How much do you really know about Idle Capital in your Parts Department?

So many Dealer Principles know they have tied up capital in their Parts Departments but what to do about it?

Your Parts inventory is just like your Used car inventory. You want it to turn quickly. Most Parts Managers started as a counter person, unless properly trained on controlling inventory they can break the bank. Dealers spend a lot of money on training in sales and service but never think about the parts department. A great parts manager is like an accountant. Crunching numbers on a daily basis and making sure the whole inventory is bin checked at least once a month. This is called perpetual bin checks. Checking every return and getting rid of any Special order parts. A great Parts manager never has more than 5% Total idle.

I am one of the lucky ones. My D.P. thought I was worth getting the training and spent lots of dollars for me to learn. It was quite a bit of money but I made double the amount back in the first 3 months after it was over. That was 10 years ago and we are still raking it in. In a few weeks I will celebrate my 29^th year with Carman Auto Group and have loved every minute of it.

Often a Parts Manager is a victim of your other departments. Sales, Service and Bodyshop order parts then do not need them. That is not really the parts departments fault but they are stuck with the damage. If you hold the other departments accountable it is much easier to control. Also if all SOP’s are pre paid except warranty this helps also.

How to properly determine your Idle Capital?

In the old days everything was measured by age in months but that is not the case anymore. Non Stock parts are idle too. So this means all special order parts also need to be added to your idle number.

Shall we play with some numbers?

Activity Parts Parts% Accum Parts % Ext Value Value %

Current 1664 8.7 8.7% $62,329.07 25.8%

1-3 months 3475 18.2 26.9% $69,796.31 28.9%

4-6 months 2322 12.2 39.1% $40,766.73 16.9%

7-9 months 1971 10.3 49.4% $23,952.83 9.9%

10-12 months 1732 9.1 58.5% $11,011.87 4.5%

13-24 months 4370 22.9 81.4% $19,773.97 8.2%

25 months or more 3468 18.6 100.% $13,486.27 5.8%

Non Stock Parts $57,435.42 Total Inventory $241,117.05 Average Monthly Sales $190,304.00

This person is not a manager they are a counter person.

Total Idle is $90,695.66, that is 37% of total inventory. With a true turn rate of 2.3. You want your true turn to be between 6 to 8. There are many stores out there with 50% or more idle. Now let’s not just think of the actual dollars. You are paying insurance on that idle, you are paying your DMS on that too. Most charge by the part number. Just think of what you could do with all that money.

So where do you start? Run all the parts reports your DMS has and see where you stand with things. Check the investment areas and activity. You will see if your Parts Manager is a Manager or a counter person. Then go from there.

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Permalink Reply by Tod Collins on August 31, 2011 at 12:37pm

I agree with many of your statements. Idle capital has been and probably will be the most challenging part of a parts manager's job, although it is very controllable. Manufacturers are providing less and less outlets to remove these parts from inventory forcing managers to be more conservative with every part they stock. Ford recently announced that they would no longer offer parts inventory protection, forcing the dealers to face the problem on there side. Statistically, I love statistics; we know that based on dealership parts departments across the nation that nearly two thirds struggle with obsolescent inventory greater that 15% of total inventory. This relates directly to your statement is your "parts manager a manager or a counter person". We also know from studies that were started back in the sixties and that have been duplicated multiple times through the decades, that if a parts manager does everything absolutely correctly, stocks only those parts that meet a correct stocking criteria, doesn't take any parts back and your counter people never make a mistake, statistically, 3% of your inventory will become obsolete on its own. That's a fact of the "life cycle of a part". Based on that study, I'm not sure it would be reasonable to say that the number you’re looking for is 5% when including special orders. Logic tells me that 5% is probably not realistic if you include your special orders unless you simply don't do special orders; not including special orders in your calculation is certainly attainable and is proven by the best in the industry and widely accepted as a NADA guide number or most 20 group numbers as the benchmark. I would also say that if you held a parts manager to this standard, you would quickly find that they were discouraged from special ordering or maybe even stocking anything. Probably not the affect we're looking for, especially if we are trying to drive efficiencies in the shop.

That leads us to the non-stock parts. 24% non-stock inventory is certainly cause for concern but not necessarily panic. It's also indicative of what is being seen in the aging report. If this is a real dealer I would think the two have to be directly related. The bigger question is how we got there. Is the manufacturer forcing new model year parts into the dealership? Do we have an incorrect phase in or phase out criteria? Are these all special orders? Which would make me ask how’s your fill rate to the shop? Are body shops or other wholesale accounts being allowed to return parts without consequence? Some of these guys need to be introduced to the next closest dealer. Is someone in the department simply speculating or taking the word of the tech that this is something we really need to stock because he/she has seen a million of them? Are we fully utilizing manufacturer programs to alleviate some of this? I would be asking these questions and would be willing to bet we would come very close to the solution once we found the answers.

Dealership parts inventory remains typically, the single largest cash investment in the dealership. All other investments typically can be financed. Professional Parts Managers should be learning every day. In 32 years, barely a day goes by that I don't have an "Hmmm?" moment. As a good friend of mine says, "I'm an intellectual thief". I can't tell you how many times I have seen counter people "promoted" to managers as a cost savings, particularly over the last 5 years only to have that parts department deteriorate into a financial mess. DP’s, owner’s and GM’s for the most part have barely an understanding of what makes parts tick but certainly should since so much is at stake.

Great Points Naomi!

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Permalink Reply by Anthony Gauntner on March 8, 2012 at 11:53pm

I bet this dealer wouldn't have $90k tied up in idle used car inventory...this is such a good article. It really shows that DPs should consider grooming GMs thru fixed operations.

Also, I think the entire traditional management structure hierarchy in today's dealership needs revised but that's a story for another day.