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Organizing obsolete parts: Learn from a master

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Post Date: 06/24/2013

INVESTOPEDIA.COM defines obsolete inventory as a term that refers to inventory that is at the end of its product life cycle and has not seen any sales or usage for a set period of time usually determined by the industry.

Obsolete inventory also can be referred to as dead or excessive inventory. Generally Accepted Accounting Principles, also known as GAAP, require dealers to write off obsolete inventory as soon as it’s identified. In general, accounting rules direct dealers to establish a reserve account for obsolete inventory on their balance sheets and expense it as they dispose of it. But this practice reduces profits and can create huge losses.

There are several causes for obsolete inventory. One of the most common is the requirement from OEMs to stock quantities for specific part numbers for each model of vehicle that the dealer has for sale. If the particular bike model doesn’t sell as well as expected, these parts will still be on the shelves long after new models have replaced the slow sellers.

Most dealers accept this as a cost of doing business, but that leaves the problem of what to do with the leftover inventory.

Each OEM has its own parts return policy but will not credit a dealership for all parts not sold. For example, if a dealership purchases $100,000 worth of parts, the OEM may take back 2 percent to 5 percent annually, but only at its current value — not necessarily what was paid when purchased. Also, parts must be in their original packaging.

This business deal left everyone involved better off. The seller got way more money than he would have made at the rally, Henig had a better weekend than he planned, and lots of rally-goers were able to find the vintage parts they needed for their restoration projects.

As Henig’s inventory of other people’s “obsolete” parts grew, so did his business — it eventually morphed into a BMW motorcycle dealership. Today, Henig’s enormous inventory of parts and mail-order business caters not only to owners of recent models but also to collectors of classic and vintage BMW motorcycles dating back to the 1950s.

We asked Henig for some advice how he deals with obsolete inventory.


Dealernews: What do you do with your obsolete parts inventory?

Henig: Any dealer must continually make decisions about parts salability, value, inventory tax liability and the value of shelf space.

The questions that must be answered are: Does the part go on shelves where I can try to sell it to my customers? Should I put it on a list to sell to other dealers, or should I crush it in the compactor and write it off as a business loss? This process is ongoing, and all of these options should be available to choose from at any time.

If the definition of “obsolete parts” is those that are not selling, how can you add value to them?

Henig: Leverage your customer relations management (CRM) database. I track customers and all of the bikes they own — not just the ones I’ve sold to them. You may already have customers that want these parts; you just have to find them. Target [email advertising] to customers that own specific models and years of motorcycles that you have parts for. EBay is another tool for selling these parts, and it reaches a worldwide audience.

No matter how you reach customers, try bundling parts that will fit more than one year, make or model of bike.

You mentioned selling obsolete parts to other dealers. How do you go about doing that?

Henig: One dealer’s taxable inventory is another’s sales opportunity. BMW dealers have a dealer-to-dealer old parts list, and while some dealers may not ever read it, there are those of us that actively sell each other the parts we can’t or don’t want to sell ourselves.

Sometimes I’ll sell or purchase an entire parts list from a single dealer. Even though I may get pennies on the dollar for parts lists that I sell, the transaction makes space for parts that I can sell. Also, many dealers have personal collections of vintage bikes and most don’t realize that they may already have parts for their collection.

What’s the difference between obsolete and vintage parts?

Henig: The classical definition for vintage is 25 years or older — at least that’s what the Department of Motor Vehicles defines it as. For me, vintage or rare parts are those that I can’t get from the manufacturer any longer, as they are out of production.

Regardless of age, you have to have a gut feel for a part or group of parts as to when they cross the line from just being worth their normal retail value to having value as a hard-to-get part.

A general rule I have is that cosmetic parts always have more value than other parts. Gas tanks, side covers, mirrors, grips, levers and exhaust components are all easily damaged and are more in demand. A problem with these types of parts is that they are more difficult to store because they take up more space and need to be protected from damage. (Continued)

Obsolete inventory is a reality for any dealership but viewing it as a continuing problem or a business opportunity all depends on perspective — the glass half-full or half-empty.

One man with a glass-half-full attitude is Bob Henig of Bob’s BMW in Jessup, Md., who started his career in 1981 by selling used motorcycle parts out of his garage. Collecting parts that he knew were in high demand turned into a business where he eventually bought entire old inventories from other collectors and dealers.

“The process of turning obsolete parts into a business opportunity is simple: market the parts to the customers that want them,” Henig says (pictured above in his office). This business process can be applied to any dealership’s obsolete inventory.

While attending a motorcycle rally in Virginia Beach, Henig noticed a private seller with a trailer full of old motorcycle parts.

As he was stacking the parts onto a picnic table, the seller told Henig that he had purchased a dealer’s old inventory and hoped to sell all of it at the rally. During the afternoon he sold only about $50 worth of parts, so Henig offered him $800 for everything that was left.

Early the next morning, Henig sorted through the parts, throwing away about 20 percent that he considered junk. He also took into account the years and models of bikes he saw at the rally and displayed parts for these motorcycles. After organizing, categorizing and displaying the parts, he ultimately sold $2,000 worth over the weekend. The parts that were left had a value of several thousand dollars and were sold over the months and years ahead. There also were a few rare bits that he kept for the motorcycles in his personal collection.

 

This business deal left everyone involved better off. The seller got way more money than he would have made at the rally, Henig had a better weekend than he planned, and lots of rally-goers were able to find the vintage parts they needed for their restoration projects.

As Henig’s inventory of other people’s “obsolete” parts grew, so did his business — it eventually morphed into a BMW motorcycle dealership. Today, Henig’s enormous inventory of parts and mail-order business caters not only to owners of recent models but also to collectors of classic and vintage BMW motorcycles dating back to the 1950s.

We asked Henig for some advice how he deals with obsolete inventory.


Dealernews: What do you do with your obsolete parts inventory?

bobs3Henig: Any dealer must continually make decisions about parts salability, value, inventory tax liability and the value of shelf space.

The questions that must be answered are: Does the part go on shelves where I can try to sell it to my customers? Should I put it on a list to sell to other dealers, or should I crush it in the compactor and write it off as a business loss? This process is ongoing, and all of these options should be available to choose from at any time.

If the definition of “obsolete parts” is those that are not selling, how can you add value to them?

Henig: Leverage your customer relations management (CRM) database. I track customers and all of the bikes they own — not just the ones I’ve sold to them. You may already have customers that want these parts; you just have to find them. Target [email advertising] to customers that own specific models and years of motorcycles that you have parts for. EBay is another tool for selling these parts, and it reaches a worldwide audience.

No matter how you reach customers, try bundling parts that will fit more than one year, make or model of bike.

You mentioned selling obsolete parts to other dealers. How do you go about doing that?

Henig: One dealer’s taxable inventory is another’s sales opportunity. BMW dealers have a dealer-to-dealer old parts list, and while some dealers may not ever read it, there are those of us that actively sell each other the parts we can’t or don’t want to sell ourselves.

Sometimes I’ll sell or purchase an entire parts list from a single dealer. Even though I may get pennies on the dollar for parts lists that I sell, the transaction makes space for parts that I can sell. Also, many dealers have personal collections of vintage bikes and most don’t realize that they may already have parts for their collection.

What’s the difference between obsolete and vintage parts?

Henig: The classical definition for vintage is 25 years or older — at least that’s what the Department of Motor Vehicles defines it as. For me, vintage or rare parts are those that I can’t get from the manufacturer any longer, as they are out of production.

Regardless of age, you have to have a gut feel for a part or group of parts as to when they cross the line from just being worth their normal retail value to having value as a hard-to-get part.

A general rule I have is that cosmetic parts always have more value than other parts. Gas tanks, side covers, mirrors, grips, levers and exhaust components are all easily damaged and are more in demand. A problem with these types of parts is that they are more difficult to store because they take up more space and need to be protected from damage.

 

How do you store your small obsolete parts?

Henig: In the parts room, I have the usual shelves and drawers. I keep small parts in compartmentalized drawers, but they are all taken out of their boxes or plastic wrap packaging for easy identification.

I’m never going to return any of these parts to BMW so I don’t need the packaging (and it really slows down the process of finding what you are looking for). Part numbers are indicated on labels for each compartment.

Any other ideas for storage?

Henig: I used to have a pair of antique candy display cases in the showroom filled with vintage parts. Inside the cases were signs that stated, “Everything in this case is for sale. If you don’t see what you want, just ask.” The cases are now in storage because I need the floor space for motorcycles. I do store vintage gas tanks on high shelves that run around the showroom. These add color, interest and promote a sense of history for the dealership.

Every dealer needs to decide how to handle unsold inventory. Rather than view it as just a cost of doing business, look at it as an opportunity for doing more business. “One dealer’s junk is another’s treasure” is good advice and provides a path to turn inventory tax liability into another revenue source for your store.

This story originally appeared in the July 2013 issue of Dealernews.