While the holiday season is filled with events we all look forward to, one tradition that doesn’t typically generate much enthusiasm is the annual physical parts inventory. It is usually a daunting, dreaded task, disruptive to your business and employees’ personal lives, and fraught with potential drama.

Of course, the annual rite is a necessary one, a fundamental internal control practice. And whether it’s a third party vendor conducting the process or the parts manager overseeing departmental employees, there are only two possible outcomes: one, physical inventory is greater than that what is indicated in general ledger; or two, the GL balance is greater than what’s actually there.

The first is usually received with great relief, although it shouldn’t be. Inaccuracy is a problem. The cause of the disparity should be determined, so that it can be fixed or at least explained and doesn’t become the source of a bigger problem. But it’s when the GL balance is greater than the physical inventory that the commotion begins. Is someone stealing? Or just sloppy? One is more serious than the other, but both can cost the dealership a lot of money.

We’ve worked with dealers since 1984 and conducted hundreds of inventories, and in the vast majority of cases we’ve found the causes of deficient physical inventories are honest mistakes, most often parts provided for a repair job that aren’t recorded on the job order.

The easiest way to eliminate much of the hassle and most of the fuss associated with annual inventories is to reconcile more frequently than once a year. We recommend monthly. Deviations that occur within a period of 30 days are far easier to identify, and tracking inventory throughout the year makes the final annual reconciliation much simpler, more accurate and far less of a disruption. It can take as little as an hour a month using an Excel-based tool that identifies errors and helps pinpoint whether they are in the parts or accounting department. (We’ll send you a tool we’ve developed to assist the process. See contact information below.)

One common approach to monthly inventories is the process of cycle counts. Separate parts into 12 sections and count one each month. In addition to the month’s parts sector, spot-check other bins randomly. Most importantly, check high sales volume and high cost parts; high sales volume parts are typically those that don’t get listed on a repair order, and high-priced as well as easily marketed parts are more likely to be stolen. Obsolete parts, for both reasons, are rarely an issue.

We advise dealers finding disparities not to be hasty in accusing anyone of theft. The consequences of a false accusation can be devastating to both employee and dealership. If theft is expected, we recommend bringing in an outside party for an independent, objective inventory investigation. As well, install a better process, which starts with two practices: no one other than parts personnel should be allowed access to the parts shelves, and no part should ever be handed across the counter without being charged to a ticket.

Good communications between parts and accounting departments is also vital. If a parts manager buys parts from vendors other than the manufacturer, good communication ensures the parts are bought and sold at proper prices.

Dealers have hundreds of thousands, if not millions, of dollars invested in parts inventories. A parts manager’s number one job is to see that the dealership gets a proper return on that investment. Without monitoring controls and physical inventories, all the good work of a parts department can be for naught.

The Dealership Industry Group is happy to send you our Excel-based parts inventory program. Just call us at 317-886-1624, or email Rex Collins at rcollins@hbkcpa.com.

Parts managers are using complex mathematical formulas to compute their optimal inventory quantities these days – though they might not be aware of it. Your DMS system is thinking through the process using calculus to create formulas and cost curves with the ultimate goal of minimizing the cost of ordering, stocking and holding the parts inventory.

Generally, the more of a part you order, the less expensive it is – not only is the part price reduced, but so are other costs, like transportation and labor. On the other hand, ordering in quantities that don’t sell in a timely manner, even to the point of obsolescence, raises costs, not just for parts that don’t get sold but for “frozen capital.” In essence, this leaves money sitting on the parts shelf that could be used in more productive ways. In the language of your DMS system, where the part cost and carrying cost curves meet is theoretically the optimal order quantity.

Of course, running the calculus is the computer software’s job, not the parts manager’s. But even without a computerized formula it’s important to think about where these curves meet, and what tools you have available to ensure you are inventorying intelligently.

Inventory and Turn Rates
Optimally parts inventories are going to turn four to six times a year. Accordingly, a dealership should retain 60 to 90 days of parts on hand. To compute your dealership’s turn rate, take your cost of goods sold for parts (sales minus gross profit) and divide that number by the cost of the parts inventory you have on hand. Then use your turn rate to determine how many days supply you have in inventory.

An example calculation:
The factors:
Parts sales for a year = $3 million
Gross profit on those sales = $1 million
Current parts inventory = $380,000

The calculation:
Cost of goods sold ($3 million minus $1 million) = $2 million
Parts turn rate ($2 million divided by $380,000) = 5.26
Current supply ($380,000 divided by $166,670 [$2 million divided by 12 months]) = 2.27 months or 68 days

Dealerships will necessarily find some inventory stale and not turning, while other parts are turning quickly. The only way to counteract the losses associated with the slow moving or obsolete parts might be moving the fast moving parts even faster. Understanding which parts are slowing the turn rate will help the dealer make adjustments to minimize losses.

So yes, there is real value in the math you learned in middle school that you thought you’d never use. Math makes for better parts management, a better return on your investment.

Three Key Reports
There are several DMS reports that can help to make your parts operation more efficient, but there are three that are essential to having the right parts on the shelves at the right time.

1. Emergency Purchase Report. Buying from another dealer or suppliers as needed decreases net profit in both parts and service departments through higher initial prices, transportation costs, and service department downtime. Recording emergency purchases in your DMS as they occur and reviewing them regularly –at least weekly– will help you adjust your inventory accordingly.
2. Lost Sales Report. If a sale is lost because a part is not in stock, it should be properly reported. A lost sale is defined as a sale that it is reasonable to assume would have been made if the part was on hand.
3. Service Department Fill Rate Report. A weekly fill rate report gives parts managers a clear look at what’s going on in the shop. To correct fill rate inefficiencies, run the report by part number and same-day fill rate.

Take the following into consideration when reviewing these reports:

• If the unit requiring the part is a new model – and could this be a trend?
• Is the required part essential to operation of the unit?
• Is an emergency purchase or a lost sale recorded for a part used in routine maintenance?
• Does the parts locator section in your DMS indicate that other dealers are stocking a part you don’t stock?
• Does the factory maintain a large quantity of a particular part?
• Does my inventory reflect the population of models in my area?

Doing the math and reviewing your reports on a weekly basis will make for happier customers, more efficient employees and, by thawing out your frozen capital, a better bottom line.