Issue Date: Parts Manager Mar 2008, Posted On: 3/1/2008
How do you define an "Emergency Purchase?" The level of emergency purchases has a direct affect on the profitability of the parts department and to some degree the service department as well. An over reliance on emergency purchases can mean paying higher prices for parts, as well as lost discounts from the factory directly affecting the profit of the parts department.
To the service department it means tying up technicians and service bays, thereby reducing labor efficiencies. Since emergency purchases can be a drain on profits (and then some), it's important to track emergency purchases and decide if certain parts should have been on the shelf.
Look at the little picture Before you can start tracking emergency purchases you have to decide just what constitutes an emergency purchase.
We can probably agree that purchasing parts from another dealer, when you're paying a premium above dealer net and losing out on factory discounts, would constitute an emergency purchase. But how about sold parts that you purchase from a Motorcraft or AC Delco distributor? You may not be paying a premium for the part, but you're probably losing out on a stockorder discount. Looking at the little picture I'd also include this scenario since you are losing some profit and your service department or wholesale customer has to wait for the part.
What about parts that a customer wants you to order from the factory? If you place them on a stock order, you're not losing any premium, right? This may be true but your customer still has to wait for the part and again you are hurting shop efficiency.
Looking at the little picture, either the parts manager or someone who can make decisions needs to review all of the above-mentioned scenarios. The easiest way to accomplish this type of review is for the person who posts the receipts for dealer and distributor invoices and orders the sold parts from the factory to review the purchases while they're being posted to inventory. The person doing the posting and reviewing has to be able to look at a part and decide if the part is some-thing you stock or if the parts are something you should stock. It's a simple common sense approach. For example, some of the things you should look at are:
New Model Parts
Popular Vehicle Models
Out of Stock Parts (check on hand accuracy)
Chances of Idle Inventory (return factor)
Let's consider maintenance parts as an example. If the person doing the posting sees an air filter, he or she may go a step further to determine what vehicle it fits and decide to order the part for stock. Depending on our phase-out criteria, an air filter for an older vehicle may be phased out, but we still want to keep one on the shelf. It may turn out that the air filter is for a brand new model vehicle and you definitely want to keep it in stock. Some of you may be saying that our DMS should do this job for you through the phase-in criteria. Unfortunately, our DMS is unable to take a common sense approach to phasing in parts and usually takes months for a part to be phased in.
Now look at the big picture What constitutes an emergency purchase for the little picture can be different for the big picture. Just like other statistics at month-end, such as percent of idle inventory, stockorder utilization, inventory turns and so on, your total emergency purchases at month-end (the big picture) is an important measuring tool. It should be looked at and compared with previous months to ensure that a negative trend is not developing. The actual dollar figure at months end however is totally dependent on how you post emergency purchases. You can post all the scenarios above as emergency purchases or (all major DMS's have the ability to record emergency purchases) you can pick which scenarios to post as emergency purchases and the other purchases you can treat as normal or other purchases.
Since stockorder utilization (the percentage of stockorders vs. total purchases) gives you a pretty good idea of how much you're purchasing for stock as compared to purchases for parts that are sold, I recommend that you only post parts that are purchased at a premium price as emergency purchases. This can give you a pretty accurate picture of how much profit was lost due to those purchases. As an example: if you purchased $10,000 in parts in a given month from other dealers at an average price of dealer net plus 15 percent, and all the incentives lost from the factory (you should also include any obsolescence allowance) equals 10 percent, those emergency purchases cost you 25 percent, or $2,500.
Besides looking at the little picture and analyzing what you should stock, a little common sense can be used in deciding when you should or should not pick up a part at a premium. For example, you don't want technicians to dictate that a part should be picked up. If given the choice, techs will normally have you pick up everything and anything. Nothing upsets me more than picking up an expensive part at another dealership when the part isn't even put on until the next day. I could have had the part the next morning from the factory. Institute a policy that if a part is over say $100 that you talk to the dispatch-er to see if a rack is tied up or speak with the service advisor to find out the customer's expectations.
If you don't already do so, start tracking your emergency purchases monthly for sold parts bought at a premium. Once some of these processes and policies are instituted and religiously followed, I guarantee your stockorder utilization will increase and your emergency purchases will decrease.