The Dangers of a Mismanaged Inventory

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In the parts department, any part that is sitting idle on a shelf is taking up space and not earning the department any money. In fact, after a certain period of time, it can actually cost the dealership money. Parts guru Dave Piecuch, vice president of Automotive Consultants Group and author of Smart Parts e-newsletter and blog, says that, based on his observations, 25–30 percent of a dealership’s parts inventory is obsolescent, which is a huge waste of money—but it’s not the only hidden cost of a mismanaged parts inventory.

Lee Irvin, parts director at Peruzzi Toyota in Hatfield, Pa., has worked as parts manager for a number of other Toyota dealerships and has held his current position for 10 years. When Irvin came to Peruzzi, he had to change many of the processes to make the parts department as efficient and profitable as possible.

Throughout his time in the parts department, he has picked up a number of different tips for ways to best manage the parts inventory and because of that, he’s become familiar with three unseen costs of a mismanaged parts inventory.

Hidden Cost 1: Idle Parts

This may be the most obvious and the most covered—parts obsolescence. But, despite being a well known problem, it’s an issue with which many parts departments still struggle.

In all of his years working with parts, Irvin says he’s been fortunate to never have an issue with obsolescence, he says. Part of the reason for that, he says, is thanks to Toyota’s return policy, which allows him to easily get rid of special order parts that haven’t been picked up or parts that haven’t moved in 30 days.

Solution: Having a good return policy with an OEM is great, but in order to take advantage of it, the parts department needs to be organized and you need to track where parts are and how long they’ve sat on the shelf. Irvin has a system in place in his parts department that includes stocking groups and a bin locator that easily pulls up the location of any part within the DMS—and also alert him when it’s approaching the 30-day mark. Every Saturday, the team at Peruzzi purges the special order shelf of anything that’s over the 30-day mark.

Hidden Cost 2: Lacking Inventory  

Although you don’t want your inventory to pile up, Irvin stresses the importance of having the parts needed at your fingertips. If you have to order a part the day of, you run the risk of lowering CSI if the customer has to wait around, which can ultimately mean a lost customer and a lost sale, explains Irvin. Not only that, you also waste precious time that the service department could be working.

“If you don’t have a part in stock, you have to run for one and you risk not finishing the car by the end of the day—it’s wasted time,” Irvin says. “You’re not capitalizing on the hours that the tech is there.”  

Solution: Irvin says posting lost sales has been key in helping him understand what he needs in his inventory. Once you do this for a while and keep track of the necessary days supply of parts, you should be able to cross-reference that against your inventory and get a pretty good idea of what you need in stock at any given time, Irvin says.

Hidden Cost 3: Over Discounting

The temptation with parts that sit on a shelf is to discount them—sometimes heavily. That’s why, Irvin explains, every precaution should be made to prevent idle parts and to manage your inventory whenever possible. Otherwise, you’ll end up lowering and sometimes losing out on a profit altogether.  

“It’s against their (parts department) wish to discount, because it brings down gross profit,” Irvin says.

Solution: Again, the key to solving this issue is preventing it on the front end. Make sure you have the parts you need in stock and return parts that have hit 30 days. In the case that you do have a part that needs to get off the shelf, Irvin suggests making sure discounts go no lower than what was paid for it, make sure it is approved and that a discount must be scanned and approved before it is used.

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