Is Excess Stock Costing Your Dealership?
Excess stock, in a typical parts operation, is often overlooked and very rarely attacked for the reason that most excess inventory consists of faster moving items such as oil filters, air filters, spark plugs, cabin filters, and brake pads. It’s easy to over-order these items, either to make sure you don’t run out or to get a larger discount for volume purchasing. In either case, excess inventory can be considered “idle capital”. In many instances, this type of idle capital can make “Months No Sale” reports look better than they actually are, but the reality is that while that popular oil filter will almost assuredly stay in the zero (0) months no sale category, you could have a year’s supply of them on hand, dragging down inventory performance by taking up valuable space in the parts department that could be used for other parts!
Idle Capital is an investment in your inventory that’s not needed to generate profit. These are parts that did not meet your phase-in criteria, parts that have aged over 12 months, exceed best stocking levels or high days supply settings in your system. Idle Capital at most dealerships is excess, forced, technical and obsolete inventory.
Excess inventory is defined as those parts that have an on-hand quantity that exceeds your calculated Best Stocking Levels.
To break this down, let’s assume that the low days supply setting on a particular part is 15 days (best reorder point). Therefore, on this part, your reorder point would be 15 and the system would wait for this part to sell down to 15 before ordering the 15 needed to get back up to it’s best stocking level of 30.
Now, let’s assume:
- The current quantity on hand is 150
- The cost is $3.00 each.
- The total value of the 30 that are at best stocking level is $90.00.
- The excess 120 filters total to $360.00.
Result: you’ve spent $450 on a 5 month supply of this part when you could have spent$90. And because the parts sell regularly, the $360.00 spent on excess adds to the 0-3 Months No Sale category on reports instead of revealing it as Excess or Idle Capital. Start adding this up and you can have a considerable amount of wasted or idle inventory that looks good but isn’t turning.
Dealerships with large amounts of excess inventory (over 20% of the overall inventory) will usually see that both true and gross turns are low even though obsolete inventory numbers are in line. Dealerships with high gross turns and much lower true turns almost always have too much excess!
A process that closely monitors how excess is created in your parts inventory, followed by swift action can keep excess inventory at low levels, turning Idle Capital into cash for many dealerships.
How much cash is idling in your parts inventory? Need a second opinion? Get in touch!