To stock or not to stock, that is the question
In the aftermarket business, profitability can be affected by a host of factors – the competitive marketplace, rising costs for wages and benefits, warranty recovery, costs of training, cost of rolling stock, fuel and van repair costs…
Some of these factors are controllable, and some are not. One item however that is fully under our control is how much inventory we have on hand. The goal of inventory management, is to have enough inventory on hand to maintain a high level of customer satisfaction, while not having so much that it has a negative effect on cash flow, and interest expenses.
This is many times a delicate line to walk. Inventory not properly managed can make the difference between a profit and a loss. There are always “rules of thumb” when it comes to inventory. Depending on your market and the type of machinery you are selling, conventional wisdom says that you should have between four and six turns per year on your entire inventory value. I have also heard that most dealers will not stock a part until they have built a history of at least three to four purchases in the preceding 12-month time frame.
Are these the right standards to adhere to?
I think that to arrive at the right formula, we need to consider more than just a turn ratio.
Consideration 1 – Equipment sales history and finding the sweet spot
Replacement parts are just that…replacements. That means that the existing population of the parts on the machines in the field first have to fail in order to sell the replacement parts. If you analyze equipment sales data correctly, you can many times give yourself a bit of a preview as to your upcoming needs. In many dealerships the sales department and the parts department operate in two different universes. It never occurs to parts managers to leverage the data on an aging equipment population from the dealerships own records.
This is a fairly easy process. The first 12-24 months that a machine is in service, very little goes wrong. The unit is usually under warranty, and its need for parts will be limited to mostly fluid maintenance and filters. The original factory installed parts on a machine really don’t start to fail and need replacement until after the second year of service. This need only increases from year three through year seven. After the 7th year, the machine is nearing the end of its economic lifespan, and usually finds a second life in a lower usage, used equipment application. It will keep consuming parts after the 7th year…but usually at a much lower rate.
This attached chart shows the percentage of total replacement parts needed every year over a useful life of 10 years. You can see that most of the parts replacements were needed between year three and year seven. The area highlighted in the box above represents what I call the “Sweet Spot” in regards to marketing, stocking and selling aftermarket parts.
I am often astonished at the way dealers seem to think that the parts business happens all by itself. If we are going to be serious about any sales opportunity, we need to set out a battle plan. The first step in the plan is to identify your targets! The units that your sales department sold three to seven years ago represent your target audience. Now we can go about stocking our shelf, and our service vans with a mix of parts that actually have the best chance to turn.
Consideration 2 – OEM incentives
Your OEM supplier has their own set of goals and objectives that compel them to offer certain incentives. Some of these are positive incentives (the carrot), and some of these are negative (the stick). OEM’s regularly tie parts discounts to the dealership meeting certain pre-determined parts purchase goals. Some OEM’s add incentive by adjusting whole goods equipment discounts based on your participation in purchasing their parts. Whether the OEM is using the carrot or the stick, it’s important to consider these incentives when formulating your purchasing plans.
For instance, you may be purchasing your consumables like lubricants and antifreeze from a local supplier who provides you with a good price and premium service. These items are also available from the OEM. Over a year’s time your dealership’s total purchases of these items could be significant. The main reason many dealers never consider purchasing these items from the OEM is that using a local source they think that they can make a better deal. Really? Do the math. If the purchase volume of OEM motor oil helps you to meet you parts purchase goals, and it results in an extra 1% discount on ALL of your OEM purchases, perhaps you aren’t getting such a good deal after all. Even if you had to raise your price on oil by 10% to maintain your margins, what customer is going to leave you for that? Few if any.
Consideration 3 – Manpower costs
The process of purchasing parts consists of the following tasks:
- Running the reports, and assessing the needs
- Determining quantities for volume purchase discounts
- Issuing a purchase order – and proofreading
- Entering the data on the OEM website
- Obtaining and filing an acknowledgement
- Unpacking the ordered parts
- Verifying the quantities
- Changing part numbers that may have been superseded
- Stocking the shelf
- Obtaining the invoice
- Verifying the price of all line items
- Closing out the PO
- Sending the invoice and packing slip to payables
- Issuing payment
These tasks take what, many times, seems like an inordinate amount of time to complete, and they involve multiple people within your department. It may be wise to consider that when your employees are performing these tasks, what they are not doing is answering your phones, serving customers over the counter, or being of service to your technicians. Placing two or more short stock orders a week may seem like a great way to manage tighter inventories, but what efficiencies are we sacrificing in manpower? It doesn’t take twice as long to process a large stock order than it does a small one. In fact, there is not a lot of difference in the total time invested. I’m not calling a weekly stock order a bad thing. But if I stock a few more parts on my shelf and extend the interval to two weeks, I may in fact save the dealership from 10 to 20 overall man-hours per week, that could be devoted to activities that grow revenues and improve customer service.
The fact is, there is no one answer to parts inventory management. It can and should be a strategic exercise based on your size, costs, system capabilities and manpower. It should also be a planned activity with an eye toward the equipment that is entering the sweet spot. Par levels and turn ratios still can be used as baseline tools. When you use your resources however to provide some meaningful idea of what your upcoming needs will be, and you couple this understanding with knowing what your true employee costs are, you can make changes to the baseline plan that will increase both sales and profitability.
Looking ahead is important. Legendary hockey player Wayne Gretsky always felt that although he had the ability to put the puck in the net by himself, (which he did 894 times over his career), the real key to his success was in leveraging his contribution to the team as a whole. He did this by following one simple formula: Don’t put the puck where my teammate is. Put the puck where I know my teammate “is going to be.” That forward vision is an example of finding the sweet spot. Doing this allows you to be strategic, effective, and profitable.
Dave Baiocchi is the president of Resonant Dealer Services LLC. He has spent 35 years in the equipment business as a sales manager, aftermarket director and dealer principal. Dave now consults with dealerships nationwide to establish and enhance best practices, especially in the area of aftermarket development and performance. E-mail email@example.com to contact Dave.