Percentage of Orders Promptly Filled From Inventory is the Real Key to Profitable Parts Sales
By Mike Nicholes
Walk into your parts room and what do you see? If you say, "parts," you're missing the big picture.
Instead of seeing parts, picture stacks of $10, $20 or $100 bills arranged in neat rows, because that is what a parts department really is, an investment that must earn a return. And it is "real money," not floor plan.
Money earns a return when it works, not when it sits, so the faster the parts department moves money, the more income the dealership earns. And the longer the dealership's money sits on the shelf, the more income is lost.
Fill Rate is the Real Measure of Performance
Parts department performance can be measured in many ways. Unfortunately, most standard measures to monitor inventory total inventory turns, turns broken out sales and inventory shown in the statement, for example are not the most useful ways to evaluate a dealership parts department.
Fill ratethe percentage of orders promptly filled from inventoryto the technicians and counter customers is the best way to monitor parts department performance. A high fill rate means the parts department is capturing almost every opportunity to sell and produce the highest profit possible. Few sales are lost because of parts out-of-stock and there is little need for special orders or rushing to buy from a competitor to fill an order.
A perfect parts operation would have a 100 percent fill rate. Unrealistic, but a well-managed department can come close. Every parts department should have a goal of a minimum 90 percent or better fill rate.
- Good parts managers maintain a 90 percent to 94 percent fill rate.
- Great managers hit 95 percent or more.
Unfortunately, the typical dealership has a 75 percent to 80 percent fill rate. Poor departments are below 75 percent.
All other measures for inventory management should be used to optimize inventory only as long as the fill rate remains high.
High Fill Rate Equals Higher CSI
A better-than-average fill rate increases not only parts department sales, but also is very important in building service sales. Studies have shown that a low parts fill rate is a major bottleneck to improving service efficiency.
It is estimated that an improvement to 94 percent fill rate from 85 percent translates to one more billable hour per technician per day. For a shop with 10 technicians and an effective labor rate of $45 per hour, that increased fill rate puts an extra $450 a day in the cash register. And the extra billing comes with little, or no, increase in overheadwhich means most, if not all, of the gross margin on that $450 goes straight to the dealership's bottom line.
An additional benefit to a higher fill rate is an improved dealership CSI. In-person interviews with car owners reveal the hard truth about low fill rate. Where fill rate is low, customers complain, "They made me bring my car back because they didn't have the parts," and "I can't schedule an appointment until the parts are in."
Wouldn't you rather have your customers remark to family and friends that when they took their vehicle to your dealership:
- "My car was done when they promised."
- "I got my car serviced right away."
The Cost to Reach a Higher Fill Rate is Very Low
It used to be a credo that high fill rates were too expensive to maintain. The belief was that as fill rates increased, inventory turns and return on investment dropped. The incremental cost of going from 40 percent to 60 percent was small, but going from 85 percent to 90 percent was cost prohibitive. The dealership would have too much money tied up in too many slow- moving parts.
That idea is wrong.
Carmakers and successful retailers repeatedly have shown that the incremental cost to reach a 90 percent or better fill rate is very small, in some cases zero when they use the system properly and input the complete information necessary to do the job. And the added profits more than recoup any additional costs.
The management tools to achieve a high fill rate without excessive investment already are available and even better ones are on the horizon. These techniques do more than make parts operations more efficient (equal or more work done in less time), they make the department more effective (increased sales and better ROI).
One of the most common new tools, called "source by movement," automatically tracks and updates restock orders based on each part's current movement history. Unfortunately, source by movement is effective only for parts in the high piece movement category. Parts that are slower in sales must use a different (combined) approach to the problem; but the problem is solvable. Automatic reordering isn't new, but older systems recorded only the sale of each part, deducted a unit from inventory, and automatically reordered when inventory fell to a preset level.
Source by movement adds the dimension of sales frequency to the process. When first installed, source by movement programs review all historical parts sales records already stored on the department's existing system. The data are used to determine a precise movement profile for each part number.
The reorder trigger point, however, is not static. Source by movement software automatically adjusts reordering as sales patterns change. If a part's sales slow down compared to historical movement, the reordering is reduced. If sales increase, the system increases reorder levels.
Another valuable and critical inventory management feature on new programs is "Lost Sales Tracking."
When an order cannot be filled, lost sales tracking records the part number and date of the order. The lost sales record quickly identifies holes in the current inventory.
These management tools are available now. All it takes to implement them is training by those who understand their use.
Mike Nicholes is the founder of Mike Nicholes, Inc. (MNI), part of the Sandy Corporation, an ADP company. Mr. Nicholes is recognized as one of the automotive industry's leading consultants and trainers for parts and service operations. mnicholes@dealeronline.com
