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 2nd 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.