These are the worst parts in parts inventory, specifically because they come from special-order parts, which are returned or unsold.  It may be day 17 when the parts department knows they are stuck with a particular special-order part. This happens multiple times a day.

These idle parts stay under the radar until they become part of the 10+ or 12+ months-no-sale parts, where they group together with phased-out parts inventory; used-to-be active parts inventory that since lost sales demand, and have aged-out.  More on that in a bit.

Many make the mistake where they believe all aged-out parts inventory is the same.  Idle parts inventory and phased-out parts inventory are clearly different. Phased-out parts inventory used to have sales demand were ordered on a stock order often, but since sales demand has slowed, and they have aged-out.  Idle parts inventory is a result of unsold or returned special order parts – a clear difference.  Unless you have your DMS set up correctly, use and understand stocking-status, then the two groups of parts inventory, idle parts inventory, and phased-out parts inventory, normally get grouped together and normally can’t be spotted separately from a parts manager’s report only.

Strictly using months-no-sale as a means of measuring parts inventory performance will make these two groups of under-performing parts inventory look the same, and that’s where many get it wrong.  You need to understand where aged parts inventory comes from so you can stop the bleeding from the front side – how you incurred them in the first place.  More on how to fix idle parts inventory problems from the front side, here in our article; Top 6 Ways Dealers Can Reduce Idle & Obsolete Parts Inventory.

Parts managers are forced to get rid of the oldest parts inventory with a little bit of return allowance they have. For most dealers that means working on getting rid of 12-14 months-no-sale parts inventory, first.  That makes the most sense but means that these unsold and returned special order parts sit on dealers’ shelves from Day 17, until they too become the oldest, 12 months or so later.

More on the technical criteria and handling of phased-out inventory can be found here – Inventory Control Phase-In – A Good Method Improves Your Parts Operation.

Phased-Out Parts Inventory

Phased-out parts inventory are parts that used to qualify for a stock order often, but this time around, have lost momentum and lack sales.  Once active parts lose sales demand and hit 10 Months-no-sale, there is an 85% chance that these phased-out parts will never sell again in your dealership.

As phased-out parts reach 12 Months-no-sale, as mentioned earlier, the odds get worse. In that case, only 5% of them will ever sell again at your dealership.  At this point, they are relabelled, and considered obsolete parts inventory, and not necessarily phased-out parts inventory, although that’s where they began their journey as underperforming parts inventory.

Although many dealers and parts managers believe these are the worst parts to have inventory because they are aged-out, they are not.  The population count of these phased-out parts is much smaller than the worst parts in inventory – idle parts inventory.

More on the technical criteria and handling of phased-out inventory can be found here – Inventory Control Phase-In – A Good Method Improves Your Parts Operation.

Active & Fast Selling Parts

Active parts inventory are parts which you sell often and would order on a stock order.  These are parts which have their own dedicated bin space within your parts inventory.  Traditionally, these parts on a technical level are known as “3-in-12” or greater.  Meaning, there have been sales within 3 separate months, within the last 12 rolling months.  How many have sold each month isn’t important – at least at this stage.  How many have sold is important when determining how many to stock, based on sales demand. That’s called Days Supply.

Parts which qualify as having sales and/or lost sales demand, in at least 3 separate months or more in the last 12 months rolling are considered active parts inventory in a traditional parts inventory criteria.  Active parts inventory under this criteria, have a 93% chance of selling.

On an annual basis, only 7% of the active parts inventory part numbers will fall off, lose sales demand, and become phased-out parts inventory.  Like we mentioned when talking about phased-out parts inventory, traditionally speaking, active parts are relabelled as phased-out parts inventory when there hasn’t been a sale or lost sale on a part after the end of 9 consecutive months.

Active parts have a 93% chance of selling, but that doesn’t just mean once within a year.  Many of these parts will be ordered many times a month and in a year.  What it does mean, is out of the population of 3-in-12 or greater part numbers, 93% on an annual basis will see more sales, and 7% of the part numbers/SKU’s will not.

To Learn more about active parts inventory criteria, and phase-in setups, check out our this article here.

Getting These Odds To Work For You

With some thought and DMS adjustments, you too can work your parts inventory, and your ordering habits, to match what parts will increase your fill rate to customers. By doing so, you will also be decreasing the risk for the dealer, of sitting on idle parts inventory or even obsolete parts inventory.  Although you can’t eliminate idle parts inventory entirely, you can go do work and curve the severity of it, while using the DMS to automate most of the work for you.

Setting up your DMS to optimize fill rate, and decrease risk isn’t hard.  In fact, we talk about how what you need to know to set up the methodology to get the best results in this article here.

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.

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