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Counting inventory: Ask the right questions to get the right results

August 19, 2013


Most dealers count parts and accessories inventory at year end or hire a third party to do the painstaking work. And almost all notice a variance between what’s on the shelves and in their perpetual inventory system or the general ledger.

A relatively small difference shouldn’t give rise to panic. But a variance that exceeds 3% to 5% is a cause for concern. Here are some ideas for minimizing discrepancies.

Are parts a priority?

Don’t let parts inventory take a backseat to vehicle stock. Unlike vehicles, which are typically financed with a floor plan, parts are almost always owned by the dealership, and they’re easy to lose, steal and resell online.

If your parts bins contained cash — rather than hubcaps and belts — would you guard it more carefully? Although it may not be realistic to manage parts exactly like you secure cash, review how you protect your parts inventory and look for leaks.

Should you outsource physical counting?

Parts employees hate the tedium of counting inventory at year end. Plus, unknowingly using a dishonest parts clerk to count inventory is like asking a fox to count the chickens.

A third party count may be more objective — especially in cases of fraud. Moreover, outsider experts witness the industry’s best (and worst) parts inventory practices. So your CPA may be able to offer helpful tips when the job is done.

How often should you count?

Consider reconciling the perpetual physical inventory system (also known as a tracking “pad”) to the general ledger on a monthly basis. In a perfect world, the pad and the general ledger would always coincide. But the former is maintained by the parts department, the latter by accounting.

Most differences result from timing gaps between order entry, physical receipt of parts and invoice entry. Open repair orders and returns also cause legitimate discrepancies. Some variances signal problems, such as:

•    Careless receiving and ordering practices,
•    Theft and financial misstatement,
•    Billing and data entry errors, and
•    Poor communication between parts and accounting.

You also may want to count a portion of the inventory each month (not necessarily at month end). This is called a cycle count. A cycle count becomes part of your monthly procedures and doesn’t need to be performed at the end of the month. By year end, all of your inventory will have been counted.

Monthly inventory reconciliations and counts can catch errors before they spiral out of control. Your objectives: Identify sources of any discrepancies; locate missing, damaged or inaccurately priced items; and train employees to prevent mistakes from recurring.

What precautionary steps are needed?

As parts and accessories are consumed, instruct clerks to use an “inventory action sheet” to record when they take the last part from a bin or if the pad shows a count different from the physical quantity on the shelf. This information can help you reorder parts and unearth discrepancies.

Ensure your parts manager is up to speed on the latest ways to monitor and estimate parts depreciation and appreciation. For instance, if the factory decreases the cost of a part you own by $2, the parts department needs to record a depreciation adjustment.

It’s also important for the parts manager to verify what’s coming and going with purchase orders, bills of lading, packing slips and outgoing freight orders.

Who can help?

The ill effects of an out-of-control parts department can infect your entire dealership. Inaccurate parts counts frustrate technicians, reduce profit margins and cause delays that may discourage customers from returning. If you need help in this area, ask your CPA for some fresh perspectives and industry expertise on parts inventory best practices.

Fraud-proof your parts department

Employee theft is sometimes the cause of inventory discrepancies. Parts targeted may include navigation systems, aluminum wheels, headlights and stereo equipment. But catalytic converters have emerged as another hot commodity. They contain valuable metals — platinum, rhodium and palladium — that can be resold on the open market.

So, what can you do to prevent fraud from occurring? Start with background checks on parts personnel and, if you haven’t already, implement physical controls, such as:

•    Locking the parts and accessories storeroom even during business hours,
•    Limiting access to the storeroom and its keys,
•    Installing security cameras, alarms and mirrors (even “dummy” electronics can fool would-be thieves),
•    Recording serial numbers or tags for high-value items,
•    Changing “pad” passwords frequently, and
•    Spot-checking parts inventories periodically.

The cost and hassle of these security measures is recouped with fewer write-offs for lost, stolen or damaged items. Tighter security creates a sense of accountability for personnel with access to the parts storeroom.

For more information contact Frank Panzeca at [email protected]. Learn more about our Dealerships and Franchises services…

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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