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Parts Obsolescence Persists!
For most non-parts managers (and even some parts managers), running a successful department seems like Rocket Science as they seek the mysterious “magic formula” to make it all work.
But, really, it is just math and control that gets the job done.
The following report is derived from just a part of a presentation from Chuck Hartle’, a widely recognized subject matter expert and valued contributor to DealersEdge Management Education programming.
So what’s the issue with Automatic Stock Replenishment systems? The problem is that there are still parts ordered and/or stocked regularly that are not covered by the guaranteed return privileges that come with (Automatic Stock Replenishment) ASR. Perhaps the greatest and most costly unreturnables are Special Order Parts that are never actually installed or otherwise sold.
While some of your inventory has a guaranteed return privilege, a growing percentage does not and this appears to be lost by some dealership managers who have bought into the “guaranteed return” concept and have not factored in the impact of those parts not guaranteed.
OEMs have linked together the guaranteed return for ASR ordered parts with a shrinking and sometime vanishing of the return allowance that could be used to wash out obsolete SOPs, forced stock, returned parts… anything that is not covered by the ASR return guarantee.
Little or no return allowance for these other parts means that they will ultimately become obsolete and dead stock in your inventory… therefore a total loss.
So Chuck asks?
Intentional, or not, are OEM replenishment programs designed to benefit the dealership, or the OEM?
That’s for you to decide. Parts Inventory Control in truth is not similar to Rocket Science. But if you look carefully at what has resulted from these programs over time, it sure appears complicated and not as promised or implied.
Beginning with GM and RIM, Stock Replenishment and controlled setting Programs have proliferated with all but Toyota, Honda and Acura requiring them.
(It should be noted that Ford, VW, Audi and Mazda, at the time of this presentation, are running traditional parts inventory programs, but that is rapidly changing.)
Chuck’s analysis reveals that obsolescence, and the resulting losses are still a problem.
Take a look at Chuck’s Analysis of the Impact of Automated Stock Replenishment Programs:
Here’s the shocker! Based on Chuck’s research, stores participating in automated stock replenishment programs (in Red in this illustration) tend to have higher non-guaranteed obsolescence than those in traditional programs.
Chuck observed that based on the evidence he uncovered, it appears that stores with the right DMS inventory control settings tend to do better than those who rely solely on the ASR guarantee programs.
With the advent of RIM, ARO, and other Automatic Stock Replenishment (ASR) programs, return allowances and incentives have dwindled so you can’t buy your way out of a bad inventory.
Chuck recommends treating and evaluating ASR and Non-ASR parts as two separate inventories so that you can properly measure the “benefits” of ASR to the Dealership.
For Example Consider this Analysis for one dealership (real numbers):
The illustration above breaks down the performance of the ASR inventory on the topsection and the Non-ASR in the middle and allows you to see how single-minded reliance on ASR guarantees can lead you expensively astray.
Because the manufacturer only guarantees what sells, 30.04% of the ASR parts are active, and only 7.89 is obsolete.
However the non-protected… non-ASR inventory…has only 5.58% active and 31.89% obsolete.
Recognizing that a large part of the Non-ASR parts WILL become obsolete, Chuck recommends that some of the increased Warranty Retail priced parts markup be allocated to an accrual fund to purge dead inventory. In other words, create your own “return allowance slush fund” to cover these ultimate losses.
Be aware that a 40% profit margin is also no longer guaranteed.
Consider this exercise to measure the potential of this phenomenon in your parts inventory:
STEP 1: Run a counter pad on a specific Manufacturer. Make sure to include Part Number, Cost, List, and 12 Month Demand.
STEP 2: Import it into an Excel Spreadsheet.
STEP 3: Create a column to subtract “List from Cost” to show your profit margin.
STEP 4: Create another column to divide the “profit margin” column into the “List” Column to get a gross profit percentage. In Excel the formula for profit would be “=round(d3/b3*100,2)”.
STEP 5: Sort the spreadsheet by descending gross profit percentage to see how your inventory performs!
The resulting spreadsheet will list parts by gross profit and can be sorted by whether the yield is over, at or under 40%. This exercise will give you a much better idea of where your Gross Profit from Parts is going and may suggest measures to combat the unpleasant results.
This Post was excerpted from a much larger and deeper look into dealership parts inventory management - "Parts Inventory Management By The Numbers"
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This Parts Operations Guide Provides You With a Deep Dive Into the Workings of Today’s Dealership Parts Department
This DealersEdge Guide provides details centered on the numbers, reports and processes of a well-run parts department focused on providing the parts needed by your Service Department on a timely basis.
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