Not that long ago, dealership parts operations used to be pretty cut and dry. You had a card system or a pad that you checked off inventory and then ordered from that. With the introduction of computers came the realization that maybe the parts operation isn’t as cut and dry as it appears on the surface. With technology came the ability for dealers to analyze inventory more thoroughly and realize what kind of a return it could bring with clever management. In terms of tools and programs to manage your parts department, we have come light-years in a matter of about 20 years. All transactions are more or less electronic in this day and age.
With all the e-tools out there, the number one concern of just about every Parts Manager is his or her obsolete inventory. In talking with several supply chain experts in 2010, it seems like obsolescence is growing in dealerships instead of disappearing. There are some circumstances that have managed to avoid this to some extent but, it appears the majority are still experiencing an increase in obsolescence.
You could point to things such as model proliferation to understand this dilemma. There are more models that are introduced, more models that change from year to year, and this all leads to a heck of a lot more part numbers in the population when making critical stocking decisions. Manufacturer programs can change and return policies can also affect the issue, but the reality is that obsolete inventory continues to be an issue. You may be fortunate enough to be with a manufacturer who takes back parts based on national movement codes, or a stocking criteria you follow based on the manufacturer recommendations. You may be on a manufacturer program that limits returns to only the parts that they recommended for your stock that have become obsolete- such as RIM or ARO programs. If the short history of these programs is any indication of the future, it proves that manufacturers are willing to only guarantee what sells, not what doesn’t. It’s unfortunate, but at this point, it should not be a surprise to anyone in the industry.
This leads me to what I really want to convey in this post. How can you, as a dealer, general manager, parts & service director, or parts manager, attack this problem and keep the sales rolling?
In a nutshell, it simply comes down to controlling your special order demand. The DMS providers out there do a wonderful job in forecasting your demand and even the Manufacturers do well on a more global basis. What this really means is only a small portion of your inventory that has been selling or qualified for stocking all of the sudden stops selling and you’re stuck with instant obsolete inventory. When you really get down to it, it is a matter of how you control the parts that aren’t selling to your customers and/or didn’t qualify for stocking on a regular basis in the first place.
We call this “Forced Stock” inventory. Ironically, we have been talking about this for the past 15 years. Every dealership parts operation has it, knows about it, but there is not one major vendor who reports or tracks it for the parts operation. I am talking about those parts that were over-ordered by the technicians to solve a customer’s problem. You know the scenario: the technician orders 3 parts to fix the car and keep customer satisfaction and fix-it right scores high. Yet the parts that were not needed, especially in-warranty repairs, come back to parts. Now you have an instant idle capital issue. Also, returns from wholesale customers (especially body shops) can really increase the amount of unwanted forced stock into your inventory.
Other issues include speculation, or the well-known SWAG method; or ordering errors by Parts Advisors- especially those who are new and learning on the job. Imagine if you could add up all the mistakes and money spent by Parts Advisors ordering the wrong parts as they were in the learning process. In our experience, the more well trained and long term Parts Advisors that a dealership has, the less in forced stock inventory they have.
Now that I have explained the issue and explained the root of forces stocked, how exactly do you begin to attack it? There is not enough ink or time in this post to completely cover the solutions, but there are some things you may want to consider implementing at your dealership.
As a consultant that deals with these problems day in and day out at dealerships of all manufacturers and regions, it comes down to special order control. It is odd how the blame for most of this usually comes down to the parts manager level. After all, they are in control of the parts process and ordering procedures. Or are they?
Let’s examine this a little further. When it comes to controlling the wholesale, Parts Managers have more control there than anywhere else. After all, they can make the decision not to sell to wholesale customers who return too much or take advantage of return policies. A simple, yet effective way to handle this is the “30-5 ; 25-10” rule. If you are giving a 30% discount to a customer and they are returning more than 5% of their purchases, you have a problem! If you are giving a 25% discount to a customer and returns exceed 10% of their purchases, you have a problem. The simplest solution to this issue is to begin charging restocking fees that would cover restocking these parts and accrue these dollars to purge idle inventory. If that doesn’t work, wholesale clients will either seek out another vendor to purchase the parts from, or you can simply fire the customer and not do business with them. The most common complaint I get from a parts manager when presenting this scenario is, “I don’t want to lose my valuable customers by doing this!” The keyword in this phrase is “valuable”! I can promise you that you are losing money if they exceed the numbers listed above, are they really valuable and profitable customers? Why not chase them to your competition and focus on the good loyal customers who don’t take advantage of your operation, or focus on more profitable shop sales?
Now we come to controlling the process for in-dealership sales, or the special order process. We all know that you can’t have a customer pre-pay for warranty repairs. And, in many instances, the customer who is paying usually doesn’t have to pre-pay for those parts either when on a repair order. In a perfect world inventory, any customer that you order a part for can’t have their car back until it is repaired. But that’s not realistic. Technicians over order parts for repairs and you certainly can’t ask your Parts Advisors to become The Parts Police in every case. What you can do, however, is track which technicians are over-ordering and returning the most parts. How do you accomplish this? By simply putting the technician number in an unused field on the computer, such as BIN2, COMMENT or OTHER field. Now you can develop some reports and begin to solve the issue.
The buzz phrase used by consultants today to help combat customers not coming back in, especially for non-critical warranty repairs, is “Don’t order the part(s) unless the Service Advisor has secured another appointment!” This and $5.00 might get you a good cup of coffee at Starbucks, but it doesn’t mean anything with regards to the customer coming back in at that appointed time. While it is prudent to secure the appointment, that should be a given and I would bet a lot of time is spent on the parts side trying to validate the next appointment.
It finally gets down to who is responsible to contact the customer and get them in after the part is ordered and received. Ah, we finally are going to get somewhere here! I cannot begin to tell you how many times I have seen both arms pointing in different directions by both Service and Parts when it comes to this responsibility. A simple fact is that in most dealership fixed operations, once a special order has been placed, and the vehicle cannot be repaired that day, then it is out of sight out of mind for Parts and Service Advisors alike. After all, the commission plans pay them based on what they have sold, not what they have ordered. The Service Manager pins the blame on the Parts Manager for these issues and vice-versa. What really needs to happen here is for the Parts and Service Managers to team up to attack the issue right in the heart! Put the responsibility on the Parts and Service Advisors equally and develop some sort of compensation percentage or depletion of compensation based on the lack of customer returns for special order parts.
One other thing that can be done and is probably more relevant than trying to build a compensation plan based on the above would be to hire a Special Order clerk and have them be totally responsible, and their pay based on, the lack of special orders in process waiting for customers to return. They can handle the appointments, review the issues, and be proactive about keeping those parts perpetuating at an accelerated rate. When that is the only focus of that person’s job description, you have a solution for this. It may not solve some of the other underlying issues I have already discussed, but I can just about promise you that this Special Order Clerk” working for both departments, will more than pay for themselves in short order when it comes to controlling the turns of your special order inventory. And you just might be able to work with one less Service Advisor and/or Parts Advisor to cover the cost.
When you consider that the average dealer has about 25-30% of their parts tied up in unwanted forced stock inventory, imagine what you could if it was under 10% of the overall inventory? Less obsolete dollars, greater turns on inventory, and a healthier return on your investment! What is your forced stock inventory value? Use the simple equation below for reporting your forced stock value;
Select, report, and total of all parts in your inventory with 2 years sales or less in the last 12 months. If you have a typical phase in criteria of “3 in X”, you know that with 2 years sales (YRSL field for ADP or 12 MONTH HIST field for ERA) or less it could have never qualified for stocking in your inventory. This may only get 95% of the problem, but just based on this simple equation, divide this total back into your total inventory value. If you are above 20%, which I am betting that 95% of you all are in this boat, it’s time to attack!