The nuts and bolts of parts inventory management

The parts and service department can be one of the most profitable areas of a dealership — or it can be a drag on financial performance. The difference often amounts to how well parts inventory is managed.

Various factors go into improving the management of your parts inventory. One of the most important is eliminating or minimizing variances between the actual parts on the shelves and the parts that your inventory management system says are there.

When parts inventory = cash

Inventory is sometimes referred to as “cash on the shelf” — and that’s exactly what it is. Each item ordered and stored in a parts bin represents a financial investment by your dealership. Once you view your parts inventory this way, you’ll start to look at variances in a whole new light.

An example illustrates the true cost of these variances. Suppose your dealership maintains $400,000 in parts inventory and you discover a 10% variance between parts in stock and parts indicated in your inventory management system. At first glance, you might think, “Ten percent? That’s not too bad.”

Now let’s assume you realize a 35% gross profit margin on parts. In this scenario, you would need to have more than $114,000 in additional parts sales (40,000 / .35 = 114,286) to make up this $40,000 variance in inventory. You also would take a cash flow hit of $40,000 because you paid upfront for the parts you stock in inventory.

Determining the extent of the variance, assuming there is a variance, requires conducting a parts inventory at least annually. Ideally, the inventory will be conducted by an outside consultant or auditor. In addition, you should also periodically do random bin counts. By performing cycle counts on a monthly basis, you can conduct a complete inventory check approximately every quarter.

What causes variances?

There are many potential causes of parts inventory variances, such as:

  • Shrinkage due to loss, expiration and theft by employees,
  • Broken or damaged parts that aren’t promptly returned to the manufacturer for credit,
  • Sloppy storage practices, such as not placing parts in the proper bins or just leaving parts lying around on the shop floor,
  • Failure to update the inventory management system with accurate data reflecting on-hand inventory that’s actually in stock, and
  • Errors in recording parts on repair orders or parts tickets.

Minor variances aren’t uncommon, but how much variance is too much? In general, if the variance between on-hand inventory and the items recorded in your inventory management system is 5% or higher, you should probably find out why.

Based on your discoveries, you can then take corrective action to eliminate or reduce variances and improve overall parts inventory management. Possible steps might include the following:

Establish firm inventory management policies and procedures. These should dictate how parts are ordered, received and entered into your inventory management system. Also, purchase orders should be carefully matched to all items received in the parts department.

Monitor obsolete and slow-moving parts. Reduce your investment in parts inventory by tracking aging schedules and the movement of all items through the department. Return slow-moving parts to the manufacturer to receive a credit or sell them wholesale.

Send back warranty parts and core returns promptly. Get returns back to the manufacturer as quickly as possible. Also, make sure they are properly entered and reconciled in your inventory management system.

Be proactive in guarding against employee theft. Parts are in high demand among thieves because they’re easy to sell and convert to cash. Therefore, you should store all parts inventory in a secure and locked area after hours. And make sure purchase orders are filled out completely and include a corresponding parts ticket.

You also should segregate duties among parts department employees. For example, assign different employees to order and receive parts and manage inventory.

Reap the benefits

Your dealership can enjoy many benefits by improving management of your parts inventory. Discuss these and other inventory management strategies with your parts department manager today.

Know these inventory management KPIs

Understanding several key performance indicators, or KPIs, can help you improve management of your parts inventory. Pay especially close attention to these three parts inventory KPIs:

  1. Gross inventory turns. This will tell you how many times your parts inventory turns over in a year. To calculate, divide the annual cost of parts sales by your total parts inventory.
  2. True turns. This will tell you which parts sales are coming from your existing stock. To calculate, divide the annualized cost of parts sales, less emergency purchases and customer orders, by your total parts inventory.
  3. Fill rate. This will tell you how much of your sales are coming from inventory as opposed to noninventory parts that have to be special ordered. To calculate, divide the annualized cost of parts sales, less emergency purchases and special orders, by the cost of sales plus lost sales.

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