How much of your parts are considered frozen? Parts inventory is the single largest unfinanced investment that a dealer makes. Parts are ordered, received, stocked, paid for and, hopefully, sold. Then the procedure starts all over again. When the weekly stock order is submitted, who, other than the parts manager, is checking the numbers? Since this inventory is 100% dealership-owned, the dealer has an obligation to review certain financial data with the parts manager.
The first step to converting your parts frozen capital back into cold, hard cash is to conduct a monthly frozen capital meeting with an agenda to determine the difference between the accounting department's parts book value and the parts department inventory value. The only time these two records will be in balance is immediately following the physical inventory, when the two accounts are reconciled and verified by the dealership's accounting firm. At the end of any other month, if the difference between the two inventory values is greater than 2%, then somebody-such as the dealer-should determine the reason.
Case in point: one client received an end-of-month parts shipment. The paperwork was given to the accounting department, but the actual shipment had not been unpacked and stocked, with back orders noted and parts code changes made. Therefore, the accounting department parts inventory value was out of balance with the parts department number by $18,000 because of this shipment. Drill down to get the facts if your book-to-actual inventories differ by more than 2%. This quick analysis keeps you on top of the situation. Continue to measure and monitor this vital source of frozen capital.
Another aspect of the parts frozen capital is cores. While visiting a dealer, a core audit was performed. What was found? A $600 engine core sitting in the back of a parts delivery pickup truck. The driver did not want to bounce around so much when he drove across the chuck holes in the road. The added weight helped him to stop bouncing. When this was brought to the attention of the dealer, a visiting dealer was in the room. He asked, what are cores? An explanation was given. With both hands he hit himself on the sides of his head so hard everyone thought he would knock himself out. He said, "Do you know what I did? I saw four of those engine cores (he is a heavy truck dealer besides an auto dealer) sitting outside the back service entrance so I told my service manager to get a truck and haul those pieces of metal to the dump." How much did that cost him? Probably between $1300 and $4500 because he did not know what a core was. Do you? You do now.
Now, let's address parts over three months old. How do we get them off the shelf, sold, or returned to the factory? What are your policies and procedures for aged inventory? What is the parts return program your company is following? Do you return parts to the factory on a quarterly basis, on a bimonthly basis, or on a semi-annual basis? Do you, as the dealer, know how much return privilege your company has earned in the last month, the last quarter, or the last year? Does your manufacturer have a separate return policy for accessories? Do you write off the accessories under this program, or just deposit the check and take it all as profit? What is your policy?
Have you ever held a garage sale? You would be surprised what someone will buy at a special dealership yard sale. One man's junk is another man's treasure. Do you have a special order policy in place with your service and parts department? One innovative dealer told his service writers that he was going to pay their bonus in relation to the special order parts that were sitting on the parts shelf and not installed in customers' car. This quickly caught the attention of the service writers, who immediately started calling the customers for whom the parts were ordered.
Pay attention to the largest single asset that you cannot finance in your entire dealership-your parts inventory. In order to prevent frozen capital from occurring again in your inventory, consider instituting the 3M theory of management: You must Measure, Modify, and Monitor your progress on each agenda item. Do it consistently and thaw that frozen capital into cold, hard cash.
Fred Samuelson is the chairman of the board for MRI Associates, which provides financial statement analysis for the automobile dealer community. MRI also works hands-on, in-house with dealers to set up policies and procedures to correct inefficient operations, and provides follow-up phone coaching for selected managers. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3. fsamuelson@dealeronline.com