On average, every dealer in North America has 30% of their parts inventory classified as idle parts. This represents $88,000 for the average dealer with a $291,000 inventory. This includes both parts that are considered non-stocking, better known as unsold or returned special order parts, and phased-out parts- parts which once sold well but no longer sell and have aged-out.
Technically Trained Parts Managers
Often, you’ll hear the words “clean parts inventory”. A generic term that isn’t used by experienced, and technically trained parts managers to define an inventory’s performance or age. Technically trained parts managers would never refer to their parts inventory as “clean” unless they had less than 2% of their inventory value in 12+ months without sales activity (known as 12+ “months-no-sale”). Parts Managers who are trained on a technical level, use techniques like mathematical probabilities, and methodologies to qualify inventory as active or idle.
In place of using a generic term like “clean” inventory, a skilled parts manager would say something like:
“I have a $300,000 parts inventory, of which 2% or $6000 is over 12 months-no-sale, I have 10% ($30,000) that was active inventory but has ‘phased-out’ over 9 months-no-sale, and 20% ($60,000) that is non-stock parts.”
Meaning not just parts over 12 months old are a problem, but all parts that have aged over 9 months (6 months for some progressive dealers), or parts that would never qualify for a stock order are a problem.
Of course, this is a generic case, but you can see that the technically trained parts manager is technical in qualifying what is good and bad across the entire parts inventory. With a technical skill set, they can apply this understanding when handling the entire inventory and doing stock orders.
In my experience, there is no substitute for technical parts inventory control training.
# 1 Being Aware of Your Biggest Offender
Wholesale customers are by far the leading producer of idle and obsolete parts inventory. Many of these relationships don’t have a return policy in place to protect the dealer. Wholesale customers will normally return more parts inventory than the dealer can return.
Wholesale return percentages need to be monitored and measured monthly. The dealer needs to ensure that they are not taking more back than the return dollars the manufacturer has given them.
Before making a judgment on a particular wholesale account, ensure to consider core returns. Some DMS’ calculate core returns as part of the value of parts returned. Cores are charged on the part at the time of sale in addition to the part sale, with the idea that the old part (the core) needs to be returned to the dealer so that the manufacturer can rebuild it. Then the parts department does a credit to refund the core value charged at time of purchase. This affects those wholesale customers who do large volume diesel work for example, where core values exist on a lot of parts, and at a high dollar value. This affects the total value of credits processed and reported to the parts manager.
Normally, the retail front counter will have the next highest return rates, but usually are smaller in dollar size. Most sales are filled from the parts on-hand. The service department typically has a large dollar value in returns because they are normally the largest parts department customer. As a percentage, service department parts return sales are very low as a percentage, and respectable.
# 2 Getting Your Money Up Front
Prepaying all special-order parts is the only way to ensure a high likelihood that your customer will come back and that they won’t shop elsewhere while waiting their parts to arrive.
Dealerships should implement this process on the retail parts counter, retail service repair orders, and on internal invoices and work orders. In fact, the only place a dealership can’t repay special order parts is on warranty repair orders, where the repair order must be closed. If the repair order stays open, it doesn’t matter.
Applying this process is a big hurdle for parts managers because there is usually a lot of push back – from the parts counter staff. The main concern stems from fear that the customer will reject prepaying. Another fear is understanding how the DMS can handle prepaying special-order parts. Rest assured, both hurdles are all in the mind of the individual. Every DMS allows and handles prepaying special-order parts with ease; you just need to understand the process. It’s not complicated when you get advice from your DMS on the setup and process, and you trial a few parts and ensure accounting and physical inventory are working in sync with your new prepaid special-order parts process.
# 3 Parts Don’t Make Great Stools to Sit On
To ensure you don’t sit on special order parts until your next return, or for a lengthy amount of time, implement a process to pre-book all service customers next appointment before they leave the building.
The service department needs to implement a process where the service advisor pre-books your customer’s next appointment for installation of the special-order part. This happens before the customer leaves the dealership on the original visit, and before the special-order part is ordered. This is a simplistic process that involves parts department, noting the date that the part will arrive at the dealership, on all quotes issued on a Repair Order. This allows the service advisor to book accordingly without extra involvement or steps to follow through. The process is simplistic and ensures the customer comes back, and it applies to all repair orders waiting on special order parts to arrive.
# 4 Your Gut Digests Food – It’s Not Good at Making Decisions
The parts department gets the least amount of attention, the least amount of training dollars, and time. The best way to ensure that your parts inventory is being managed by a proper inventory control methodology is to train your parts manager. If you don’t train him, he’ll use his “gut” feeling to decide what should be inventoried and what shouldn’t.
Gut and experience help some, but it’s not a great method when dealing with an asset that dictates your level of service or fill-rate in the shop, the speed at which your used cars get reconditioned, and the performance of your capital. Parts Managers are not supervisors or inventory managers – they are money managers first and foremost.
A typical dealership will have thousands and thousands of unique parts numbers in stock, and tens of thousands of part numbers in the DMS – being “tested” to see if they qualify for inventory or not based on demand (sales and lost sales). If your parts manager doesn’t trust the DMS and/or have a very technical criterion to qualify parts for inventory – then they’re using their gut and experience.
There are proper and mathematical methodologies that exist, so that your parts manager only has to review a stock order to ensure it’s ok, rather than use his gut on each and every part number – one by one.
These industry standard methodologies that exist for parts departments ensure the best odds to move parts inventory and recommend which need to be ordered for stock. There are resources within the industry that outline proper inventory control and DMS setup, so you have the best odds. Training your parts manager on inventory control and then implementing it in the DMS must be priority #1 and #2 for any parts department – even if you’re on a manufacturer parts program.
A manufacturer parts program doesn’t exempt the parts manager from managing his inventory for the parts that come in for stock. As they try to work the program for the best return on investment from utilizing the manufacturer program while keeping close to the minimum compliance percentages, and knocking off parts, the manufacturer recommends you stock – but lack sales demand. That’s how you ensure your inventory is in the best shape possible even with a manufacturer program.
Resources to get your Parts Manager up to speed on inventory control methodologies can be found here in our Fixed Ops Magazine Article.
# 5 Stop the Bleeding
Besides taking year-end losses on your idle parts inventory that have aged out or selling them for pennies on the dollar, a new alternative is to exchange your idle and obsolete parts inventory dollar for dollar – not taking any discounts or losses.
This is a new way of handling idle parts inventory. According to a DrivingSales.com article, “there are only a few options for dealer parts exchanges currently available with the most comprehensive – by far – being North American Dealer Parts Exchange.”
There are few other consulting companies, who also do exchanges programs for their customers, that are on their consulting programs. As for an option available to every dealer, North American Dealer Parts Exchange (NADPE) is a viable option to move bulk idle inventory and exchange it for active inventory – dollar for dollar.
# 6 Last Resort
As a last resort, there are alternatives when your back is against the wall, and you’re ready to write off obsolete parts inventory, and toss them in the garbage. There companies that help you recover pennies to .50 cents on the dollar as a better alternative.
We’d never recommend tossing parts in the garbage until after you’ve exhausted all avenues to get rid of your obsolete parts, and only until they have 12 Months-No-Sale or greater.
We developed a list of options to move idle parts inventory here.
It Takes Time
Managing parts inventory is no different than managing used car inventory. The difference is the volume. For progressive dealers, they have all the items we listed – checked off. They still have idle parts inventory, but they never write off parts inventory, and they sit on a small amount of aged parts inventory over 6 months-no-sale.
It’s a long process, but the best method is to start implementing every mentioned in this article, right away. In time, you’ll have a great parts inventory that is managed as well as your used car inventory.
If you’re feeling overwhelmed with your idle and obsolete parts inventory, you’re not alone. If you’re looking for more in-depth support feel free to contact us and book some time to get some help.
About the Author
Shawn Larkin is a feature article writer for Fixed Ops Magazine and the Founder and CEO of North American Dealer Parts Exchange Inc. (NADPE). NADPE is a marketplace to help the parts department within new car dealerships move Idle and obsolete parts inventory in bulk without any losses.
Shawn has spent his entire professional career in the dealer parts business. Starting in shipping and working his way up to Director of Fixed Operations managing multiple locations with a staff of 75 and an annual turnover in excess of $17 Million.
Shawn brings a deep understanding of how parts departments work, their economics, and their needs and problems, as well as the psychology of parts managers and dealership owners.
To learn more about NADPE or Shawn Larkin, click the embedded links.