How to Avoid Physical Parts Inventory Horror Stories

Transcription

1 How to Avoid Physical Parts Inventory Horror Stories When it comes to headaches the annual Parts Department physical inventory usually falls somewhere between sinus and migraine. Sometimes, the best that can be said is that it puts the department back on track and hopefully without too much of a write-off when it fails to match the general ledger. Since the annual physical count is, well, annual, determining why things got off track can an arduous, time-consuming task of digging up records and reconstructing transactions. Small wonder that many managers find it easier to just take their lumps and hope that the next one turns out better. But that may be a false hope since root causes goes undiscovered and repaired. So what s a manager to do? On March 24, 2016 Mike Nicholes, President of Mike Nicholes Capital Management Inc., ( partsconsulting.com/), joined us for an online workshop to share his thoughts about how and why to adopt a perpetual inventory system and reconciliation process. Mike Nicholes has earned international recognition as a parts department and fixed operations expert. He has conducted hundreds of seminars during the past 3+ decades for more than 46 major vehicle and equipment manufacturers. During his career as a consultant, Mr. Nicholes worked with many dealers, and manufacturers to implement the parts management philosophy of sourcing by movement, which results in greatly improved off-the-shelf fill to the service department technicians without a significant increase in inventory investment. In addition, he has researched and assisted many manufacturers as a subject matter expert in the area of daily stock order implementation and automatic stock replenishment programs. Mr. Nicholes is the author of several publications and articles about inventory management, including his most recent manual, Advanced Inventory Management for Increased Customer Satisfaction; 3rd Edition. This report is a summary of Mike s comments and suggestions..see Mike s Contact Details on the last page. MKC3 - Baumgart - Tips on How & Why to Hire Millennials (Gen Y) for Your Auto Group or Store 2016 DealersEdge All rights reserved. No part of this publication may be used or reproduced in any manner without written permission.

2 In this workshop Mike Nicholes addresses the topic of inventory inaccuracy and suggests that many problems and issues can be eliminated by a well thought out monthly inventory count and adjustment process. Mike outlines how you can make it work in your dealership or group and may even make the need for the dreaded annual physical count obsolete. WHAT S MY INVENTORY REALLY WORTH? That s the question that the dealer, CPA or accountant wants to know, especially when it s tax time, and so why we have an annual physical inventory. As a rule, vehicles are inventoried at least monthly. But the Parts inventory is often an annual event and the problem arises when there is a variance. Either it is over or under the general ledger and determining why can be nearly impossible. Consider this. When a dealer, GM or just about anyone looks at a car, they see the car. Not surprisingly it s called a Sales Perspective. However when someone in Parts looks at a car they see it in a Parts Perspective where each part has a value attached. 2 MKC3 - Baumgart - Tips on How & Why to Hire Millennials (Gen Y) for Your Auto Group or Store

3 The Parts Manager s job is to manage one of the largest single capital assets in the dealership. In fact Mike suggests changing the name to Money Manager, because of the potential impact on a dealer s bottom line. However less critical items like petty cash are often more tightly managed than the relatively huge parts asset. Unfortunately while errors for petty cash are addressed daily, the parts account is often only reconciled annually. And when a shortage occurs, the question becomes where s my money, with the unspoken assumption being that someone stole it. Mike s research has found that only about 3% of shortages are from theft, most of the time the culpret is a problem with paper flow. It is at this time that the question becomes, how did you spend the dealer s money? and at that point the part manager becomes a money manager. Getting the answer starts by reconciling the Accounting General Ledger Inventory to the Computer System Inventory. Since they never match, this is where the work begins because there are parts, such as work in process, core values and overlapping receipts/invoices that have not yet hit the general ledger. Reconciliation to Accounting Mike strongly recommends that this be performed monthly rather than attempting it (always unsuccessfully) after an annual physical inventory. When implemented, this process will take just a few hours each month and saves enormous heartache after the annual physical inventory. Mike offered this reconciliation form developed by Sandi Jerome ( that he considers one of the best and is available at no charge at his site on This is a two part form with the top half being completed by the Parts Manager and Mike makes detailed instructions available at no charge at MKC3 - Baumgart - Tips on How & Why to Hire Millennials (Gen Y) for Your Auto Group or Store 3

4 The Parts Manager gathers the following information. 9 9 Inventory from the DMS summary report. 9 9 Spec/NPN parts not in the computer. 9 9 New Cores not in the computer This is becoming a larger part of inventory value as more items are able to be recycled into new products. 9 9 Dirty Cores not in the computer Are those that cannot be remanufactured, often the manager will not know until after he has applied for core credit. 9 9 Work in Process Repair Orders 9 9 Work in Process Parts Tickets 9 9 Appreciation not taken by accounting Manufacturers tend to make changes on the fly, so managers need to be vigilent. Fortunately most DMS providers provide this information on their month end summary reports. 4 MKC3 - Baumgart - Tips on How & Why to Hire Millennials (Gen Y) for Your Auto Group or Store

5 Mike recommends that managers keep track of these changes for each month since this frequently gets neglected in accounting and often creates a false shortage at annual physical inventory time. 99 Returns that are pending 99 Nuts & bolts 99 Other stuff 99 Invoices posted but not given to accounting 99 Packing slips not given to accounting The bottom half is completed by the Accounting Manager is then combined with Parts to determine the level of variance. Mike offers this illustration of how the two are reconciled. In this example there is a small difference of less than 1%. When questioned Mike noted that variances of 2% or less are acceptable. MKC3 - Baumgart - Tips on How & Why to Hire Millennials (Gen Y) for Your Auto Group or Store 5

6 Reconciliation to the DMS This step matches the parts in the bins to the computer inventory value. Many managers do perpetual inventories where the warehouse is divided into sections so that the total inventory is counted within a defined period of time. For example, if the warehouse is divided in to 60 sections and one section is counted each day, then the total inventory is counted every three months (60 20 work days in a month = 3 months to completion) However Mike proposes a better, less labor intensive way to accomplish the same result. Understanding that if an error occurs, it is going to happen first in the most active part numbers. For example, thieves are not likely to steal obsolete or slow moving parts since they are hard to resell. They also are unlikely to steal parts that are stocked as single pieces since their absence is too easy to notice. For this reason, Mike is comfortable leveraging the Pareto Principle (80-20 rule) which has been found to apply to many disciplines such as sales, economics, production etc., to reduce work load and improve control. Mike made the point that managers are frequently surprised when they run their first ranking report by how few part numbers actually account for the bulk of their sales. In most dealerships part numbers produce most of the sales transactions. By focusing on those numbers and performed monthly, errors will be caught while they can be easily researched and resolved. This starts by generating a Piece Sales (or ABC) Ranking report from the DMS 1. Create a list of the fastest moving parts that sell over 20 pieces/year. 2. List those parts (only) by Bin location. 3. Double space the report to make it a count sheet. 4. Count those parts monthly. The goal is Count Integrity By perpetually ensuring that the physical parts inventory matches what the system says should be there, and combining it with the Monthly Parts Inventory Reconciliation Worksheet managers can breath easy 6 MKC3 - Baumgart - Tips on How & Why to Hire Millennials (Gen Y) for Your Auto Group or Store

7 when the annual physical inventory rolls around knowing that the dealer s investment is secure. Other benefits A clean and accurate inventory will improve manufacturer automatic stock replenishment (ASR) program performance. The DMS ordering will be more accurate in general. The Piece Sales Ranking report can be used to organize the warehouse to improve efficiency. Q&A Q: What is a good Return on Investment? A: Assuming that expenses are allocated fairly and wholesale margins and returns are controlled a good benchmark GP should be in the 26-34% range. Q: How does he feel about price matrices? A: Use with caution. These were good when customers did not have today s information bonanza brought on by the internet to compare prices. When customers perceive that they are being abused you run the risk of losing them. Conclusion Accurate inventories are central to efficent and profitable Parts departments, and controls to ensure that they stay that way are not as burdensome as many fear. MIKE NICHOLES miknik@ol.com MKC3 - Baumgart - Tips on How & Why to Hire Millennials (Gen Y) for Your Auto Group or Store 7

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