Ownership/Operations
Parts Inventory: How Much Of Your Parts Are Considered Frozen?
By Fred Samuelson
Since the parts inventory is the single largest un-financed investment that a dealer makes, it is imperative that the dealer pay attention to what is happening in this department every month. Parts are ordered, received, stocked, paid for, and sold. Then the procedure starts all over again. When the weekly stock order is submitted, other than the parts manager, who 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. Please tell me if you think this is ultra important now, given that one manufacturer is contemplating reducing the parts purchase discount to 2% from 5%. Further, they are considering reducing the parts return privilege earned monthly from 5% to 2%. Just with these two possible adjusted numbers, the manufacturer has made it much more imperative that the dealer take notice of what is going on with this very large investment. It is imperative that dealers pay attention to the following procedures and ensure they are consistently reviewed. Take a closer look with the 3m theory of management: that's measure, modify, and monitor. There are other changes in the parts purchase program that are being considered for implementation at the same time frame, but the two above are probably the most important.
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, like 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 core charges. While visiting a dealer, a core audit was performed. What was found? A $600 engine core was 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 potholes 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. The visiting dealer asked, "What are cores"? An explanation was given. With both hands he hit himself on the side of his head so hard we 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–$4500 because he did not know what a core was. Do you?
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 inventory return program your company is following? Do you return parts to the factory on a quarterly basis, bi-monthly 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, 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? Believe it or not, that is exactly what some dealers are doing–cashing the check for parts return credit instead of returning the old parts to the manufacturer. And please do not allow your parts manager to return the parts closest to the shipping door instead of the aged parts that have a last time to return notice. What exactly is your policy?
Have you ever held a "SNIAGRAB" sale? (Spell it backwards.) 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? How many of you have followed the program of this innovative dealer who told his service writers that he was going to pay their bonuses with the special order parts that were sitting on the parts shelf, and not installed on the customer's car? Did the thought of changing their bonus arrangement get their attention–you bet it did. The service writers immediately started calling the customers for whom the parts were ordered. Have you ever thought of paying a bonus to your service writers for parts special ordered and not delivered?
In order to prevent frozen capital from occurring again in your inventory, consider instituting the 3m theory of management. That means you must measure, modify, and monitor your progress in each agenda item. Do it consistently, and you will be a very happy dealer.
Please pay very close attention to the largest single asset in your dealership that you cannot finance–your parts inventory. After all, we are talking here about your money. Do everything possible to manage it wisely!
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. fsamuelson@dealeronline.com
