Auto dealerships are hubs of activity, offering a range of services from vehicle sales and financing to maintenance and repairs. Among these services, managing parts inventories efficiently is critical for ensuring smooth operations, holding parts department team members accountable, managing frozen capital, and customer satisfaction.
Frozen Capital: A Renewed Concern
In our most recent Auto Dealer Business Intelligence (ADBI) Report, we saw a consistency among all dealers in our database . . . frozen capital is a big deal again. In recent years, frozen capital has not been an issue. Dealers could not get inventory, customers and banks had plenty of resources to pay off receivables quickly, and the cost of capital was so cheap that it did not really matter. That has all changed. Ensuring that your parts department personnel are managing this inventory efficiently and effectively will help hold them accountable and will minimize frozen capital.
Leveraging Technology and Organization
Parts inventory is an often-overlooked area of opportunity in the dealership. Maintaining a well-organized and clean parts department helps to improve customer satisfaction. Ensuring shelves, bins, and storage areas are clearly labeled will make it easier for parts department team members to quickly fill orders for parts, reducing search times and improving efficiency. A well-organized and clean parts department also helps with cross-training other parts department employees by easily integrating team members into different functions of parts inventory management, including receiving, stocking, picking, and shipping. This ensures operational flexibility and resilience to staff turnover. Strategies for managing inventory include:
- Leveraging Technology – Most Dealership Management Systems (DMS) and Original Equipment Manufacturers (OEM) have tools assisting parts managers with effectively and efficiently managing their parts inventories. Setting stocking levels, monitoring missed sales, managing reorder points and lead times, and other tools help parts managers to identify fast moving parts and parts that should not be stocked, but may be needed. Having proper systems in place and actively managing this inventory will help prevent frozen capital, hold parts team members accountable, and improve customer satisfaction.
- Forecasting Demand – It is important to have a strong system of forecasting parts demand needs. Your forecasting model should consider seasonal demand, promotions, and changes in vehicle models. Most OEMs have parts depots near dealers, which allows a dealer to use Just in Time ordering for certain parts. It is important, however, to allow for unexpected demand spikes and supplier delays. Maintaining healthy relationships with suppliers is critical so you have more than one supplier to go to in the event of emergencies.
- The ABC Method – One way to effectively manage parts inventory is to adopt an ABC method, or similar method, of classifying parts inventories. Using this approach, parts managers classify parts according to their importance and sales volume. This helps to allocate more resources to high-value, high-demand parts while adopting more streamlined approaches for low-value, low-demand items.
Customer Service and Continuous Improvement
Customer service, your service department, and ultimately your customers, are critical to an effectively managed parts department. Focus on providing excellent customer service by being responsive to inquiries, processing orders promptly, and resolving any issues or complaints quickly. A satisfied customer is more likely to return to the dealership for additional services and refer friends to the dealership, resulting in increased sales.
If you have not already, we recommend at a minimum that each year dealers complete a parts inventory using an outside third-party inventory company to complete the physical inventory. These companies see lots of different parts departments, both well managed and not so well managed, and have suggestions for improving the management of your parts departments. We have several that we work with around the country. Please contact us if you need a name. Adopting cycle counts throughout the year and reconciling the general ledger inventory to the parts pad each month are best practices. These steps will help you quickly verify inventory accuracy and identify discrepancies. This helps prevent stockouts, reduces shrinkage, and maintains data integrity.
It is important for dealers to continuously improve. They should be monitoring key performance indicators (KPIs) such as inventory turnover, fill rates, and stockout rates. Use data analytics provided through your DMS, OEM and other vendors, such as our ADBI reports, to identify areas for improvement and to implement process enhancements accordingly. Properly managing your parts department will help ensure the right parts are available when needed, prevent frozen capital, help minimize downtime for customer vehicles, provide faster repair turnaround times, and enhance overall customer satisfaction. Please contact your automotive CPA if you would like more information or assistance with managing this department.
Bart joined ARB in 1996 and is a Principal with the firm. The growth of ARB’s Auto Dealership Group is a natural result of consistently anticipating the needs of dealerships and providing savvy, sensible and customized services at fair prices.
