The recession has forced most dealers to take a hard look at how much they spend, return on investment and how to run a cleaner, leaner operation, but some dealers may be overlooking their most promising profit center: the parts counter.
Steve Jones of Gart Sutton & Associates wants you to knock it off. Specifically, he wants dealer principals and GMs to start empowering parts managers to take charge of their departments and turn them into the most profitable department in the dealership. That means implementing an Open-To-Buy system to make inventory management a slave to profits, he told an overflow crowd at Saturday’s Managing the PG&A Department seminar.
So what is an Open-To-Buy system? It’s a method for managing inventory in a tighter, smarter way that squeezes every dime out of the space and budget a dealership has allocated to parts.
“Obsolete inventory will suck the life right out of your department and your dealership,” he said. Top-performing dealers have only 1.9 % obsolete inventory, but that’s only one dimension of Open-To-Buy. The system also helps identify opportunities to hire and train the right people, give them ownership of their roles at the dealership and, most importantly, build a cushion that can see a dealership through lean times.
Essentially, Open-To-Buy is the difference between the amount of any type of inventory in stock, and the budget for that category of inventory. “It says, ‘I have set a number for this category, and I don’t have that much in inventory, so I have this much space to buy,” he explained.
That helps parts managers make the most of supplier programs like preseason buying, return guarantees and incentive programs. It also forces them to constantly reevaluate what’s selling and, above all, make sure as little inventory as possible ever gets stale on the shelf. “It helps you select high-volume, high turn inventory,” Jones said. “Cash flow is king.”
The core principle is knowing what your parts budget is, where it goes and what’s moving. It helps set goals for the dealership as a whole and for each employee in the department – goals that can help with hiring, training and management. “It gives every category a number that you want to manage to,” he said.
First, inventory is sorted into “geographical” and “categorical” categories. Geographical is inventory is items that are in a fixed location in the dealership, such as a display of tires or other large or heavy items that will always be in the same place, or a cabinet that keeps all the small parts together. Categorical is for inventory that may be moved around the store, like a display of jackets that may be moved based on the season.
“If you haven’t gone through and recategorized your inventory properly, you can’t track any of this stuff,” he said. “Clothing and accessories are two very different animals.”
The two main parts of an Open-To-Buy system are sales projections and calculation of the inventory levels needed to meet those projections. For projections you need to know past sales, what inventory is in stock and how it has met past demand, and the dealership’s goals for the department.
That means “cycle-counting” inventory, a rolling process of counting at least one bin (or a specific quantity of part numbers) per day, every day. Any employee can do the counting, or split the task among employees. It helps keep staff busy and engaged while keeping inventory accurate. The goal is to get complete and accurate inventory count at least six times a year.
“There’s nothing worse than you promised a bike to the customer because the DMS says the part is in inventory and it isn’t there, or the guy drives two hours from Podunk because you told him you have the part he needs and it isn’t there,” Jones said.
By managing inventory accurately and on budget, dealers can reach profit margins of 35 percent to 40 percent on PG&A. Compare that to the margins on new units, used units and service, and the value of Open-To-Buy becomes clear.