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 Dealer Expo’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.
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.
SORTING IT OUT
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.
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.
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.”
Another benefit is managing inventory more closely to supplier programs. Look for good return terms, Jones counseled, to keep from getting stuck with unsalable merchandise. For those just starting an Open-To-Buy system, that advice may come late. “If inventory levels are high across the board, there is no easy solution,” he said. “Reduce the inventory as quickly as possible. Don’t tie up dollars where they are not needed.”
“Obsolete inventory will suck the life right out of your department and your dealership,” he said. Top-performing dealers have only 10 percent obsolete inventory (the national norm is closer to 20 percent).
How long do you hang on? What is considered a slow mover? “Six months with no sale. If it is not a seasonal part, I am going to take really hard look at whether I want to keep it. Because I don’t want it to get to 12 months,” Jones said.
Inventory is obsolete if it’s been sitting on the shelf for 12 months. “Run a monthly non-movers report; bimonthly is better. Seasonality should not impact the 12-month report,” Jones said. Then pull the obsolete items and “get rid of it. It won’t go up in value.” Start by using return or obsolescence programs that suppliers offer. After that, it’s time for the three Ds:
- Discount it: Discount obsolete items to market value to get them out the door. “Customers want to know two things: what’s new and what’s on sale,” Jones said. Set up a sale area in the store to move it out.
- Donate it: Donate used clothing and accessories to charities and fundraisers. If you can’t send it back to the supplier and you are in the right tax situation, you can donate it and take 100 percent off your taxes. “Take the writeoff and dump it,” Jones said.
- Dumpster It: Some metals bring good prices from recyclers. But keep in mind that shelf space is worth more than dead inventory. If you can’t move an item by discount or as a donation, bite the bullet and throw it out.
Inventory should be sorted into “geographical” and “categorical” bin locations. Geographical is inventory 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. Once the inventory has a bin location in the DMS, overall part number sequencing is not necessary. They can move high-turn stock nearest the parts counter to minimize chasing after high-demand items.
“If you haven’t gone through and re-categorized your inventory properly, you can’t track any of this stuff,” he said. “The price guide categories are generally not properly defined or broken down to the extent necessary to track sales and profits by inventory groups such as ‘men’s helmets’ or ‘ladies jackets.’ Often, the suppliers’ price guides lump clothing and accessories together – these are two very different animals.”
It’s also important to “cycle-count” 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. Parts managers should spot-check the counts by running a random 25-item report and checking those items.
“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.
Accurate inventory is good for far more than just tracking stock. Parts managers can track sales by employee to help them do their jobs better. And the information can be invaluable in an emergency: One dealer at the seminar said his store had had a fire that gobbled up $3 million in inventory. His count was so tight, the insurer paid 100 percent of his losses.
Some parts managers are creative about use of programs. One dealer at the seminar said his parts manager buys new discounted parts at liquidation sales, then returns them to suppliers who give 100 percent credit on new returns.
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 tight inventory management becomes clear.
“When unit sales are tight, PG&A and service should keep you profitable,” Jones said. “Get that overhead absorbed so at least you can keep the doors open and keep everyone employed.”
This story originally appeared in the Dealernews May 2012 issue.