One of a dealership's largest investments is its parts inventory. And dealers, like everyone else, want their investment to provide returns. Proper stewardship of a parts inventory investment should lead to returns measured in at least three ways:
- The turn ratio of investment
- The fill rate of the part selection
- The amount of obsolete inventory
The KEA benchmarks for these three metrics respectively are:
- Gross turns of eight annually
- First-time fill-rate (by piece) of 90 percent or better
- Less than 2 percent obsolete inventory
Gross turn rate measures how many times you cycle through the value of your inventory each year. Increasing gross turns means you get a return on the same investment more frequently, which increases your total annual return.
Fill rate measures how often you can meet the customer’s demand the first time they need a part. Any time the customer has to wait for you to order the part, you risk losing the current or future sales from that customer.
Obsolete inventory is any part number on hand with no sales in the last 12 months. The KEA benchmark is less than 2 percent obsolete inventory.
Achieving these metrics leads to having the right part, in the right quantity, at the right time when your customer needs it. KEA refers to this as “right-sizing” the inventory. Having the proper parts inventory is a key tenant of having a profitable parts department.
The First Step
Put up guardrails to ensure only parts and quantities that meet current demand is ordered into your inventory. KEA refers to these as stock criteria. Each DMS has settings that can be customized for each vendor/source/stock class, that once completed, will suggest proper ordering levels and timing.
The stock criteria need to be used in conjunction with your vendor managed inventory. Data points most DMS use are sales demand, current on-hand quantities, package counts, best stocking levels and best reorder points based on lead times for delivery. Understanding these settings inside of your DMS, and then customizing them properly for each vendor/source/stock class is the best starting point to having the right inventory going forward.
The Second Step
Identify any obsolete Inventory, work to remove it and, most importantly, understand how it got there and what to do to prevent it from recurring again. Prioritize your efforts by the return on the value of the aged inventory. Once you have removed the aged inventory, begin this process around nine months to prevent future obsolescence.
- If you have multiple stores, identify opportunities to transfer the part to a store that is seeing demand for the part, and sell it at that location.
- Check with your vendors and identify stock classes and parts that can be returned for credit or refunds.
- Utilize third parties that will attempt to sell/transfer the parts for you. Beware of the fees these companies will charge
- Scrap it
The Third Step
Build daily routines to maintain the integrity of your inventory. The benefits to “right-sizing” will fade away quickly without routines to maintain it going forward. Daily cycle counts, reviewing the set-ups of new parts added, stock out reports, and credit memo reviews to ensure parts are properly returned to the physical inventory are excellent places to start in improving and maintaining Inventory Integrity.
The results from building and working the disciplines described in steps one thru three are dramatic. KEA customers that maintain these disciplines routinely have department performance that are best-in-class. This includes gross profit performance being over 31 percent for the department, return on gross exceeding 35 percent (after fully allocating), gross return on inventory investment exceeding 300 percent, and a physical inventory that is accurate (<5 percent error rate) for both location and count.
Measure your progress. Share the wins with your team. Everyone gets excited to see improvement; and with fewer obstacles to finding the right part at the right time and serving our customers, your team’s buy-in to the process will only increase.
Use first-time fill rate, obsolescence percentage, and turn ratios to see the results of your efforts!