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No matter which dealership is in question, management of used car inventory and parts inventory is vastly different. Nobody really questions why this is the case – it’s just assumed - but there is an underlying reason for this. It has to do with acquisition and disposal of assets, better known as physical inventory management. In the used car department, you can easily wholesale stagnant inventory, but it’s not so easy for the parts department.
It’s the lack of manufacturer’s parts return allowance.
Not quite sure what the parts return allowance is? It’s the small amount a manufacturer will allow you to return back to the warehouse. Those return allowances typically range from 0% to 7% of parts purchased from the OEM.
Why is Parts Return Allowance Important?
If we strip down why dealer principals and general managers are on-top of used car inventory, the answer is obvious: money must perform. It’s always about the performance of capital, and the return on investment – in a nutshell, that’s business.
With used car brokers and auctions, dealers can unload used car inventory easily. When you’re unable to retail a unit, you send it to the auction or find your broker in your rolodex or iPhone contact list. You might break even or take a small loss, but there’s an extra spot on the lot for a unit you’ll turn.
With parts inventory, it’s not so easy. Parts only have a few options – sell it, leave it on the shelf, return a small percentage of the total problem, or write it off.
It is a fact that North American dealers have more than 30% of their parts inventory locked up in idle parts. These parts lack demand, and shouldn’t be in parts inventory. Every dealership is effected without question because the manufacturer’s return allowance is so low. The only difference amongst dealerships is whether they want to address it or not, or learn more about the problem to understand they too have a major issue.
How A Used Car Inventory Strategy Will Help
The strategies implemented in used car inventory can and should be applied to alleviate capital locked in idle parts. It centers on getting rid of idle parts inventory – those pesky parts which lack demand but tie up a huge part of your operating funds. You need to recognize two key issues:
What Does Used Car Inventory Strategy Implementation Look Like for Parts?
Addressing the first issue is an straightforward task. Implement and enforce policies to reduce special order parts from entering the building, such as having the customer commit to those parts via prepayment. That includes Special Orders that are requested in the shop. This means a customer must prepay special order parts if the car is leaving your shop as well as over-the-counter purchasers too
This isn’t a new concept, and will be explored further in the future. Like an oddball color or a bespoke model used car that you wouldn’t bring in unless you already had a committed buyer, you simply don’t chance holding the bag with special-order parts you won’t be able to move otherwise.
It gets trickier in the second stage. These are parts which are in inventory that lack demand. These parts need to go immediately. These aren’t just obsolete parts – you’re also looking for parts which haven’t sold in the 10 of the last 12 months. These parts have about a 35% chance of ever selling within a 12 month period. Don’t neglect parts with over 12 months with no sales, either. In using a traditional inventory control method, anything over 9 months-no-sale is really your target number for parts which were previously active, and now are phasing out. There are two types of idle parts:
Parts that haven’t sold within 10 of the last 12 months. Don’t use consecutive months-no-sale regarding these parts. It’s a misconception for parts inventory to use 9 or 12 months-no-sale on these parts, which never qualified for inventory stocking in the first place. These are the parts you use your used car inventory control methods. Clear them out as fast as you can.
Parts that had demand previously, but demand stagnated. Typically, after 9 months-no-sale, you need to get rid of them. There is only a 15% chance these parts will ever sell again in your dealership – with the odds of selling less by the month.
The largest and unspoken problem is really in non-stocking parts. These are the parts which you can apply the same rules you use on used car inventory.
Here is an easy way to see the correlation of parts and used car inventory:
Active Parts = Similar to Used Car Inventory Which Sell within 60 Days
Non-Stocking Parts = The 2002 Chrysler Concorde You Shouldn’t Have On Your Lot - It Won't Ever Sell
Obsolete Parts = That Used Car Over 120+ Days Old. These are parts that haven’t sold in 12 months.
If you think your store is exempt, think again. Walk back to your parts department and ask someone, or look at part’s managers inventory reports closely. You have more ‘2002 Chrysler Concordes’ In your inventory than you’d expect. On average, it’s nearly $88,000 per dealership. Fact.
What Are Your Options with Idle Parts Inventory?
Your options are limited, but in alphabetical order, here are the ways to get rid of idle parts;
Auction: After all expenses are paid, usually 10-15% of original parts cost is recovered
Cash Discovery Program: A dealer-to-dealer network, where parts are at 50% of dealer cost. Parts moved in bulk.
D2D Link: Available for Dodge, GMC, and Ford dealers. All are single part transactions. Manual process with various parts prices.
Dealermine Inc: A dealer to dealer network, where parts are at 50% of dealer cost. Parts moved in bulk.
Ebay: An established audience. Listings are typically 1 part at a time with time required per listing unless dealer has signed with a digital software company to provide this service. Typically, the majority of a dealer’s inventory is listed on eBay with this software.
NADPE: A dealer-to-dealer network, and an emerging technology, where parts are exchanged evenly at dealer cost, in bulk. No write down of parts.
Write Off: Write off the part in full, and toss in garbage. 100% loss.
There are many traditional avenues to get rid of parts, but nearly all require major losses. A few emerging technologies exist that can help expose you to marketplaces which can assist in reducing or eliminating idle parts, with little to no loss, or expense. It’s these new emerging technologies that allow you to implement Used Car Department inventory control methodologies. Sitting on non-performing capital isn’t an option – start exploring the avenues above to clean up your parts inventory.