Today, it makes no sense for a dealership to maintain a large parts inventory, or stock ten of the same item, because manufacturers have greatly improved their ability to get you the parts you need when you need them. Twenty years ago, it took almost 30 days to get a part, and now you can get a part delivered to you in one to four days. Think how that changes your approach to deciding on the number of any particular part item you should keep on hand. Twenty years ago, you may have had to carry eight different carburetors in order to meet the needs of your customers and service department. You can easily meet that demand today by keeping only four in stock. While you can’t do that with every part, it is still easy to reduce your item count on each part, and still meet the daily demands placed upon your parts department.
Most parts managers understand the importance of measuring their parts inventory turns which, theoretically, helps them determine if they are doing a good or bad job controlling their department, but they also need to understand the difference between “gross” inventory turns, and “true” inventory turns.
To determine “gross” turns, you need to 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 four, you may be carrying too much inventory, and with more than six you are probably ordering too often and missing volume purchase discounts.
You can get a more accurate picture of how your parts sales are moving through your on-hand inventory by looking at your “true” inventory turns. To calculate your “true” inventory turns, you must take the annualized cost of your parts, subtract any special or emergency orders, and divide by your parts inventory. For example, if your cost of parts is $300,000, your special orders and emergency orders are $30,000, and your parts inventory is $60,000, your 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 figured out your “true” turn number, we encourage dealers to determine their “Inventory Days On-Hand.” To calculate Inventory Days, divide your inventory turns into 365 days. For example, if your “true” turn were 4.5, you would have enough inventory on-hand to cover your needs for 81 days. The formula is simply 365/4.5=81 days.
The reason we like parts managers to measure their inventory in terms of days instead of turns is that it gives them a more accurate picture of what is really going on. The difference between 3.5 turns compared to 4 turns doesn’t seem significant, but by turning those into days, it is the difference between 104 days and 91 days of inventory on-hand.