Solving Your Inventory Issue
Mark Michalski says the biggest problem for a modern parts department is still out-of-control inventory amounts. Excessive inventory, idle inventory, overstocked inventory and obsolescence are commonplace and ultimately lead to higher inventory carrying costs, reduced cash flow and lower inventory gross and true turns, he says. As the parts instructor at the National Automobile Dealers Association (NADA) Academy, Michalski sees countless examples of parts managers not having a firm grasp on their right mix of parts inventory.
“The parts department typically makes the dealership the most money,” he says. “What happens is there’s typically not a lot of analysis done with it because the variable [operations] people don't understand it. And because it makes them money every month, they go on to other things that need to be sorted out. But because of the criticalness of having the right parts at the right time, a big focus of what we do is demand tracking.”
Michalski explains how to utilize the demand tracking functions in your dealership management system (DMS) to take back control of an overweight parts inventory, stock the right parts and make more money.
Demand comes down to sales and lost sales. It’s the lost sales that aren’t being tracked because today's parts managers have abdicated that control to the vendor-managed inventories. Vendor-managed inventories—such as the Chrysler ARO program or the Nissan Smart Stock program—have in recent years become part of many dealers’ agreements and involves the vendor managing its inventory versus a parts manager managing the dealer’s inventory. If you’re a dealer and you have an agreement that requires you to be part of the vendor-managed inventory systems, you’ve abdicated giving the power to the brand and as a result, it’s to the benefit of the manufacturer and at the dealer’s expense.
As a result, dealers have deeper inventories—deeper in value and the wrong parts or parts that they will hopefully be able to send back in a 12-month period of time. While most of the brands allow you to return those parts if you’ve held on to them for a year, they really don't offer any assistance in inventory carrying costs.
These issues can be prevented, though.
The progressive dealers understand that you need to get back to tracking the demand in your DMS and using it to suggest the orders and compare that with what’s going to the vendor for the manufacturer to correctly track your parts. In other words, use your own computer to help you see whether or not what the automaker is telling you to stock is appropriate. You should be telling them what to stock, not the other way around. Within your DMS, you should set up and track demand, expense, proper phase-in/phase-out controls, proper days supply set-ups within each source, and source ranking by piece sales.
You can’t just blindly accept everything the manufacturer says. If you’re not watching your demand and what’s in your DMS, you may be taking junk that sold once or twice and let it sit on your shelves until you can return it. So, for example, if they tell you to stock five of a certain part, you need to go back to your own system to check how many of those you sell, the last time you sold one, and the travel rate. Then make adjustments based off that.
While I understand that some of those programs offer incentives to keep your compliance percentages at a certain point, that can’t be at the expense of dealers spending money on parts or quantities they don’t need.
The inventory “desired weight” is easy to figure out. Simply take your total average month’s cost of sales and divide by the industry gross turn guideline. That net result is your average month’s inventory value and anything over that is obsolescence or overstocked inventory. Reviewing the stock orders, either in house or with the manufacturer’s stock replenishment programs, is something that should be done frequently, as well.