Parts inventory: Revenue Management



Lessons’ from the NADA Dealer Academy:

The Parts Department is an important asset management component that if mismanaged, will have a negative impact to the balance sheet. Since most managers don’t take a path of leadership through Parts, this department is overlooked and undervalued.  The metrics of parts department performance is measured can be fully realized. The balance-sheet concern for the dealer is receiving good Return on Investment (ROI) for the dollars invested in inventory.

These essential functions are the key to excellent asset management and this is why it is imperative to have the right manager operating the parts department. Arriving at a good Return on Investment (ROI) is the result of careful planning and that addresses the many different facets of operating a profitable parts department.

Parts Management has two divergent roles regarding inventory investment:

  1. They must manage the stocked inventory, deciding which parts we should invest in with the objective of providing maximum return on inventory investment.
  2. They must work to limit the dealerships exposure to non-stocked and excess inventory, preventing investment in parts that are likely to become obsolete.
  • Each manufacturer carries hundreds of thousands of part numbers.  The average dealer stocks in the area of less than 7,000.  Of the hundreds of thousands of parts available how do you choose which is the right part to stock? The DMS (dealer management systems) are the integral tool for managing and monitoring the inventory status.  Specific to inventory control, the DMS helps managers retain data and provides specific stocking guidance.  A productive DMS program helps the manager determine; what to stock, when not to stock and how much to stock.

For your DMS to function accurately it must first have 100% of the demand data.  Demand comes from posting sales, posting lost sales and posting emergency purchases.

Posting lost sales:  The purpose for posting lost sales is to collect the demand data, identifying parts that should be stocked. There is only 1 rule for posting lost sales.  Always post a lost sale, unless you have the part in stock, or sell a factory part.  Your phase-in requires 100% demand to work effectively.

Posting emergency purchases: Some purchases will have to be made on an emergency basis.  The challenge for the Parts Manager is to minimize the need. Improving the Level of Service can be accomplished through over-stocking but this method drains away potential profits. The overall effect of purchasing parts correctly through the parts demand process as opposed through emergency ordering is that the savings gained improves profit margins.

True Turns:  Average inventory value at cost divided by annual cost of sales.  It is important to measure turn so that the Parts Manager can stock what is being sold and sell what is being purchased.  A true turn measurement is 5 to 6 turns per year.

Gross Turns: This calculation is the total number of parts in inventory divided by the total number of sales for the year.  Gross turns tell the Dealer how much money is tied up versus how much money is turned into profits.  The guide for Gross turns is 7 to 9 turns per year.  Gross turn numbers that exceed 12 have been accomplished by highly efficient parts departments.

Fill rate: Having inventory on the shelf to meet demand.  Current fill-rates should be equal to or greater than 95%. Off the shelf fill rate is having the parts on the shelf at the time of the demand.

Obsolescence: Is a part or parts that have been ordered (Special Order or stock) that no longer meets the stocking requirements.  Guide for obsolescence is to be no more than 5% of total parts inventory.

Level of Service: This is the measurement of your efficiency rating. It is a figure which details how well the parts department shelves are stocked and how many parts are filled on demand out of stocked inventory, rather than going outside locally, or completely losing the sale.  Your level of service should come in within the range of 92-97%.

Source by movement: Parts are segregated based on sales movement.  Days of supply settings are inverse to the rate of movement.

When not to stock – Phase out Methodology:

Active parts to inactive parts phase out begins from day 1 based on the demand cycle.  No demand in 6 months for the perspective part = 65% chance of becoming obsolete.  No demand in 9 months in the sales cycle = 85% chance of becoming obsolete.  The parts manager can always recycle if the demand increases so that the part can come back into stock if needed.

  • If there is a proliferation of non-stock , obsolescence and/or unwanted Parts. The parts manager must work diligently to control and manage the SOP (special order parts) process, non-stock inventory requests and inventory turn analysis.
  • At month-end the Parts manager along with the General Manager and Business Manager should complete a parts inventory balance sheet.
  • An Inventory stocking investment spreadsheet should be completed by the Parts Manager and the General Manager to ensure the investment is being managed for maximum ROI. The NADA provides an exceptional inventory assessment tool.

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