For years, OEM manufacturer replenishment programs, such as Chrysler’s Automatic Replenishment Order (ARO) program have stocked dealers with additional parts that lack sales volume on the individual dealer level. It is true, that these additional parts do have regional and national sales. But there is a cluster of parts that are suggested an individual dealer should stock for inventory for 12 months, although there isn’t any or enough sales; or get punished for failing to comply when you screen any sort of volume of these parts.
These parts we’ll call “junk” ARO parts are between 3.5–5.5% of the average dealership’s parts inventory total according to our data. “Junk,” in this case, refers to parts that have two or less separate months of sales demand within 12 months rolling – a traditional criterion when deciding what is active or idle parts inventory. While ARO can be a helpful inventory management tool, new and experienced parts managers alike must know how to work the system to optimize the working capital the dealer principal allows the parts manager to use to fund his parts inventory.
“The whole idea behind investing capital in parts inventory is so that you make money perform,” says Shawn Larkin, Founder, and CEO of North American Dealer Parts Exchange (NADPE), in a video on getting the most out of ARO. “You can’t do that if you just tie up money and let it sit there.”
Dealers may return unsold ARO parts after 12 months, but this does not make waiting for sales a worthwhile investment. According to multiple studies, selling a 12-month old part at retail price results in a loss, as the holding costs will exceed the gross profit earned. Furthermore, failing to sell the part at all results in an even greater loss, as you’ve made nothing to offset holding costs.
While ARO has its problems, progressive dealers have found ways to regain full control of their inventory. There are two steps that you can take to get the most out of ARO — the first takes place when selecting which ARO parts to stock, and the second covers what to do if and when you already have ARO junk parts.
Many dealers fear what will happen if they do not accept the parts that ARO recommends them. Failing to take a certain percentage of ARO parts lowers a dealership’s compliance rate, which typically results in small purchase discounts, and lower manufacturer return percentage, to name a few.
Other dealers take pride in maintaining a high compliance rate but, as covered earlier, accepting every part offered by ARO hurts a dealership more than it helps.
“Being compliant is not a badge of honor in my books,” says Shawn. “In fact, I think that you should be as close to the minimum [compliancy] as possible and, depending on what you get for benefits, maybe it’s not even worth being compliant.”
Balancing a lower compliance rate helps to cut down the number of junk parts accept from ARO. However, there is a way to get rid of and even reduce your stock of junk parts, which is where the second step of controlling ARO comes into play; using a Parts Exchange Program such as NADPE, you can move these parts our of your inventory without losses.
It helps to know that manufacturers never suggest actual junk; across a region or a nation of dealerships creates sales demand for these parts which make is seem to them as an ideal item to stock since many other dealers are selling them, but they are considered special-order parts that qualify as “junk” in your inventory. Still yet, stocking these parts is a bad idea. We talk about in other articles how to best manage your parts inventory for the best odds, and rule out these types of parts from ever being ordered in the first place.
The most progressive dealers are not compliant and have zero ARO junk parts in stock. If you struggle to be compliant, you have no worries to contend with and should accept zero ARO junk parts. In fact, the highest performing inventories are dealers who are not even on ARO – yes, that is an option. That being said, some of the most out of control inventories are not on ARO too. It depends on whether or not your Parts Manager is professionally trained, and whether or not you give them the time to actually manage their parts inventory.
There are many other progressive dealers who are still compliant and have zero to a few pieces of these ARO junk parts. It does take a bit more time though. If you have a dealer principal looking to reduce parts inventory or are just trying to get a handle on parts inventory – this is the easiest place to start. Start by not accepting ARO parts that lack sales on your stock orders.
Secondly, when you do sell an ARO junk part, ensure to go into Dealer Connect and make sure they don’t ship you another for stock. Otherwise, you’re playing musical chairs. Likewise, if you get rid of a volume of these parts on an Exchange Program, ensure to toggle the part off from coming back into inventory for stock.
About the Author
Shawn Larkin is the Founder and CEO of North American Dealer Parts Exchange Inc. (NADPE). NADPE is a company that helps 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.