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When you
have the part on the shelf in your warehouse you are just
like everyone else. It's when you don't have the part that
you have the opportunity to reaffirm for your customers why
it is they want to do business with you. After all it's the
part that you don't have that is the only part that matters.
Back in
the 1960s, as we began installing computers, we shifted away
from the Kardex System of inventory management toward sophisticated
mathematical models. Since then, we have measured inventory
performance by several key indicators:
Service
Level. The number of parts that we supplied to the customers
as a percentage of all the parts that the customer ordered.
For stocked
items the minimum standard is normally over 90%.
For all
items the minimum standard is normally over 80%.
Turnover.
The dollar value of our sales, at cost, for the past 12 months,
divided by the Average Inventory Investment over the same
time.
For the
traditional turnover, the minimum standard is over 4 times.
For "true"
turnover, excluding back orders, the minimum standard is 2.4
times.
Stock
Order Ratio. The dollar value of parts ordered on a stock
order, as a percentage of the total dollar value of all parts
orders.
For major
lines, the standard for this ratio should not be below 60%.
Non Moving
Inventory. The percentage of the inventory that has not sold
in the past 12 months.
Normally
not more than 10% of total inventory.
These
measures became almost a routine part of life for a parts
manager. Standards were set for each point, and that was a
primary criterion used to measure how the parts manager was
doing his job. Of course, the usual business measures of sales,
expense and profits are very important, but in the case of
asset management, the parts manager has always been held responsible
for the inventory performance.
When I
first came into the industry I was hired to help with a computer
model for inventory control. It was during this time that
I first ran into a contrasting point of view relative to these
standard measures. The comment was made to me that "even if
you give me 99% of everything that I want and need, if the
part that is missing still keeps my machine from going back
to work, you have given me nothing."
I found
this very troubling. But think about it-that is truly the
view of our customers. If we don't have everything they need
when they need it, we have not satisfied them. Order formula
codes, minimum maximum criteria, Poisson statistical tables,
time controlled order points, and exponential smoothing statistical
forecasting methods, to name just a few, are all useful in
calculating order points. The economic order quantity, more
commonly know as the EOQ method, created by Kerr and Norton,
helps with the order quantity. These are important, but that
is only a portion of the job of inventory control. There is
more to it than that.
Remember:
The critical part is the one we don't have on the shelf. It
is the part that the order points and order quantities failed
to produce at the time the customer needed it. And right now,
it's the only part that matters.
WHAT
CAUSES A BACK ORDER
One of the most useful studies to perform in a parts department
is a back-order analysis. The objective of this type of study
is to find the causes of back orders and then to take corrective
steps to reduce the back order possibilities. There are seven
main reasons why back orders occur:
- Stock
Order Placement Delayed
- Abnormal
Demand
- Supplier
Shortage
- Warehouse
Discrepancies
- Inaccurate
Order Points
- Picking
Errors
- Customer
Convenience
Lets be
clear on what each of these are and what, if anything, we
can do about them.
Stock
Order Placement Delays: A critical element in inventory management
is the lead time. This is the total elapsed time from when
a part reaches the order point, in the bin, in the warehouse,
until the part is back in the bin, in the warehouse and the
computer record updated.
When placing
a stock order with a supplier, each of the time elements must
be consistent and you must monitor them. If we decide not
to order a part for a week, we increase the risk that we will
have a back order. This is typically caused by the parts manager
getting bogged down with too many other things to do and not
placing the stock order promptly.
Abnormal
Demand: This is a normal occurrence in this industry. In our
business, most of the part numbers that we supply are sold
fewer than 12 times a year. Therefore, if one sale consists
of a two-month supply of one item, you will have a back order.
And for most inventory control systems, the sale of a two-month
supply of one item constitutes an abnormal demand. This is
an occasion in which the dealership is totally at the mercy
of market demand.
Supplier
Shortage: If the supplier does not ship the parts that you
order in their initial shipment it may be because they have
a shortage themselves. If that's the case, the dealer will
have a back order sometime soon as well unless special steps
are taken. Normally when a supplier short-ships on a stock
order, the parts are still available on an emergency basis
that can be put into stock. If the part that is short will
keep a machine down, then it would be wise to place an emergency
order for that part to be put into stock.
Warehouse
Discrepancies: The physical quantity in the bin must match
the quantity on the computer. From a parts management perspective
this is extremely critical.
If there
is a discrepancy in the warehouse count then everything that
we do in inventory management will be at risk.
Items
that are sold in high volume should be counted regularly.
Depending on the number of parts involved this could even
be each week. Don't forget to weigh the parts that have high
quantities. Don't take the time to count them when the quantity
is in the hundreds. This is an important item-we are trying
to avoid back orders on it.
One thing
to remember: Discrepancies are usually caused by count errors,
not procedural or theft problems.
Inaccurate
Order Points: Order points tend to vary depending on the system
in use. The time-driven order point or the minimum maximum
systems are consistent. Poisson, exponential smoothing and
other statistical models are not.
Although
I don't subscribe to the theory that we are in a cyclical
demand business, there tends to be a life cycle for a part.
If we sell machines in a large quantity, within a three-month
period we will tend to have engine and transmission rebuilds
in similar groupings. Statistical models tend to catch up
after the cycle is completed and the dealer carries excess
inventory for some time thereafter.
Picking
Errors: One truly troublesome cause of back orders is when
the part is in the bin, but we did not pick it and supply
it. It will happen!
But there
are steps we should take to minimize this event. One way to
curtail this area of concern is to measure it.
On a daily
basis take the orders for items that were short during the
day and double check each one through the bins in the warehouse.
Let everyone know that this is going to be standard procedure.
I am going
to take some heat on this. It's simply not consistent with
the quality movement. Our first obligation has to be to the
customer. If his machine is down waiting for a part that we
have back ordered but which is actually sitting uselessly
in our bin, we have no excuse. The very thought taxes my patience
nearly as much as it would your customer's!
Customer
Convenience: Sometimes a customer's choice will be that you
place a back order to make it easier for them. For example,
if you have only one or two items in stock out of a total
of 12 parts needed, they may ask you to ship everything from
one large back order, rather than piece meal. It makes sense
to satisfy the customer and place a back order for items that
you could have supplied.
These
reasons for back orders are pretty straight forward, aren't
they? Some we can avoid, or minimize, and some are just unavoidable
facts of life.
Let's
review what we have to do when there is a back order. It's
important because today it is so simple and easy that we forget
what it is we truly need to do.
Most manufacturers
now have systems in place whereby the dealer can inquire about
availability and place orders over a computer network. But
are we in a rut? Electronic ordering has become such a routine
that if the part is not available at the time of back order,
the dealer will just sit and wait until it does become available.
GET
THE LEAD OUT
This is where, somehow, we need to rediscover the function
of expediting.
There
needs to be an urgency to a back order. We need to get it
now.
The customer
has a machine down that is costing him money. Remember what
we do in product support? We reduce the customer's owning
and operating costs and protect the residual value. We are
not meeting our goals unless we find that part and eliminate
as much down time as possible. (Note: There are methods available
to us today to quite accurately calculate values on the costs
of back order based on the fixed and variable costs associated
with a back order. But that is a subject for another discussion.)
When you
have a back order you must find the part. You must expedite
the item that is not available from your traditional supplier.
Search other dealers, other suppliers, take the part off of
a machine in your inventory-whatever it takes, find the part
and get it to the customer. It is critical. Once again, the
only part that matters is the one that you don't have.
If this
is a priority, then we need real goals to guarantee that are
customers receive the best imaginable service. How do we start?
The parts
department is confronted today with competition from out-of-territory
dealers, replacement parts suppliers, dealers of like parts
in the territory, Internet suppliers, and many more. The competition
will get more fierce in the future.
The movement
to customer service within the industry is dramatic evidence
of how seriously we are viewing this potential loss of business.
The best
way to stop this loss is to have the parts.
Now I
don't expect that we all will have all the parts all of the
time. That would be nice but completely impractical and unnecessary.
But I do expect something equally effective.
Before
going home at night the parts department has some serious
obligations.
Every
part ordered during the day but was not available needs to
be located and the customer advised. Is that asking too much?
I suspect that many dealers would not pass this test.
And I
take yet one step further.
Before
the parts department staff can go home there are three questions
I'd like to have answered:
- Have
you shipped all parts that were ordered today that we had
in stock?
- Have
you shipped all back orders received today?
- Have
you found another source for all parts that were back ordered
today?
It is
fundamental and basic to assume that we do this every day.
But it is a rare occasion, indeed, when I find this to be
true in equipment parts businesses.
If this
were the way you operated, your customers would be much happier
with your level of service. And this could save your business
some day.
In AED's
August '97 Contact newsletter, one headline read, "Contractors
Rank Equipment Failure a Critical Business Emergency."
This is
the most important dealer-related concern your customers have.
Now think about it-doesn't this equipment failure emergency
get more serious when we don't have the part? We're actually
contributing to the emergency, aren't we?
Implementing
these three conditions before leaving every evening is a very
simple matter.
Talk it
over with your parts department personnel. What do they think?
Do they pass the test? How can you ensure that this happens
every day. And I mean every day. As a former parts manager
and a former service manager, I rank these matters very highly
in my book.
Just think
what it would do for your service department. Imagine the
service manager having the ability to precisely schedule repair
work because all of the parts are available. Imagine how your
customers will feel.
Over the
years I have poked fun by asking parts departments if they
were in the parts business or the part number business. Too
often, the latter is true. We just do our job, it becomes
a routine. We supply what we have and back order the rest.
But your
employees care about what they do. They want to do a good
job. We just have to communicate what it really means to do
a good job.
In the
parts business it means finding every part that customers
want, every day before closing up shop and going home.
It doesn't
matter if you stock thousands of parts. In this instance,
it's what you don't have that counts most.
To that
customer who's losing money faster than an oil leak, that
one part he needs is the only part that matters.
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