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Everything we do in parts is to make one thing happen — we want to have the parts our service department and counter customers’ need — when they need them. While this might seem easy to those who have no experience in parts, it’s like the game of golf. It’s simple, but it’s not easy.
It would be simple if you had an unlimited amount of storage space and dollars available to put parts in your inventory, but that is never the case.
Focus on this goal for your parts department: Create a balance between your inventory and the demand for that inventory so that everyone, including the owner, is happy at the end of the day.
The parts industry has made some big changes over the years. Years ago, when transportation wasn’t what it is today and manufacturers were not as efficient, it could have taken up to 30 days to get the parts you needed. As a result, dealers had to carry enough inventory to ensure they had what was needed for the season. Many dealers back then prided themselves on having all the parts the customers could ever need. While that was a noble cause 10 or 20 years ago, things have changed.
In today’s world, companies have improved their ability to get you parts when you need them. So, carrying a big heavy inventory with 10 of the same parts in stock just doesn’t make sense. Now, you can often receive a part within 3-4 days as opposed to the 30 days it would have taken 20 years ago.
Stocking the Right Parts
Think about how that changes your approach to what you should carry in stock. Twenty years ago, I might need to carry eight of a specific carburetor to meet the needs of both my service department and customers walking up to the counter. Today, I could easily meet that same demand by having just four in stock. While you can’t do that with every part, it would be easy to reduce your item count on each part and still meet the daily demands placed upon your parts department.
It’s important to have a strong inventory, however, it’s even more important to have the right part on hand. That’s where the measure of “fill rate out of stocking inventory” comes into play. You could have $500,000 of parts in your inventory, but if you don’t have the right parts — the parts that will meet the need of your customers today — none of it matters. If you don’t have a part on hand today, a customer will go elsewhere to buy.
Keep track of lost sales in your business management system to find your on-hand inventory fill rate. To increase your fill rate, you need to expand your stock-keeping units (SKUs). Then, do your item counts and spread your money farther across the skew line to build a wide but shallow inventory.
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Most, if not all, parts managers understand the importance of measuring their parts inventory turns — which helps determine if they’re doing a good or bad job of controlling their department. I warn dealers that they need to understand the difference between “gross” inventory turns and “true” inventory turns.
To determine your “gross” turns, take the annualized cost of your parts sales and divide that number by your total dollars of parts inventory. Your goal is to have a “gross” turn 4-6 times per year. With a turn of less than 4, you may be carrying too much inventory, and with more than 6, you are probably ordering too often and missing out on volume purchase discounts.
The problem with just looking at your “gross” inventory turn is that it doesn’t tell you how much of your inventory you’re actually selling from what you have on-hand. By looking at your “true” inventory turns, you get a more accurate picture of how your parts sales are moving through your on-hand inventory.
To calculate your “true” inventory turns, take the annualized cost of your parts, subtract any special or emergency orders and divide by your parts inventory. For example, if your parts cost was $300,000, your special orders and emergency orders were $30,000 and your parts inventory was $60,000, the formula would be as follows: $300,000-$30,000=$270,000/$60,000=4.5 turns per year. Our goal for dealers is 4-5 turns per year.
Once you have determined your true turn number, we encourage our dealers to determine their “inventory days on-hand.” To determine inventory days, divide your inventory turns into 365 days. For example, if your true turn rate was 4.5, you would have enough inventory on-hand to cover your needs for 81 days. The formula is: 365/4.5=81 days.
The reason we like parts managers to measure their inventory in terms of days instead of turns is because it gives you a more accurate picture of what’s really going on. The difference between 3.5 and 4 turns doesn’t seem significant, but by turning those into days, it’s the difference between 104 and 91 days of inventory on-hand.
Today, you can receive a part in 24 hours if need be. If I am a parts manager and can get over 90% of my parts in 24 hours, I don’t want to carry any more than I absolutely need. Yet, I have to balance out my desire to carry fewer parts with the impact that has on customers, both in the service department and at the counter, as well as the time it takes me to do orders on a daily basis, instead of every other day or even once per week. As in life, everything works better if we can maintain a good balance.
Since there are no hard and fast rules and because, in my experience, every dealership and customer base is a little bit different, balance is something every parts department has to get its arms around to meet the demands of customers, the needs of the dealership and the needs of the parts people.
That balance ultimately takes place on fast vs. medium to slow-moving parts. We want to have all the fast moving parts on hand and understand that they will represent a large portion of the department’s total sales. Those are the parts like plugs, filters, belts and blades — quick wear items that you’re going to need to carry in a quantity that will meet your daily demand.
To find your fastest-moving parts during season, go to your business management software and run a report detailing parts sales during season last year. Look at the top 50, 100 or 200 parts, and make sure you have what you need to meet a two-week demand. If you have a specific oil filter that you sell a case of 50 per week, you don’t need 10 cases on hand taking up valuable room in your parts department. Take advantage of early order specials and free shipping if it makes business sense, but make sure you are not carrying unnecessary inventory. Only order what you need to get the best rates, and then stay on top of your inventory on a daily basis to fill in.
How well do take care of your two best customers — the ones at the counter and the one in your service department? The next area to focus on is your fill rate.
Read Part 2 in tomorrow’s Daily Email Update.