Parts Managers who are the most progressive, and have the cleanest parts inventories, are those Parts Managers who are professionally trained in parts inventory control. But there is more to the story than just that. Learn what some of the country’s most progressive Parts Managers know that help them keep their inventories within industry guide, and their Dealer Principals out of their hair.
You’re talking to these dealers every day and parts managers in specific. And what do you find with parts managers? How are they defining their inventory? You see some that are, “Oh my God, I need help.” And then other people are like, “No, I’m pretty good. But I just got a little bit that I probably don’t need.” What do you find? What are the most progressive dealers doing?
So, the difference between the most progressive managers and how they handle their inventory, and the ones that have inventory that’s out of control or aged out – severely aged out inventory – the only difference is actually in training. And in fact, you only need a few basic skills or understanding of inventory to at least get started where it’s not a mess. And you don’t really know what that means. Even if you’ve been in the seat for 20 years, until you have a technical definition on how to manage inventory, the performance, and the probabilities behind it, you’re really just winging it.
Yes, we’ve blogged on this quite a few times and we talk about it in a lot of our social media posts, about how to define your inventory and what dealers are doing. But I mean, how many people read a blog? That’s why we’re here, talking about it.
Yes. So what we’re talking about is being progressive with their inventory, but how would you define that yourself, Shawn?
So, really we could probably break it down into a 15-minute section of how do I define inventory, so you would think that inventory is really broke up into three groups: active inventory, special-order parts, stuff you don’t want…stuff over 12-months old. I think everybody kind of has that basic understanding. That is kind-of the three groups, but really it gets a little more technical than that. And that’s the difference in the definition behind them and the probabilities that there are. First, let’s talk about active inventory. How do we define it?
So what happens is every single DMS, we’re measuring 12 months rolling, the last 12 months rolling. And it matters that you measure the last 12 months for seasonality, whether that’s weather-related or consumer behavior, as per the geographical location where you are located, that will vary.
Yeah, absolutely. I mean, it varies from weather to consumer spending habits-
Well, that’s like where you are. You’re in Toronto and what’s the weather today? It’s probably warm.
It’s 20 Celsius. I don’t know what that is in Fahrenheit.
And I’m in Grande Prairie and it’s -10 and a blowing blizzard outside.
So obviously I’m going to drive a bit different vehicle than you are or you might not even drive a vehicle today.
Right. So we’ll talk about that in just a second, the definition of active inventory, but let me say that we have two dealers here in the greater Toronto area.
They are about a 10-minute drive from each other and they are two progressive parts managers. They have incredible control on their inventory. And one is actually was taught by the other. And they’ve been in the job, in the chair for years and years at the same dealership.
And would you believe that even though they’re the same owner, taught by the same guy, both parts managers, one taught the other…right? That their inventory, at least part numbers on hand, when we look at the part number population, its 47% different than the other and they’re 10 minutes apart from each other.
But how does that happen? Why is that?
Well, a different customer base. I mean, they’re both the same brand and they’re 10 minutes apart, but that’s how widely different just being 10 minutes apart can be. And we know this because we have their data.
But we see that whether you’re an hour apart, half-hour apart, other state or country, province is different, but we see it. So for certain, there’s a wide range of differences between dealers, but even still… But let’s get back on to talking about how do you define our active inventory. So we’re looking at 12 months. 12 months rolling, the last 12 months behind.
And we move a new month, we move the last 12 months went ahead. So what we need to do is we need to measure how many months had sales activity in the last 12. And if there have been three separate months of sales activity in the last 12 months, you would consider that active. But then the more sales activity, three or greater sales activity in 12 months, is good. So let’s say we sold… What are we now? We’re in November. So we sold parts in November, October, and September that’s three months of the last 12 months. We would consider that active. If we also sold some in January that had passed, so that’d be January 2020, that’d be four… We call that four in 12. So all the way up to 12 in 12. Sold one every single month in the last 12 months rolling, all that would be considered active.
What is considered non-stock stuff you don’t want, is actually the difference. You have two or less months of sales in the last 12 months rolling. So we call that two in 12 or less. Could be one in 12. So you only have one month in the last 12 months, you never sold any and/or zero in 12, you haven’t sold any in the last 12 months. Those are the 12 months and older parts. So active inventory is called three separate months of sales activity in the last 12 months, or more than three. Three or more.
So that’s classic inventory or traditional inventory control. And we call that the technical way of saying it is, “Three periods of demand in 12 months rolling.” So three periods. Periods is months. Demand is sales and/or lost sales. So we would consider that active stocking parts, of course. And the reason that matters is that, on an annual basis, only 7% of those part numbers will not go on another year to sell multiple times a year. Of active parts. So 93% of the active part population will continue on the following year, to sell multiple times a year. Now here’s a key point where we’re not… at this point, we’re not counting pieces. We’re counting to define, is it good or is it bad. We are counting the number of months. It matters when we’re… We really think of it as two buckets of parts. Parts you want and parts you don’t want.
And if it’s three in 12 or greater, it’s parts you want. Two in 12 or less, which is the difference.
You don’t want it.
And 93%… we talk about the probabilities of this other stuff here in a minute. 93% and turning profit, selling them wholesale and retail, you’re in good shape. Only to have 7% of losers at the end of the year.
That 7% that fall off. Traditionally after nine months… After nine months, there are no sales. We call those phased out parts or in CDKs language, it’s called auto phase-out parts.
But more progressive dealers say after six months no sale, if it was active, three in 12 or greater, after six months, it hasn’t sold, 65% of those won’t sell again. At least between seven, eight and nine months 65% of those won’t sell. But it’s a very small number population of the part numbers. Right?
But we call those… that 7% that drops off annually, we call that phased-out parts. So that’s actually the second group of parts. Active parts, phased-out parts. Phased-out parts are parts that you stocked and sold for years. Because that’s really what it is, you stock for years and years.
And then they just lose sales demand and they’re gone. They start to phase out. It’s a small population though.
So notice how we really said at the start, there are three groups of parts. There are three groups of parts, but they’re technically defined differently. The third group of parts is, well we all know, it’s unsold and return special-order parts. They are those two in 12 or less parts, that may or may not have aged out yet being over 12-months old.
So depending on the prior sales history, whether or not you use lost sales, you have between a 35 to 65% chance they won’t sell at your store, provided they’re not even aged out yet. And that’s important because you have a compounding issue when they do become aged, probabilities fall off dramatically more.
So those are the three groups of parts. Parts you stock; active parts. Phased-out parts; parts which sold lots over the years and then lost sales demand, now they’re two in 12 or less. And then unsold and return special-order parts; parts which are non-stocking parts.
And as part, some of them… I mean, depends on the DMS language you use, but really it’s all the same.
Here’s the key point, unsold and returned…you would think this is a no-brainer, but it’s not how everybody thinks.
Let me ask, when do you think a special-order part that has been returned or has not sold, unsold is a problem? When is it a problem?
When it’s not paid for.
When it’s not paid for sitting there on the shelf and it hasn’t moved and you can’t sell it. And it’s not a stocking part. So now you’re stuck with this part unless that customer comes in or… You know whatever the case. Maybe the tech has ordered the parts and maybe something, whatever happened. It’s just sitting there. That’s a problem. The moment it sits there, to me it would be a problem. But I recognize that problem because I understand how this works. Nobody is maybe paying attention to that, or it gets overlooked. That just compounds, as you said.
Right. Well, you hit the nail on the head earlier in your statement. The moment it becomes a problem is when it’s not prepaid. If you order a prepaid special-order part, that’s not warranty, it’s a problem at that moment. Because risks are high that you’re stuck with it. Especially if it’s a walk-in customer or it’s a shop customer that has to come back and book an appointment for another day.
There’s more risk that you’re going to own it. And in fact, you do own it and you have such a small return allowance. So believe it though, when you ask many parts managers. Where are your problem parts? They’ll say parts that are over 12-months old. Now, in fact, those are a huge problem because there’s only a 5% chance that those parts over 12-months old will ever sell again, ever.
So that’s a huge problem. Right?
But the reality is, the parts are a problem, the moment that you own them. And that could mean the moment you special ordered it and you can’t return it, or you’re going to be stuck with it. But here’s what happens. Parts managers take the oldest parts in inventory and return them first. Which makes sense and so they should. So if they have 13, 14, 15-month old parts, they’re using their return allowance to get rid of those first, which makes tons of sense. But what happens to the part that was returned three weeks ago, four weeks ago, two, three, four months ago? When do you suppose that part gets returned? When it becomes the oldest. When it becomes the oldest part in inventory. So if you’re using your return allowance to get rid of the oldest parts in inventory, and you always have to do that in your oldest parts in inventory that are returnable or 15-months old, even if they’re 12 months old. That special-order part that customer returned or didn’t pick up, it stays in inventory until it becomes the oldest parts.
So it’s a huge problem. Yeah.
Okay. So we said that depending on the prior sales history of special-order parts and whether or not you use lost sales, it’s between a 35 to 65% chance that they’ll sell. When parts get between nine months and 10 and 11-months old, 15% chance that they’ll ever sell. And then once they hit 12, like I said, 5% chance they’ll ever sell. Now kind of a rule of thumb, and it’s a rule of thumb and it works for some dealers, some dealers it doesn’t, just the rule of thumb. Generally speaking with the parts manager, that’s been on the job for some time, even if he hasn’t been technically trained but has a fair handle on his inventory and is a medium to a larger store.
Smaller stores can have quite a problem, that’s another story. The rule of thumb is, the number of parts that you have that are 10 months and older as a whole, you have approximately the same amount of parts in dollar value that is unsold and return special-order parts, which are not aged out, meaning under nine months and younger. So if you have $50,000, 10 months and older, you have about $50,000. Now that’s just a rule of thumb. And that’s kind of what we see, smaller stores have it much worse than that, but nonetheless. Because dealers don’t see these parts being returned, one by one, or not picked up by customers. You don’t actually see it as a problem until month 12. But think about it. If I have parts in month 12, exactly month 12 today, and I have $10,000. That $10,000 that’s on month 12 today, was 11-months old, last month, of $10,000.
And it was $10,000, two months ago, that was 10-months old.
Dealers will have…I guess depends on the dealer size, they could have 100,000, 200,000, 300,000, 400,000…I mean, it depends on the dealership size and the return allowance that they get, which varies widely. But you’ve got to think they’re using up all this return allowance to get rid of these parts. If you use $200,000 return allowance, first off, I’m saying you’re not getting enough return allowance to begin with.
Yeah. What are they doing?
What did you use it on? For certain you use it on… for the most part, you’ve used it on your unsold… Those are special-order parts, no question. There’s a very small population of active parts, which phased out that are there, generally, the phase out starts. Happens slowly, so it gives you enough time to get rid of it and not reorder it.
It’s almost like parts managers are prioritizing those special-order parts. Those ones need to go right away. But the active parts that are slowly phasing out, those ones are further down the priority list because, “Oh, we have time.” Or wait until they’re 12-months old, but what they’re not saying there’s 12-months old… That just keeps rolling over. As you said, each month there are new 12-months older and new 12-months older parts.
So it’s just compounding. And then, as you said when you start to use up your return allowance and you’ve got a hundred or $200,000 worth of parts that you’re now looking at. What are you doing with those parts?
Right. Exactly. So with being able to understand the probabilities, we can talk about at another time, how to order active inventory and why you should and why it matters. But just understanding the probabilities and what you should do will help you greatly get it under control.
First off there are two extremes. There’s a wide range of different criteria that part managers will use to order parts or some even wing it. They just look at a page and look at the sales history and they can’t tell you the numbers or the definition behind what they, or how they, order parts and stock it. But they need to see a page put in front of them to be able to do that. That’s because they’re using their gut. And it does work to some degree, but there are two extremes. If you order parts that don’t have enough sales volume to begin with, so two in 12 or less, mostly the two that they might order, you’re signing away too many parts that have a high probability of not selling.
If you don’t order the parts… if you have a tighter parameter than that, where it’s maybe four in 12 or five in 12 that they’re ordering, and maybe they’re just winging and it’s just some version of that, who knows. The problem is, you’re not stocking enough and your fill rate is hurt by it, which means if a customer calls in and can’t find parts, they’re just going elsewhere. You got to do a second run to them the next day for the special-order part. Customers don’t come back, which perpetuates a special order problem. The thing about this is actually even worse in the case wherein the shop, you don’t have a part that you should stock because you don’t know better and don’t know the probabilities. What happens is you have to bring the customer back in another trip to get the part put on, when you should have had it.
If you know fill rate, you know these probabilities. What happens though is, because that happens, you handle the customer twice, the whole sequence of a customer coming in. So the customer calls in, talks to your appointment coordinator, and books an appointment. They drive-in, they deal with your porter to park the car… park the car, talks to the service advisor, goes to the hands of a technician, he drives in and out of the shop. That whole process, you don’t actually make money off of. Right? But when you don’t have a part that you should have you’ve just done that twice and you got paid once. And the problem is too, that you bring a customer in twice for a job that should have been done once. Could have been done once if you know better and you bumped the customer that could have paid for that time. Another customer, you bump them because you needed to make room for that customer. In fact, I’ve seen dealerships that don’t use fill rate. It’s called lots of things. Fill rate, off the shelf rate, it varies.
And they thought they were doing a good job, but they didn’t know better. The problem is, every day we would have a massive number of customers coming back to install special-order parts. We were busy being busy, going nowhere, making no money. Dependent on the month, the service department was taking on a loss after fixed expense or parts department was.
But we’re running around putting out fires. So, I mean-
Work smarter, not harder.