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How to say “Yes we have it” almost every time.
by: Jim Richter
One of the most frustrating situations for any parts manager is to not have parts that technicians need for a job that is in the shop. Not only do we miss out on the highest potential gross profit sale, but service also stands to lose the labor they have invested in diagnosis, and we’re looking at another Special Order with all of its problems. Why does this happen, and what can we do to reduce the frequency of service Special Orders?
Often times, in our zeal to prevent Obsolescence, we lose track of why we exist. Just like the Used Car Inventory, the Parts Inventory is expected to fulfill a high level of initial demand, in spite of the fact that many of these demands can be unique. How can we do this?
The Computer
That was then -Those of us who have been in the dealership parts business for more than 20 years remember when Dealership Management Systems (DMS) were no more than a storage medium for inventory and sales data. They were not much more than an electronic cardex system, incapable of doing much beyond reporting their contents. The Parts Manager determined what was needed by experience and SWAG (Silly Wild Ass Guess) ordering. The situation was such that there was no real good way to project your needs. One could only respond to obvious demands and hopefully buy the ones that would result in future sales.
This is now – Jumping forward to today the modern DMS is capable of doing far more than keeping track of our activities. It can actually forecast from them and make stocking recommendations based on statistical data that provides high probabilities of resale. There are only two requirements necessary to make this happen:
- The Parameters for Phase In and Phase Out and Supply Depth need to be set properly for your store based on your Franchise(s), Market, Order Frequency, Resources, Business Profile, and target Levels of Service.
- All Demands must be aggressively entered into the DMS so that they can analyzed and incorporated into the forecasting process.
When these critical activities are performed correctly, most modern DMS will provide a very serviceable selling inventory. Like most computer systems, you get results based on the quality of the information you provide.
Phase In Parameters - Books have been written about this subject by people who have made careers of teaching their personal beliefs concerning just how you should set up your DMS. I personally don’t think that there is any one right way to do this, due to the fact that there are very few dealerships that behave exactly alike. There are some basic elements which need to be determined up front:
- What is my market potential? How many units are in operation, and what is my share of the repair business going to be? This will help determine what space, people, and working capital, are going to be needed.
- What will I need for each franchise? Most multi-line stores have major and minor franchises, each generating different levels of demand, requiring different response rates. The smaller lines will actually need more aggressive settings than the larger ones, to make up for reduced overall demands.
- How many sales areas am I going to be active in? There’s little need to be aggressive in crash parts if you’re not going to be a player in Wholesale. Don’t go overboard on Accessories if you don’t have the support of the sales department.
- How aggressive does my service department need me to be? What inventory investment level will Executive Management support? What level of Obsolescence can I sustain with returns?
Once you have the answers to these questions then it is time to determine how many different categories of parts will be stocked, and how each of them will be introduced into the inventory. You may have 10 or more different sources, each with its own unique settings; or you may choose to use a Non Stock Test source where all parts undergo an initial qualification. In either case the quality of the response you receive will be directly related to how thoroughly you plan before making your settings.
Supply Depth – Once you’ve qualified a part for stocking status, the next step is to determine how many of them are needed. Some of the factors to be considered are:
- What are the Stock Order frequencies? Does Daily Stock Order mean next day receipt? What are the benefits and penalties involved in the various order types/.
- How good is the service from my PDC(s)? Can I expect good fill rates, or must I increase stock in self-defense?
- Are there multiples of certain parts that are necessary to complete a job? You can override the calculated stocking levels in most DMS to allow for parts that require specific amounts, such as brake rotors.
- Are there space limitations that you must work with? Sheet metal stocking levels are often influenced in this way.
Phase Out Parameters – Every part eventually reaches a sales level where it no longer makes economic sense to keep it in stock. Some people would like you to have certain parts “just in case” there’s a need for it, and with the debatable exception of some maintenance and campaign items this does not make sense. There are 2 primary criteria used to calculate the point where a part is phased out of the DMS inventory.
- Time. This is usually expressed as a specific period where there is little, or no demand for a part. Some will recommend 6 months, others 9 months or even 1 year. If you are in a seasonal market you may want to use 9 months to allow for overlap when analyzing “no demand.” When calculating for reduced demand the norm is typically 12 months, since most DMS can calculate this easily.
- Levels of Demand. There is a point where, after deducting the cost of ownership which is estimated at 20% annually, low levels of sale do not allow for net profitability. For example, if you average 30% Gross Profit for the entire department, and deduct 20% for your cost of ownership, then that only leaves 10% GP before cost of sale and departmental overhead. Most of my clients find that they need to sell at least 3 pieces per year just to be marginally profitable. Caution should be taken not to set this too high or you will cut yourself off from re-qualifying AP parts, as well as starting up the Special Order devil again.
Lost Sales - I can’t stress this aspect of modern parts management enough. As we said earlier, the major benefit from your DMS is its ability to forecast. A Lost Sale should start the analysis process. It allows you to begin testing a part number without ownership, something a Special Order can never do. There are safeguards in most DMS that allow multiple demands within a month, but consider them all to be one demand period for the purposes of Phase In. If you assume that an inquiry for a particular part is driven by true need for it somewhere, and that you only have a chance of making the sale if you have it, then the cost of NOT POSTING the Lost Sale becomes enormous. The DMS lives off demand posting, and demands are only Sales and Lost Sales. Which one makes the most economic sense?
The Human Factor
The Parts Manager – If the DMS could truly think for itself, then there would be no need for human intervention, and we all know that does not happen. However, many of you spend an inordinate amount of time “correcting” its recommendations because you don’t trust it, or can’t understand why it makes such crazy calculations. Most of the time this goes back to settings that are not appropriate for your business model. Many new managers inherit settings from their predecessors, who in turn got them from someone else who was there ahead of them. There was no effort to answer the questions we covered earlier, leading to a setup that works improperly, and little understanding of how changes can improve future calculations. The result becomes one of trial and error, with the emphasis on error. If you accept the fact that the primary responsibility of the Parts Manager is to manage the inventory investment, then you also need to acknowledge the need for that person to be able to configure and adjust the DMS properly, and as needed. Where does a Parts Manager find help with this? There are many resources available to them:
- DMS Schools – The major DMS providers have off site and on-line training for their products. While they do not dig into the underlying daily needs of the department, they do provide explicit instructions in the operation of their systems and software. Every Parts Manager has a responsibility to become proficient in the use of their DMS.
- Franchise Schools – These are good for new managers. It teaches them the unique traits of the franchise, as well as the Terms and Conditions which influence the decisions on stocking and returning parts.
- Professional Support – Every Parts Manager lives and works in a very confined environment. There is constant demand for their time all day, and little opportunity to see other ways to get the job done. One of the most frequent problems I see is a lack of time management skills. This often causes a manager to focus on sales, and neglect the inventory management aspect of the job because there is “never enough time” for it. Outside help can help identify those areas that need improvement, and provide suggestions, training, and alternate solutions toward solving problems.
When all is said and done, it is the Parts Manager who makes the day successful. If you’ve planned properly, designed the settings in the DMS to match your needs, prompted your staff to post Lost Sales aggressively, and provided quality time in your day to do your administrative job as well as the selling job, you should be looking at Levels of Service of over 85% for part numbers and pieces. If you aren’t there yet get help. You owe it to the store, and yourself.
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