Issue Date: Parts Manager Aug 2008, Posted On: 8/3/2008
Get proactive with parts inventory management! Ordering the right quantity of parts is perhaps the most difficult responsibility of dealership parts managers. Make a mistake and you can severely impact dealership profits. Do it without a true understanding of your dealership's financial position or adequate purchasing controls and it could spiral into an absolute nightmare.
That's what recently happened to a dealer known by Jim Eagan, an audit partner in the auto dealership industry group at CPA and business advisory firm Plante & Moran, PLLC. The dealer told Jim that he was in desperate cash straits because his parts manager had just ordered $75,000 worth of parts without telling him. But the dealer had never told any of his managers that the business was having cash flow challenges.
"The dealer kicked himself for not communicating more forthrightly with his parts manager," Jim tells us. A purchase order system requiring dealer approval for purchases over a specified dollar amount also would've prevented the parts manager from ordering tens of thousands of dollars in parts that the dealership couldn't afford, he says.
Not every inventory ordering mistake is fatal. "Maybe in the normal course of things, the dealership could've sold the parts in 40 to 60 days," says Jim. But things were far from normal during this recent situation.
"The dealership eventually did close - not just because of the ordering mistake but because it was near the end of its financial rope," says Jim.
It's easy to say the dealer could've prevented this ordering blunder. But parts managers also can and should be taking increased responsibility for inventory decisions as dealerships become more dependent on fixed operations in a weakening economy.
While this situation was extreme, even smaller inventory ordering mistakes can hurt. In brief, dealers don't have the working capital to tie up in excess inventory and they can't afford to lose parts and service business if they don't have enough of the right inventory on hand, notes Jim. Some of his suggestions to help parts managers do a better job:
Request guidance. While you may like having authority to make autonomous purchasing decisions, you really should bring up the topic of a purchase control system to your dealer if your store doesn't already have one in place, says Jim. Even with a very good understanding of the business, "you're likely to have some misfires periodically," says Jim.
Question the big picture. If you suspect there may be cash flow problems or other issues, ask your dealer what you need to know to make the best decisions for the dealership. Relying on the true story and not the rumors will benefit everyone.
Share knowledge. Parts managers often detect problems before their dealers do through the many reports they analyze. Be proactive and bring things to your dealer's attention that can improve profitability. While it may be hard to admit if you're the one who made a mistake, such as stocking too many slow moving parts, acknowledging and fixing it is in everyone's best interest. Your pay plan may even include a feature that requires you to take good steps in managing inventory.
Do the math. Some parts managers rely upon complicated mathematical formulas to determine optimal "economic" order quantities, notes Jim. Such formulas help determine the right quantity of inventory to order to minimize the variable costs of ordering, stocking, and holding inventories and also factor in the costs of tied up working capital, insurance, security, obsolescence, shrinkage, etc. Even if you don't use these formulas, you should still be calculating your turn rate for parts and accessories, he says. (See "Critical calculations")
Also check if your dealership is complying with the many inventory best practices provided by Jim in the accompanying sidebar.
Jim Eagan can be reached at (800) 544-0203, ext. 3257 or firstname.lastname@example.org.
Critical Calculations Optimally, parts and accessories will turn at four to six times a year, translating into a 60- to 90-day inventory supply, says dealership CPA Jim Eagan.
To compute your dealership's parts and accessories turn rate for calendar year 2007, first determine your 2007 parts cost of goods sold amount by taking your December 2007 factory statement and subtracting the parts department's gross profit for the year from the parts sales for the year. To arrive at the 2007 parts turn rate, divide the parts and accessories inventories reflected on the dealership's December balance sheet to the parts cost of goods sold amount.
Parts Sales = $2,900,000 Parts Gross = $1,000,000 Parts & Accessories Inventories = $350,000 Parts Costs of Goods Sold = $2,900,000 - $1,000,000 = $1,900,000 Parts Turn Rate = $1,900,000 ÷ $350,000 = 5.42 Days Supply = $350,000 ÷ ($1,900,000 ÷ 12 = $158,333) = 2.2 x 30 = 66
If you're looking at some interim period of the year and want to compute your approximate parts turn, simply annualize the parts department sales and gross amounts from whatever statement you're looking at and perform the computation above, says Jim.
Inventory best practices Ask yourself the following questions regarding your dealership's management practices regarding parts and accessories inventories:
Does the dealership have established ordering policies and procedures that are consistently followed?
Are purchase orders required for all outside purchases?
Is there limited authority as to who can issue purchase orders?
Is the dealership's day's supply of parts and accessories appropriate for the circumstances?
Is there a system in place to notice and take action if a buildup of slow-moving parts occurs?
Do you require all old parts to be turned in to the parts counter?
How is the dealership doing regarding the retention or return of parts, as required by the manufacturer?
Are claims for missing or defective parts filed on a timely basis?
Does the dealership have problems with special-ordered parts that aren't returned, if not used?
Are internal controls in the parts department adequate?
Is the parts department's pricing accurate?
Do you, or other appropriate management personnel, review the volume of employee parts purchases?
Is a file maintained of sales tax exemption certificates for each wholesale account?
Are parts department personnel aware of your policy with respect to employee theft?