How to cut costs in Parts, courtesy ADP's Ethington

Publish Date: 
Aug 4, 2009
By Arlo Redwine

THE AVERAGE inefficient dealer spends about $59,000 per year in carrying costs for obsolete inventory. The average efficient dealer, on the other hand, spends less than $14,000. This statistic was part of an hour-long webinar last week aimed at helping dealers optimize LightspeedNXT.

Hal Ethington, a senior analyst with the firm, hosted the webinar, titled “Find Hidden Cash.“ Below is a summary of his suggestions regarding LightspeedNXT.

Make better use of ordering sales curves: Use wholesale prices instead of retail prices when creating your 12-month ordering sales curves, Ethington said. Note that LightspeedNXT uses weighted averages, emphasizing more recent months over older ones.

Do your end-of-year parts inventory maintenance. Some dealers complain that NXT tries to order twice as much inventory as they need. The reason this happens, Ethington said, is that at the end of the year dealers don’t zero-out the amounts ordered. If they don’t, the system is tricked into thinking everything the dealer ordered last year was ordered this year, thus doubling its predictions.

Record lost sales. Remember that NXT can record your lost sales, Ethington said. Employees at the cash register should do this to keep track of the true demand for certain products, thus helping the dealer to order appropriately. Consider spiffing the employees who do this.

Emphasize the importance of accurate recording. Ethington pointed out that just one employee entering a number in a wrong column can ruin your Buying Guide for a particular item.

Get control over your obsolete inventory (12 months with no sell). Assign employees certain rows, bins, etc. to spot-check. Perhaps make a contest out of it. In a sampling of 500 dealers, Ethington said, the total value of parts that had been stocked for more than a year and a half without a sell was $250 million.

Watch your margins. The average PG&A margin for the average LightspeedNXT dealership is 33 percent, Ethington said. But some are averaging higher, some lower. Low-priced items like O-rings should be marked up to about a dollar using NXT’s minimum retail price function. Don’t go solely by MSRPs. Dealers should also make greater use of NXT’s escalator and rounding functions. The average $5 million store makes $6,000 more in gross margin per year just by using the rounding function, Ethington said. Remember to set these functions for each parts source.

Lower prices to move inventory. Among other things, NXT dealers can use the “Variable Parts Inventory Updating” function to lower prices on slow-movers, in some cases to just pennies. Ethington suggested that dealers consult their accountant about writing off the lost profits. Discounting may also affect some dealers’ inventory taxes.

Use the Parts and Major Unit Locator. Ethington said 163 dealers are posting inventory using the tool, which went live in May 2008. As of July 28, dealers had searched other dealers’ inventory 18,251 times. In February alone, there were about 4,000 searches. NXT is programmed so that the dealer locator button is automatically highlighted anytime a dealer is getting ready to special order an item that another dealer has for sale. Dealers can search the inventory for free, but the ability to post inventory costs $20 per month. (continued)