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Probably
one of the most significant changes in your dealership's operational
expenses this year has been the dramatic increase in interest
charges. If you're like most dealers, you're focusing primarily
on equipment inventory levels. But why aren't you equally
concerned with your parts inventory? All aspects of your dealership
should be working properly, and your parts inventory is a
very significant investment.
Over the
years the metrics for the parts department have included parts
inventory turnover, stock order efficiency and off-the-shelf
service as the obligatory asset-management items.
Traditionally,
parts inventory turnover is calculated by taking the sales
for the last 12 months, at cost, and dividing that value by
the average inventory on hand over the same 12-month period.
Pretty simple, but seriously misleading. Why? Because it credits
all back-order sales during the period as having been a turnover
event.
Not true.
Back-order sales do not-and should not-count in the turnover
calculation. Those parts don't come out of your inventory.
When we take the back orders out of the calculation, the turnover
number goes down dramatically. That caused the industry, starting
in the late 1980s, to pay more serious attention to the stock
order ratio.
The stock
order ratio is the value of orders a dealer places that are
on stock orders as opposed to back orders. For example, if
a dealer ordered and received $600,000 on stock orders in
a month and $200,000 on back orders, the stock order ratio
would be 75 percent, or $600,000 divided by $800,000 ($800,000
being the total purchase: $600,000 on stock orders and $200,000
on back orders.)
If your
dealership has a parts inventory turnover of 3.2 (which by
traditional measures is quite good) and a stock order ratio
of 75 percent (which is very high), your true turnover rate
is 2.4. (This is 75 percent of 3.2.) We used to be very satisfied
with a turnover rate of 2.5; in fact, 2.5 was an AED average
performance level for many years.
So what
can we do to improve the turnover of our inventory? You need
to dig into the details.
Most dealers
require a part to have had three "hits" before stocking it.
So when a part has had three sales in the past year it is
added to inventory and everyone feels good about the policy
and the operation. There's also the "drop-from-stock" criterion.
If a part sells twice or less in the past year it's no longer
carried. (Let's exclude "protective" parts from this discussion
for now.)
Do you
know how much you have invested in parts that don't meet your
stocking criteria? Do you know how much space in your warehouse
locations these parts take up?
Probably
not. So here are some facts that might get you to find out
the facts for your dealership.
Typically,
one-third of a dealership's inventory does not meet the stocking
criteria. Further, close to half of a dealership's warehouses
have a part that does not meet stocking criteria. How does
this happen? Pretty simple. First, "drop-from-stock" rules
aren't managed as tightly as "add-to-stock" rules. Second,
most surplus return systems don't qualify these parts to be
returned. For instance, a part that has sold once in the past
year, for which you have one on hand, will not show up on
a return report.
So try
another tack: Run a report of all the parts in your inventory
in descending order of calls. (Most computer systems can produce
such a report.) Don't run the report for all parts, just for
parts that have had four calls a year and less. Also exclude
any parts for which there is nothing on hand or on order.
Once you have the report, examine the list carefully. No short
cuts.
Believe
me, this exercise is worth your time. You'll probably find
you have an opportunity to recover money out of your inventory.
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