How To Avoid Physical Parts Inventory Nightmares · How To Avoid Physical Parts Inventory Nightmares ... an Automotive Parts Physical Inventory Company (2) ... computer set-up and

How To Avoid Physical PartsInventory Nightmares

WithMark Payne, President & CEO

Total Dealer Solutions

Moderated ByMike Bowers, Executive Editor

DealersEdge

Mark Payne, President & CEO of Total Dealer Solutions Mark J. Payne's experience in the automotive industry started very early on. His father, Leo Payne, owned 17 car dealerships in the Denver area for over 30 years. Being the visionary that he was, Leo created dealership row, a collection of manufacturers, one right after the other, spanning several city blocks. Leo is still thought of today as a pioneer in the auto mall concept.

Mark grew up in the car business and learned it literally from the ground up. His very first job was to pull the weeds at his father's dealerships. By the time he got to one end of the dealership, the weeds had already begun sprouting back up at the other end. No coward to hard work, his other duties included dusting the parts bins, helping mechanics clean their tools, emptying grease pans and later serving as a lot rate - moving cars about the lot. He eventually graduated to working in the service, sales and finance departments where he gained invaluable experience with front end and back end fixed operations.

At the ripe age of 10, Mark had made a personal goal to own his own car dealership by the time he was 30. He let his father groom him until it was time to go off to college. Not surprisingly, he attended Michigan's Northwood University, a school renowned for its automotive industry based curriculum.

Just months before Mark's graduation from the Palm Beach campus, Leo announced the impending sale of his dealerships. Mark saw it as a minor setback to achieving his goals but forged ahead, making a name for himself in the car business, nonetheless. He opened and sold a used car lot in Florida. Then, he managed a Honda dealership in South Florida. Under his management, the dealership was catapulted into the top 2% for sales and customer satisfaction of all Honda dealers nationwide. He returned to Denver for four years where he started a joint venture with his brother in the telecommunications industry. His share of the business generated the revenue necessary to buy his first dealership. Drawn to the sun and sea, he returned to South Florida working as Sales Manager for Bayview Cadillac, poised to act. After two years, the right opportunity presented itself and, at the age of thirty, he had accomplished his goal as the proud new owner of Mark Payne Mazda of Miami.

In just a few short years, he built up the business and recognized a shift in the industry toward dealership consolidation. He then developed and executed his exit strategy and sold for top dollar. After being a dealer operator and recognizing dealers' lack of knowledge of and emphasis on fixed operations, he decided to begin consulting & developed products geared towards the fixed ops side. He wanted to highlight the enormous potential for profitability and efficiency as the Fixed Ops Director. Mark J. Payne is President/Owner of three distinct yet complimentary companies. Under the Mark J. Payne umbrella are: (1) Total Dealer Solutions, an Automotive Parts Physical Inventory Company (2) Zipcode Target Marketing, a Service Dept Retention & Retrieval Program; and (3) Partsfisher, an Automated Parts Obsolescene & Redcuction Tool

Although he is known for his laid back Colorado style, many people come to find that he is extremely passionate about his role in the automotive industry. He is a seasoned automotive consultant with decades of successful front and back end experience to draw from. Mark takes great pride in bringing creativity and ingenuity into products that dealers can rely on to make an immediate impact to their bottom line.

Mark is a member of many dealer organizations including NADA. His companies are endorsed by many automotive organizations and he has been a welcomed guest speaker at several 20 group meetings to promote his products and services.

Mark Payne Presents:

HOW TO AVOIDPHYSICAL PARTS

INVENTORY NIGHTMARES

Best Practices for a Successful Parts Physical Count

________________________________________________

Mark Payne -

Currently Owner and President of Total Dealer Solutions. Spent over 26 years in all facets of the automotive business as a Sales Manager, Parts Manager, Service Manager, General Sales Manager, General Manager and Dealer Principal.

• What do I do?... Its not something we do regularly.

• If it is an outside company…will they screw up my inventory?

• Will my performance be scrutinized?

• Many late nights “getting ready” for inventory

• Worries of the unknown of being Over or Short

WHY DO WE DREAD IT?

• _________________________• _________________________• _________________________• _________________________• _________________________• _________________________• _________________________

WHY DO WE DREAD IT?From the Audience

Create Your Strategy

• Identify your biggest concerns• In-House vs. Outsource • Set your realistic goals • Get your plan in writing broken

into a three phase approach

Phase1… Pre-Inventory

• Make up list of tasks and delegate• Set up Pre-inventory meetings

with the GM, controller, parts manager and service manager.

• Walk through the department looking for housekeeping and potential problems (special orders, claims and returns, NPN’s, bin locations, computer set-up and satellite parts locations).

• Coordinate with Controller on a daily basis

Samples of Pre-Inventory Checklists or reports to run prior to inventory

Parts Manager-Ten Days Prior to Inventory-Complete Cycle Counts 10 days prior using 2302 or

INS-Make a map of the parts department with bin

locations -Prepare the parts bins/storage area using checklist-Run No Cost Reports 2255 or RNC-Review Negative On Hands 2245 or RNO-Verify all parts have a bin location 2301 or RNB-Locate all App/ Depreciation Reports since last

physical 2161 or RAD-Determine how special orders will be handled and

separate if needed

Samples of Pre-Inventory Checklists or reports to run prior to inventory

Parts Manager-cont.Ten Days Prior to Inventory-cont.-Organize your dirty cores -Tape off items not to be counted-Identify Obsolescence and remove if possible-Review Open RO/Invoice Reports 3613,6910 or

ROO-Contact DMS provider and corporate IT to inform

them of the date-Verify your log on has access to all the programs

you will need-Test Run your count sheets to verify they are

printing properly

Print Count Sheets 2302

Print Count Sheets 2302

Print Count Sheets INS

Samples of Pre-Inventory Checklists or Reports to Run Prior to Inventory

Parts Manager-cont.

Two Days Prior to Inventory-Verify all delegated items have been done-Verify all tasks up to this point have been completed-Make sure all parts have been receipted and put

away-Make sure all items are turned into accounting and

posted to the GL-Make sure you verify inventory start time with all

parties-Be sure you have enough printing supplies on hand

Parts Manager-cont.

One Day Prior to Inventory-Ensure all items that need to be posted are turned

into accounting-Return display items to their respective bin locations-Delete all old list from the system (Reynolds only)-Print Final count sheets-Collect all items necessary for reconciliation-Set up your control desk for collecting count sheets


Parts Manager-cont.

On Inventory Day-Arrive one hour before teams show up -Have parts staff dedicated to answering questions-Review Key punch procedures with Keypunchers-Have meeting with all people involved so everyone

knows what to do


Service Manager-

Ten Days Before Inventory-Be sure to have WIP report clean-Schedule a time during inventory to have cars

checked -Be sure to have hat tags displayed not blocking VIN-Start parking all WIP cars together-Get documentation for vehicles not on premise-Be sure to return all dirty cores to parts asap-Identify parts stored in shop that need to be prior to

inventory


Service Manager-cont.

One Day Before Inventory-Ensure all RO’s that need to be closed are closed-Print a final listing of WIP-Turn a copy of final WIP into the Controller-Print a copy of the last repair order opened and turn

into controller.


Controller/Office Manager-

Ten Days Before Inventory-Hold meeting with all parties involved-Verify WIP is being cleaned daily-Verify factory statement is reconciled -Match GLs to Sources for proper reconciliation


Value by Source 2223

Value by Source PH7

Controller/Office Manager-cont.Two Days Before Inventory-Verify all paperwork being turned into accounting is

being postedOne Day Before Inventory-Verify that outside purchases are being turned in

throughout the day-Obtain the final WIP from the Service Manager-Once all business is complete for the day ensure the

end of dayprocedure will run.

On Inventory Day -Verify all Ros and Invoices posted properly-Check the WIP with the Service Manager-Print General Ledgers for all parts accounts


CHECKLIST OF PAPERWORK• Copy of Last RO• Copy of Last Counter Ticket• Voided PO after close of business• Copy of WIP including open invoices• Value of General Ledger• Copies of all packing slips of parts received

but not invoiced• Copies of all outside purchase packing slips

not submitted to accounting• Copies of all claims and credits not yet

posted to accounting• List of all prepaid parts not yet received• Copies of all appreciation/depreciation

reports


Phase 2.. The Inventory

• Start on time!!• Have count sheets/scanners

ready day before• Follow every step of the

inventory process specific to your DMS (timing is very critical)

• 100% blind count• No count report• Variance report• Perform one count and check all

variances

• Establish inventory value including WIP, claims and returns, unpaid invoices, pre-paid special orders, manufacturers packing slips, appreciation/depreciation

• Inventory operations analysis• Obsolescence analysis

Phase 2… The Inventory

Phase 3... Post Inventory

• MEETING WITH THE CONTROLLER AND THE PARTS MANAGER.

• Presentation of the inventory summary

• The parts inventory comparison: Book value versus Inventory value

• Supporting documents• Inventory operations analysis• Observations and

recommendations• Obsolescence Analysis

Is Outsourcing My Physical Inventory Right for Our

Dealership?Pros vs ConsPros

-Bridge the Gap between Accounting and Parts-Parts inventory value is fully reconciled with your General Ledger-Knowledgeable second opinion on the operations of the parts department-An unbiased point-of-view on the level of obsolescence and frozen capital

Is Outsourcing My Physical Inventory Right for Our

Dealership?

Pros vs. Cons-cont.Cons

-Qualified companies are limited-Can seem costly

Closing Comments and Questions

Thank YouMark Payne

[email protected]

MONTH

DEALERSHIP

DATE

PARTS DEPARTMENT MONTHLY EVALUATION CHECKLIST (v.20 10)

1. PART NUMBERS

CONTROLLED 19. EXCESS STOCK $ / %

2. TOTAL CONTROLLED INVENTORY $

20. TRUE EXCESS STOCK $ / % LINE 19 MINUS LINE 21 = TRUE EXCESS STOCK

3. RECONCILED INVENTORY

21. PARTS > 6 MONTHS NO SALES $ (Technical Obsolescence)

4. NS PART NUMBERS # / %

22. ALL PARTS > 6 MONTHS NO SALES %

5. NON-STOCK DOLLAR VALUE $ / %

23. PARTS > 12 MONTHS NO SALES $ (Absolute Obsolescence)

6. GROSS SALES (Annualized) $

24. PARTS > 12 MONTHS NO SALE %

7. GROSS PROFIT (Annualized) $

25. NEW PARTS NO SALE $

(No Movement New) %

8. COST-OF-SALES (Annualized) $

26. TOTAL DEMAND (Pieces)

9. GROSS PROFIT MARGIN %

27. EMERGENCY PURCHASES+ CUSTOMER ORDERS (Pieces)

10. INVENTORY F/S $ (Actual Cash Value Inventory from the General Ledger)

28. LOST SALES (Pieces)

11. LIFO RESERVE, IF USED $

29. FILLED FROM STOCK RATIO % Calculated with ‘pieces’

12. GROSS TURN RATIO (COS ÷ INV.)

30. MONTHS/DAYS OF SUPPLY (F/S INV. ÷ AVG. MO. COS)

13. PURCHASE EFFICIENCY (Factory Stock Orders) (Annualized) $

31.

14. PURCHASE EFFICIENCY (Other Sources For Stock) (Annualized) $

32. NET PROFIT (% of Sales) PARTS DEPARTMENT %

15. PURCHASE EFFICIENCY (Optional, Other Factory) (Annualized) $

33. PERSONNEL EXPENSE (PERS EXP ÷ GP) %

16. TOTAL EFFICIENT (Total Lines: 13 thru 15) PURCHASES $

34. PRODUCTIVITY (Pieces/Employee/Month)

(Dollars/Employee/Month) $

17. PURCHASE EFFICIENCY (TEP $ ÷ COS$) TOTAL EFFICIENT PURCHASES FOR STOCK

%

35. ABSORPTION RATE = % [GP Parts, Service & Body (YTD) (YTD) Total Dealer Fixed Overhead Expense]

18. TRUE TURN (TEP % x GROSS TURN)

36. SERVICE EFFICIENCY____________ %

You may copy this checklist as necessary

This checklist is not copyrighted. It is in the public domain and may be used at will.

www.partsconsulting.com

MONTH

DEALERSHIP

DATE


1. PART NUMBERS














(No Movement New) %




27. EMERGENCY PURCHASES+ CUSTOMER ORDERS (Pieces)

10. INVENTORY F/S $ (Actual Cash Value Inventory from the General Ledger)







31.








17. PURCHASE EFFICIENCY (TEP $ ÷ COS$) TOTAL EFFICIENT PURCHASES FOR STOCK

%


18. TRUE TURN (TEP % x GROSS TURN)

36. SERVICE PROFICIENCY___________ %



www.partsconsulting.com

1

MONTH

DEALERSHIP

DATE


1. PART NUMBERS














(No Movement New) %




27. EMERGENCY PURCHASES/ CUSTOMER ORDERS (Pieces)

10. INVENTORY F/S $ (Actual Cash Value Inventory – General Ledger)







31.








17. PURCHASING PERFORMANCE (TEP $ ÷ COS) TOTAL PURCHASES FOR STOCK

%


18. TRUE TURN (SOP % x GROSS TURN)

36. SERVICE PROFICIENCY %



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INTERPRETIVE KEY TO v. 2010 MONTHLY CHECKLIST Updated Version

This new version, v2010, is a final compilation of many changes both in the data being analyzed and the sources of that data. It includes some additions of data that are essential to good inventory management. It has deleted some data that is no longer effective or that has been replaced by a measurement that is more precise or defining of the efficiency and productivity and profitability of the parts department. The most important addition is a measurement from the service department, the prime customer of the parts department and the ‘face’ of CSI to the marketplace; it is ‘service efficiency’ that really defines how well the parts department has ‘fed’ the technicians who in turn move the cars into and out of the service department. This monthly checklist is a summary of important interpretive data for the Dealer, General Manager and Parts Manager. It is intended to be produced at the end of each month with data taken from four sources, along with some calculations, that should be reviewed by the Dealer/General Manager and Parts Manager. This version has also been re-sequenced to reflect the additions and/or deletions of data. The information is derived from the following sources:

1. The dealership financial statement; 2. The monthly summary data from the computer system (or the same information taken

from report generators); 3. Specific purchase informationusually available from the Factory. Included in this is

additional information taken from the accounts payable records from the detailed general ledger;

4. Specialized information from the DMS system (the accessibility of this information will vary from system to system);

5. Calculations comparing different pieces of data to each other to achieve numbers upon which management decisions will/should be made.

This summary is intended to be just thata summaryand not an all inclusive discussion of the background and source of the numbers. The detailed information is found in great detail in the Manuals produced by Nicholes Capital Management and is available from the company. A new version of the manual, accommodating this newer checklist is also available. To get more detailed information go to www.partsconsulting.com. 1. Part Numbers Controlled . These are the part number records in the computer systems that are monitored by the system for sales activity and other information. This number represents only those numbers placed in the computer system by the parts managerat the time of demand. Not all of these numbers are considered part of the physical stock on hand, but rather a list of all part numbers that have been requested, or inquired about, from the parts department. 2. Total Controlled Inventory Value (Replacement value currently stocked and shown in the DMS system). This number represents the cost of the part currently shown on the master tape of the manufacturer. It is updated frequently and represents the ‘replacement value’ of the inventory on the shelfnot necessarily the amount paid for the parts. A comparison between

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line #3, the reconciled inventory and line #10, the figure from the financial statement, will and should be made continuously. 3. Reconciled Inventory . This figure is similar to that seen at the completion of an annual physical inventory. It does not necessarily replace a physical inventory (but could do so under stringent conditions) but is a monthly check and reconciliation of all parts (value) that are now in limbo - such as work in process, overlapping billings/receipts, etc. It is this figure that should be compared monthly, with line #10, the figure for inventory from the general ledger. This figure and the G/L figure should not vary more than 1-2% of each other on a monthly basis. See the ‘Reconciliation Sheet’ at the end of this summary. 4. Non-Stock Part Numbers and the percentage (%) of th em carried in the system show the number and percentage of part number demand that is being tracked by the system, but are not yet active. Most of these should not have (in theory) an on-hand value. The use of this feature in a computer system is, in the opinion of the writer, second only in importance to the production of a stock order. The feature enables the parts department to pre-test every number that presents itself at the counters or on the phone with the possibility of stocking the number once sufficient demand has been established. The guideline for this figure is 50% + line #1. 5. Non-Stock Dollar Value [A PRIME NUMBER FOR EVALUATION] shows the value of those parts that are being carried on an NS or Non-stock status in the system that also have an on-hand value. This process is also called ‘Watch’ in some DMS systemsthe application and theory are the same. In theory, the on-hand value of non-stock numbers should be zero. In practice there are some cases where an on-hand value is justifiedsuch as special orders that have not yet been picked up by the customer or recommended stocking guides for new models that the manufacturer is suggesting be stocked to the shelf before any actual demand has taken place. The guideline for this figure is <5% of line #2 . Any ongoing increase in this figure should be looked at very seriously and could be the cause of an increase in obsolescence or purchase speculation on the part of the parts department. 6-9: These lines are shaded together on the checkli st to distinguish them as having a relationship with each other and also to emphasize that they are annualized from the financial statement. Although this is a ‘monthly’ a nalysis, the annualization of some of the figures is necessary in order to obtain guideli nes that are recognized within the industry. Any annualization must be done before any elective or mandated parts transfers of gross profit to another department (se rvice department). 6. Gross Sales (annualized) is a simple formula arrived at by taking the year-to-date figure from the statement, dividing the number by the months it represents, and multiplying the result by 12. This figure does not have, in and of itself, any guideline. However, when trending the checklist, month to month, it would be desirable if there is an increase over the previous year (or month). 7. Gross Profit (annualized) is Gross sales minus cost-of-sales. This also has no fixed guideline but it would be a goal of the parts department to see an increase of the profit from month to month. Annualization is done in the same manner mentioned in the calculation of Gross sales. 8. Cost-of-Sales (annualized) is calculated by subtracting gross profit from gross sales. This figure can be roughly defined as the cost of doing business or the total (annualized) dollars spent by the parts manager for the parts purchased year-to-date and annualized for the year. This is an important figure in that it is used in several other calculations in the checklist and in the analysis of the efficiency and productivity of the parts department.

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9. Gross Profit Margin is expressed as a percentage and is calculated by dividing the gross profit by the gross sales. The range of the gross profit margin, in an average parts department, is 28-35%. However, before any judgment can be made on the gross margin in the parts department a detailed analysis of the selling gross profit, by sales type, and the accompanying percentage of business in that type must be made. If a parts department were heavy in wholesale (if 40% or more of the total sales are wholesale) then it would be common to see a lower overall margin. If the parts department had policies using a matrix or changed the margin in sales to the new car department, body shop, mechanical shop, wholesale or front retail counterthese also could reflect in the overall margin. Before any analysis of the margin is done, review the sales by sales type chart first. A judgment of this figure is also done before any transfer to another department. 10. Inventory (Financial Statement) also called an “actual cash value of the inventory ” is taken from the financial statement for the month being analyzed. In the case of dealerships using LIFO accounting in the parts department, the LIFO reserve should be noted on line #11 and included in the number shown on line #10. The ratio between line #3 reconciled inventory and line #10, the G/L inventory, is considered A PRIME NUMBER FOR EVALUATION. 11. LIFO reserve, if any, is noted on line #11. Again, it is important in reviewing the parts department that the inventory before any accounting adjustment such as LIFO is done. There is no guide, nor opinion offered, on the use of this method of accounting and it left totally to the decision of the dealer principle and the accountants if it is to be used. 12. Gross Turn Ratio is referred to by many other names (such as: turn, dollar turn, raw turn, or simply gross turn). It is however a ratio and does not define or truly measure the number of times the dealerships parts investment turned relative to purchases. This figure is one of the oldest in use in the automotive and heavy duty truck industries, and many other similar industries. It is a ratio between dollars bought (cost-of-sales) and dollars stocked (inventory value on the shelf). It does not tell the dealer, or anyone else for that matter, the true efficiency of the investment - that is done with other calculations. As a rough guideline the following is offered:

- for dealers on a daily stock orders (for over two years): 5-7 - for dealers on a weekly stock orders: 4-6

13-16. These lines are shaded together because of the relationship they have with each other. Four lines are given on this generic checklist - three could be used and the number could be expanded for multiple line dealerships if desired. These lines measure the purchases (bought ‘smart’ or efficiently) are referred to as purchases for stock from three distinct sources. This area of measurement was called stock order performance for many decades until it was discovered and clarified that the parts manager had three different types and sources of purchasing, all three of which could be accurately deemed as wise, efficient or ‘smart’ purchases, yet were technically not stock orders. The designation of this category of evaluation to Purchase Efficiency was begun in 1998 and continues to the current day. 13. Purchase Efficiency [annualized] (daily or weekly or ‘RIM’ stock orders from the manufacturer annualized ) are those parts purchased or acquired on the programs in place by the manufacturer that affords the highest eventual profitability to the parts department when the parts are sold. These purchases often include, but are not limited to, discounts, obsolescence return credits, free freight, etc. The most important aspect of this category is that the parts, when needed by the customer, especially the technician, are available on demand thus increasing the efficiency and profitability of the technician. The source of this information is from the manufacturer. Some manufacturers make this data readily available and easy to obtain (a few do not however). This category is one of three that will be used, in connection with a purchase efficiency guideline, in the parts department.

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14. Purchase Efficiency . [Annualized] Parts purchased from outside jobbers and suppliers for stock and on a regular basis. These parts also use sales history as do the parts purchased from the manufacturer on regular, daily or weekly, or ‘RIM’ stock orders. This is often not a popular category with the manufacturer, but it is, nonetheless, an efficient purchase made by the parts manager which, in return for increased discounts or availability, afford the user instant availability (the technicians) and thus increase the efficiency in the service department in the dealership. This category is one of three that will be used, in connection with a purchase efficiency guideline, in the parts department. 15. Purchase Efficiency : [annualized] foreign parts purchased by the parts department and processed through the accounting functions that are for parts ‘foreign’ to those lines of product carried by the franchised dealership. These parts, although not purchased on a stock order in the same fashion as lines #12 and #13, are usually purchased only ‘as needed,’ which could be misconstrued as an emergency purchase. For posting purposes, they are ‘emergency receipts or purchases’. The purchase of this category of parts increases the cost-of-sales and affects the gross margin and gross sales in the parts department. In this category, the parts manager did not have an option of stock order or not and purchased what was necessary, when it was necessary, to fill the need of the mechanical shop or body shop. Because these parts are processed (in a sales function) as all the others and because the parts manager had no purchase option, they are deemed to have been purchased “as efficiently as possible” and are therefore included in the analysis. To omit these purchases, which could be very large in the case of the dealership having a body shop, would be to dilute the end numbers severely and improperly reflect poor purchasing efficiency when just the opposite is the case. This category is one of the three that will be used, in connection with a purchase efficiency guideline, in the parts department. 16. Total Efficient Purchases or Purchases for Stock (Dollar totals from lines 13-15 ) designate the total dollar amount that the part department purchased in such a way as to be deemed efficient purchases which, in turn, increased the efficiency of other departments - such as the mechanical and body shops. No guide is given here for this number; it is used in the calculation of Total Purchase Efficiency on line #18. 17. Purchasing Performance (in the past used to be called stock order performance)a designation abandoned in the early 1990’s with the advent of daily stock orders) is the percentage of cost-of-sales (line #8) that were purchased in a manner that gave the highest gross profit margin and offered the customer instant, or near instant, availability. Formula: Total efficient purchases on line #16 divided by the annualized cost-of-sales on line

#8. Guidelines vary based on whether the parts department is on a daily or weekly stock or ‘RIM’ order.

[A PRIME NUMBER FOR EVALUATION]

- “RIM’ replenishment order up to 94% - Daily stock order: 85-90% - Weekly stock order: 80-88%

In the case of manufacturers using ASR or RIM (automatic stock replenishment or Retail Inventory Management) which was pioneered by Saturn, this number will be significantly higher than those departments that have to ‘place’ a daily or weekly stock orders.

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18. True Turn [A PRIME NUMBER FOR EVALUATION] is one of the four strongest designators of efficiency and profitability for the parts department. The measurement is to take the gross turn ratio (line #12) and multiply it by the total purchase efficiency (Line #17) (don’t forget to move the decimal when doing the conversion from percentage to multiplier). The desired figure for this calculation is heavily influenced by the frequency of stock orderdaily, RIM, or weeklyand the level of total purchase efficiency. The desired results are as follows:

- daily stock orders: 5-7 true turns per year - weekly stock orders: 3-5 true turns per year - ASR or RIM will often exceed 9 true turns per year

19. Total Excess Stock is a calculation that tells the dealer and parts manager the total dollar amount of inventory that ‘is in excess’ of the current calculated buying guides. The formula is as follows:

On Hand + Back Orders + Outstanding Orders > Max/BS L/High Guide

It should be noted that before any definitive decision or conclusion is made based on this number that the following rule should be observed:

All obsolescence is excess, but not all excess is o bsolete

Some computer systems have these reports ‘built into’ the user programs, while others need to use a report generator to obtain the report. The total value of the report should be the amount that is ‘in excess’ and not the on-hand value of the part number. Unfortunately, this error is found in one major system. The general guide, and this should be a ‘trended’ guide, for total excess stock is <25% of the total on-hand value, or inventory investment in the system. 20. True Excess Stock is a calculation that strips off the excess parts that are obsolete, over six months no sales history, and reports the excess due to intentional or system created overstock. The calculation for true excess stock is as follows:

Total Excess stock – parts over six months no sales history = True Excess Stock

The guideline for true excess stock is less than 10% of the total inventory investment. 21. Inventory greater than 6 months no sales history (Technical Obsolescence ) are parts, on the shelf that have had no sales, or sales history, posted in the last six months. Line #21 shows the dollar value of this category. These parts are much like used cars on the lot for 90 days, in that the holding cost of the value of the investment on the shelf is being incurred because of lack of sales. It is normal for some of the inventory to ‘cycle’ in and out of this category. 22. Inventory greater than 6 months no sales history – Percentage of investment. The interpretation should be made on a trended basis without a concentration on a single month. The guideline for this category is <35% of the total inventory investment. 23. Inventory greater than 12 months no sales history (Absolute Obsolescence ) are parts on the shelf that have had no sales history in the last 12 months. The term ‘absolute obsolescence’ is used to designate these parts as not producing any true profit on the sale of the part. The holding cost, in most cases, exceeds the profit made on the part. It is important, when returning parts on a factory obsolescence return program or scrapping parts from the inventory, that the oldest parts should be returned or scrapped first. The guidelines vary for those on daily rather than weekly stock orders.

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24. Percentage of parts over 12 months no sales . Guidelines for line #23 are as follows:

Daily Stock order systems: <5% of the inventory inv estment Weekly Stock order systems: <10% of the inventory i nvestment

ASR or RIM controlled inventories: <2% of the inven tory investment 25. No Movement New (also called: New Parts no sales ) is a category automatically reported by only a couple of DMS systems but available through most of the other DMS systems’ report generators. This category is unique in that it tells the dealer and the parts manager about the potential of speculation or failures in the processes of handling new parts in the parts department. These parts have three things in common and can only enter this category at the time the part is placed into the inventory DMS system for the first time:

1. The entry date (date the part was placed in the system first) is <12 months 2. The on-hand value is greater than “1” (there are pieces on the shelf) 3. There is no sales history for this part number(s)

This situation begs the question: if there is no sales history, why are we stocking the part? There may be two valid answers:

1. A special order that has not been picked up by the customer (yet) - but when the customer picks up the part, sales history is recorded and the number is out of this category never to enter the category again.

2. Manufacturer recommended stocking kits or packs, often called RSG or recommended stocking guides. The parts manager frequently has no control over these parts and must, for reasons put forth by the factory, to have them on the shelf before any demand is realized. This is often a ‘preemptory’ move on the part of the factory and is often warranted based on past sales history for similar parts and vehicles.

There is, however, a third option. It is this option that must be monitored and watched carefully and that is the possibility of ‘speculation’ in stocking parts without any demand indicators. In other words, someone is ‘guessing’ at the need of the part, and often they are wrong and the part heads for instant obsolescence. It is this third case that needs to be established or eliminated.

The guideline for this category is: <5% of the inv estment. 26-29. These lines are ‘shaded’ together on the checklist denoting that they have something in common with each other. Lines 26-27 contain information that is plugged into a formula to come up with a measurement that is used by the managers to measure the effectiveness of the inventory in filling the demand of the technicians and customers of the parts operation. There have been several formulas used over the past 36 years which are designed to try and measure the most accurate response of the parts department to the service department technicians. While all of these formulas have merit, one of them has come to the forefront as the most accurate and therefore is the one used (fill off the shelf FOS) on line 29. 26. Total Demand can be expressed in part numbers, dollars or pieces. In the current calculation, pieces are used and are the most accurate in evaluation. This is the total demand (sales + lost sales) for all the pieces transacted, or requested and lost, for the month. There is no guideline for this number; it is whatever was transacted over the counters. Accuracy is of the utmost importance here in this calculation. For the use of the fill-off-the-shelf (FOS) calculation that will appear on line 29, pieces are used and not part numbers or dollars.

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27. Emergency Purchases or Receipts + Customer Special Orders . This figure represents a slightly different approach than calculations used in the past. Here we are adding customer orders that were placed on the stock order (smart move by the parts manager) yet represent hybrid emergency purchases. There is a fine line drawn here in that many of the DMS systems allow a variety of receipt and posting codes for parts that are, by definition, emergency purchases. The fact that a daily stock order exists allows the parts manager to put these on the stock order. They are not for stock, but for a specified customer; they are a hybrid emergency receipt or purchase. A loose guide would be that less than 10-15% of all orders should be emergency or customer special orders. The piece count of emergency receipts and customer special orders is used for the FOS calculation on line 29. 28. Lost Sales demand is one of the most critical pieces of information the system needs in order to calculate suggested orders more accurately, within the established buying guides, and to monitor testing parts that might, eventually, need to be actively stocked to the shelves. A lost sale is a demand, from anyone, that does not result, at the time of demand, in a sale of the part; the customer leaves or hangs up the phone and that specific transaction is ended. Despite the reasons for the lost sales, all of them must be posted to the system. There are three types of lost sales demand . Two of these types can be tracked and posted in the parts department, at the time of demand. The third type of lost sales is still a problem for most DMS systems and Factory Distribution Systems since it represents untraceable demand done electronically without leaving a trail of the demand in the parts department. The three types of lost sales are:

1. Lost sale based on availability over all the most frequent type. 2. Lost sales on the cost of the part customer hangs up and goes elsewhere 3. Electronic locator systems demand from others that leaves no trail of the

demand It is critical that all parts personnel that talk with the customer on the phone or at the counters be trained to post all lost sales. In the calculation for FOS the pieces lost is used. The guidelines here are from two databases. One is from a database of over 10,500 dealer records and represents an average of lost sales posted per person per day; it is: 2-3 /person/day . Average is not much good here because it does not designate what is possible when careful attention is paid to the posting and recording of lost sales. From a ‘select database’ of 105 dealers who, by observation, do the job nearly 100%, the rate is 5-8 /person/day . The more accurate guideline is simply to post all lost sales. Remember: It is not the existence of lost sales that is a problem; it is the absence of lost sales that should concern the managers of the dealership. 29. Filled from Stock Ratio - also called Fill-off-the-shelf (FOS) has become the most accurate formula for measuring the effectiveness of the parts inventory in satisfying the demand of the technicians and customers, on demand , thus making the technicians more efficient and profitable and increasing the customer service satisfaction measurements in the dealership. Unlike the older level of service calculation, the calculation for FOS adds an additional piece in the formula and uses pieces and not part numbers or dollars. The formula is as follows: Fill off the Shelf = Total Demand – [(Lost Sales) + (Emergency Purchases & Special Orders)]

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Total Demand

The guideline for FOS is 85-94 %. These rather high figures can only be obtained by using the following controls in the system completely and accurately: FOS IS A PRIME NUMBER FOR EVALUATION

1. The correct calculation of the buying guides 2. Economic Order Quantity guides 3. (Beyond EOQ) the use of minimum stocking levels for certain grou ps of parts 4. Complete posting of lost sales 5. Complete posting of emergency receipts and custo mer special orders

If all of these criteria are utilized in the parts ordering formulas, an increased rate of fill off the shelf can and will be achieved in the parts department, and the result will be an increase of service efficiency (flagged hours/technician/day) and the profit that goes with it. 30. Months/Days of Supply is a calculation in use by most manufacturers, accountants, banks, twenty-groups and others which is really a ratio and not an indicator of the real value or effectiveness of the investment. This measurement is included on this checklist because it has an inverse relationship with true turn . As months of supply go down, true turn goes up. This makes this calculation a corroborating calculation only. This calculation is, in the opinion of the writer, a potentially dangerous calculation if used alone. A better evaluation of the ‘quality’ of the inventory in doing the job would be lines 17, 18, 29 and 36. For instance: to say that a dealer has a 1.5 months of supply does not mean that the dealership can stay in the parts business for 45 days in the absence of resupply, but is only a ratio of dollars stocked (inventory value) to dollars purchased (cost of sales). The formula is:

Inventory (from the financial statement) Average monthly cost of sales

31. Rate of change is no longer used . 32. Net Profit is defined in one of two formulas. While the classical formula used by almost all business schools and manufacturers is to define this as a retained percentage of gross sales, a few manufacturers define the net profit as a percentage of gross profit. The formula used does not change the ‘bottom line dollars’ but does have a different percentage to brag about. The two formulas are as follows:

Net Profit = Bottom line (annualized) net profit Annualized Gross Sales

Or

Net Profit = bottom line (annualized net profit Annualized gross profit

The guideline based on gross sales is 8 – 15% The guideline based on gross profit is 15-30%

It is a reality that two things must be considered before making a decision whether or not the parts department is really profitable:

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1. The parts department does not have total control over all allocated expenses 2. The parts department must carefully evaluate the percentage of sales and the specific

margins in all five (or six, if a body shop exists) of the sales types and the percentage of sales in each type.

33. Personnel Expense is a formula that calculates the total cost (annualized or year-to-date) of all the personnel working in the parts department. We do not include those in other departments that contribute to the overall operations of the department and/or the dealership, but only those in the parts department. Many average guidelines are given by many organizations. Typically these organizations take the best of a group (such as 20 groups) that are, by definition, better operations and make the averages from them. In addition, the geographical differences in personnel expenses, which can range from a low in some states of 25% to a tolerable ‘high’ of 60% in other states, demands that this figure be examined only for a dealers specific marketplace and not for the nation as a whole. For instance, the existence of union vs. non-union shops can also be a prime factor is some of the differences. National average is about 40-45%. 34. Productivity is defined in two different areas: as the dollar amount of business, on the average, that parts personnel are producing on a monthly/yearly basis and as the pieces per person per month that are ‘moved’ across the counters. Some argue that we should only look at those who are selling parts: counter personnel, wholesale, etc. The reality is that it takes the whole team to stock, handle, ship and sell the parts. So this author uses all those in the parts department from the parts manager to the stock pickers and delivery personnel in the formula. The formula is as follows:

Total number of parts sales dollars person Total Sales (Line 6) divided by 12 divided by # par ts Personnel

Total number of pieces sold per person

Total Demand (Line 26) The guideline varies on whether there is ‘heavy wholesale’ (>40% of total sales in wholesale) and is not applicable to parts departments with 3 or fewer personnel. In the smaller operations we fall into a ‘minimal operations’ reality that is not given to the standard guide. Normal guideline for ‘dollars’: $30,000-$38,000/person/month. The guideline for pieces per man per month will vary by factory type and mixture of sales types. Each parts department should establish the piece calculation for themselves using a trend analysis sheet. 35. Absorption Rate is often called the holy grail of the dealership. It defines how much of the total fixed operating overhead (cost of turning the key in the door) that is paid by the profits of the fixed operations (Service, Parts & Body shop). The calculation is as follows:

Total Fixed Overhead expense (annualized) (no not i nclude variable selling expense) Annualized gross profits from Service, Parts & Body Shop

National averages vary from 55-65%. The rate is 9-15% higher for stores with a body shop. If the parts department can ‘feed’ the technicians efficiently and profitably in the service and body shop then this figure will increase through the increased efficiency of service and body. The goal is, of course, 100% but that will probably not ever be realized for most dealerships. The more realistic goal is to get the absorption rate as high as possible, and parts availability plays an integral part in the formula and process. 36. Proficiency (Service Productivity) is a new addition to the parts checklist. It has been demonstrated that an increase in the efficiency of parts fill to technicians, while it might have an accompanying increase in inventory, is manifested not in the parts department but in the

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fill to technicians, on demand, in the service department . This guideline varies a bit, but the basic formula is:

Flagged or billed Flat Rate Hours (varies by month) Clock Hours for the Technicians

The goal is to exceed 100% (125+% is achievable). Other factors such as stalls/technician ratios can also affect this guide. Parts availability, the availability of customers and the space to repair the vehicles all play a role in this most important measurement. [SERVICE PROFICIENCY IS A PRIME NUMBER FOR EVALUA TION] Note: Other measurements can be added to the checklist as the dealership becomes more skilled in the measurement process. The most important thing is to realize that one month is a ‘Polaroid’ snapshot of a horse race. The monthly checklist, while valuable, only tells us where we are right now. When the monthly data is taken and trended on an Excel spreadsheet, the direction of the trend is infinitely more important than a single month.

When we deal in generalities we will never succeed. When we deal is specifics we will seldom fail. Where performance is measured, performance improves . Where performance is measured and reported, the rat e Of improvement accelerates.

Thomas Monson

Monthly Parts Inventory Reconciliation Month____________________________ Date_________________________________ 1. Dollar Value per DMS (replacement Value) $_________________ 2. Dollar value of non-computer controlled parts $_________________ 3. Dollar value of parts on Repair Orders $_________________ 4. Dollar value of core charges (DMS system) $_________________ 5. Dollar value of defective core charges $_________________ 6. Dollar value of damaged parts claims $_________________ 7. Dollar value of pending credits (returns, cores, etc.) $_________________ 8. Adjusted dollar value of parts department Inventory $_________________ 9. Dollar value of general ledger (actual case value) $_________________ 10. Dollar value of appreciation/depreciation due to price changes $_________________ 11. Dollar value of handling charges, C.O.D., special discounts, etc. $_________________ 12. Negative on hand and plus/minus adjustments $_________________ 13. Items invoiced not received, dollar amount of unrecorded payables, etc. $_________________ 14. Dollar amount of accounts payable reconciling items $_________________ 15. Adjusted dollar value of parts general ledger inventory $_________________ 16. Dollar value of parts difference – Over+/(Short) $_________________ 17. Revised dollar value of parts general ledger inventory $_________________

In practice, Line 8 should equal line 15 or be within +/- 2%

MonthTo be completed by Parts ManagerDealership Sandy Chevrolet June 09Inv per parts management reportSpec/NPN - not in computerNew Cores - not in computer totalsDirty Cores - not in computerWIP - Repair ordersWIP - Parts TicketsAppreciation not taken by accountingReturns - no credit received yetNuts/BoltsOther - describe -$ Invoices posted not given to AcctPack Slips posted not given to AcctTotal -$

To be completed by Accounting ManagerGL Account# 1 ______ (example 242) (YTD)GL Account# 2 ______ (example 242A) (YTD)Appreciation not booked -$ Accounting Invoices not postedAccounting Credits not postedParts Invoices/Pack Slips not in office -$ Total Per GLDifference (shortage) -$ Variance #DIV/0!

Source - Sandi Jeromewww.sandijerome.com

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