How to Evaluate Parts Department Performance: A Consultant's View

How to Evaluate Parts Department Performance: A Consultant's View How GMs & Parts Managers alike can dissect the Parts Dept performance to find areas and strategies for improvement With Richard Owen, Fixed Operations Specialist, ROI Consulting, Inc Moderated by Mike Bowers, Executive Editor, DealersEdge Thursday, March 15, 2012 1 2:30pm ET Richard Owen, Fixed Operations Specialist, ROI Consulting, Inc Richard Owen, author of several Parts and Service Management training programs is President of ROI and a Fixed Operations Specialist providing business solutions and process improvement recommendations for parts, service, and body shop operations. Richard has a wide range of experience with U.S. and international automotive and heavy truck industry organizations. He is recognized by industry leaders for his expertise in workshop training, in dealership consulting, inventory verification and reconciliation, asset management, and profit improvement by providing customized solutions combined with real-world practices. His expertise encompasses areas of management and administration relating to development of marketing plans, business management strategies, polices and procedures, introduction of new products and services into the marketplace, implementation of operational improvement programs, management of personnel, and other related areas. Richard is a frequent speaker for dealer groups, parts/service conferences, and industry associations, including both NADA and ATD workshops. He has been featured in industry publications and has worked extensively with the major automated automotive management systems used in the vehicle industry today. Richard's 30+ years of hands-on experience in these areas has provided him with a high level of expertise to develop and recommend programs which identify and correct operational deficiencies in dealership parts and service operations and for conducting all fixed operations training and consulting assignments. Mr. Owen, as a Fixed Operations Specialist, is available to provide in-dealership consulting and assistance. Richard can be contacted by phone at 404 791-6365 or e-mail him at ROwenROI@aol.com. 1

MANAGING PARTS PROFIT FOR EXECUTIVE MANAGEMENT (The Key Indicators to Managing the Parts Manager) Richard Owen Fixed Operations Specialist ROwenROI@aol.com 404-791-6365 WELCOME TO THE WEB WORKSHOP Primary Parts Goals Maximize Sales Maximize Profits Maximize Owner Retention 4 2

Objectives Improve Asset Management Improve Off the Shelf Fill Rate Increase Fixed Operations Profits Reduce Exposure To Loss Improve Return on Investment 5?? ASK QUESTIONS?? There will be question breaks along the way All Rights Reserved 6 3

PARTS MANAGEMENT IN ORDER TO IMPROVE, WE NEED TO KNOW: WHERE HAVE WE BEEN? WHERE ARE WE NOW? WHERE DO WE WANT TO GO? 7 Inspect What You Expect! Track and Trend YOUR Parts Departments Performance! 8 4

Management Reality People are resistant to change Gravitate to familiar processes No decision IS a decision All Rights Reserved 9 When Customers Arrive for Service, What do they expect? Instant Attention Immediate Action Fixed Right the First Time Free to Cheap Costs 10 5

The Hidden Employee The Technician-Owner of the Time Inventory If Well Trained Can do the job the first time IF they have the right parts. 11 The Reality There is a direct connection between Technician Proficiency, Profitability AND Parts Availability What s Needed? Well managed parts operations that delivers the highest rate of off-the-shelf availability on demand! 12 6

WHILE Controlling the buildup of obsolescence Controlling inventory security, both physically and documented Controlling any write down of inventory investment Maximizing the Return on Parts Inventory Investment 13 The Typical Parts Manager No Formal Asset Management Training Parts Driver Counter Person Assistant Parts Manager Learning is from Experience 14 7

Primary Job Functions Attention to detail Computer Systems Knowledge Manufacturer Processes Personnel Management Marketing & Merchandising Security Control #1 Function: Purchasing 15 Purchasing Manager Buying Smart and And Selling Smart Translates to Maximizing Profits $$$! 16 8

So, How s it Done? Four Primary Steps (Questions) 1. When to Stock? (The Primary Decision) 2. What to Buy? (Next Major Decision) 3. How Much to Stock? (Purchasing Management) 4. When to Unload? (Obsolescence Control) 17 The Trick is Inspect What You Expect! (Track & Trend Performance) And Manage the Exceptions 18 9

Focus on Four Corner Stones System Set-ups Perpetual Inventory Posting Lost Sales Effective Special Order Process 19 System Set-Ups Phase-In: 2 months out of 12 with min of 3 pieces Phase-Out: 0 in 6 mos or less than 3 pieces in 12 Days of Supply: MIN/BRP 24 MAX/BSL 30 NS Test Retention: 24-36 Months Minimum Order Value (ADP): $0.00 Maximum Months Supply: 2 Min. Ord. Qty Set to 1 (R&R): Y 20 10

PERPETUAL INVENTORIES 21 PERPETUAL INVENTORIES 4,000 Total stocked part numbers Fastest moving parts (considered later) Part numbers 4 Parts personnel 3 to count entire inventory every 120 days 24 Days in a month Fastest moving parts 4 Parts personnel 21 Days in a month 22 11

PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) Part numbers 4 Parts personnel 3 to count entire inventory every 120 days 24 Days in a month Fastest moving parts 4 Parts personnel 21 Days in a month 23 PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) 3,600 Part numbers 4 Parts personnel 3 to count entire inventory every 120 days 24 Days in a month Fastest moving parts 4 Parts personnel 21 Days in a month 24 12

PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) 3,600 Part numbers 900 4 Parts personnel 3 to count entire inventory every 120 days 24 Days in a month Fastest moving parts 4 Parts personnel 21 Days in a month 25 PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) 3,600 Part numbers 900 4 Parts personnel 225 4 to count entire inventory every 120 days 21 Days in a month Fastest moving parts 4 Parts personnel 21 Days in a month 26 13

PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) 3,600 Part numbers 900 4 Parts personnel 225 4 to count entire inventory every 120 days 11 21 Days in a month Fastest moving parts 4 Parts personnel 21 Days in a month 27 PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) 3,600 Part numbers 900 4 Parts personnel 225 4 to count entire inventory every 120 days 11 21 Days in a month 400 Fastest moving parts 4 Parts personnel 21 Days in a month 28 14

PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) 3,600 Part numbers 900 4 Parts personnel 225 4 to count entire inventory every 120 days 11 21 Days in a month 400 Fastest moving parts 100 4 Parts personnel 21 Days in a month 29 PERPETUAL INVENTORIES 4,000 Total stocked part numbers - 400 Fastest moving parts (considered later) 3,600 Part numbers 900 4 Parts personnel 225 4 to count entire inventory every 120 days 11 21 Days in a month 400 Fastest moving parts 100 4 Parts personnel 5 21 Days in a month 30 15

PERPETUAL INVENTORIES 4,000 Total stocked part numbers 400 Fastest moving parts (considered later) 3,600 Part numbers 900 4 Parts personnel 225 4 to count entire inventory every 120 days 11 21 Days in a month 400 Fastest moving parts 100 4 Parts personnel 5 21 Days in a month 16 Part # s 31 PERPETUAL INVENTORIES Cost: 15 minutes of employee time, per day, each. BENEFITS: Daily on-hand accuracy. Stock orders and report accuracy. Closer monitoring of fraud should it occur. 32 16

Lost Sales What is a Lost Sale? Any request for or inquiry about a part that: We did not have in stock. And The customer refused to special order. - Or - If part was special ordered and never picked up, log a lost sale when returned. 33 LOST SALES You can not hurt the inventory by posting too many You can only hurt the inventory by not posting enough 34 17

Analysis of Lost Sales New Model Part X X X X 1 1 1 35 Analysis of Lost Sales New Model Part X X X X 1 1 1 10 100 36 18

Analysis of Lost Sales New Model Part X X X X 1 1 1 Phase-in = 3 in 12 Months 12 months = 365 Days Max Days Sply = 60 1 120 60 120 = 1 37 Analysis of Lost Sales New Model Part X X X X 1 1 1 1 Phase-in = 3 in 12 Months 12 moths = 365 Days Max Days Sply = 60 1 90 60 90 = 1 38 19

Analysis of Lost Sales New Model Part X X X X 1 1 1 1 1 Phase-in = 3 in 12 Months 12 moths = 365 Days Max Days Sply = 60 1 72 60 72 = 1 39 The Lost Sale Rule! You either Sell the part Order the part OR Post a Lost Sale 40 20

Special Order Process What are the KEY Elements of an effective special order process? 41 Elements of an Effective Special Order Process Appointment established before part is ordered Service Manager approves all expedited special orders Advisor advised immediately of order disposition Parts ages special order receipts notifies Service Manager one week prior to return Parts retains special order if appointment is rescheduled Parts returns to supplier if appoint not rescheduled 42 21

Parts in the CSI Cycle High Availability means more productive technicians More billable labor Customers are better satisfied Customers return to spend more money 43 Dealer Expectations ROI Inventory Protection Gross Profit % Low Inventory No Frozen Capital Profits! 44 22

Customer Parts Expectations Every Part Available Off-The-Shelf Immediate Local Purchases FedEx All Overnight Orders Very Inexpensive 45 The Dilemmas $ALE$ PROFIT$ 23

Inventory Management Goals Stock parts that sell Don t overstock Buy at the best price 85%+ fill rate from stock 47 Tracking & Trending Performance It s time to Inspect What You Expect! What should you track & trend? 48 24

ROI Parts Indicators 17 Indicators to Track and Trend Parts Department Performance 49 ROI Indicator #1 Active/Normal Inventory $ s/b 60-75% of Inventory $ 50 25

Days of Supply ROI Indicator #2 How many days would it take to sell the value of the inventory? Months of supply = Inv value / Avg. month cost of sales Days of supply = Months of supply X 30 51 ROI Indicator #3 Frozen Capital (7-12 MNS X 65%) X 2 plus Absolute Obso.* *(ADP Plus New Parts No-Sale > 5%) Guide: < 20% 52 26

ROI Indicator #4 Selling Days of Supply Indicator of quality of inventory (Inv. Frozen Capital)/Avg. COS) X 30 Note: Frozen Capital is: (7-12 MNS X 65%) X 2 plus Absolute Obso.* *(ADP Plus New Parts No-Sale > 5%) Guide: 30-45 Days 53 ROI Indicator #5 Gross Profit Margin Guide TOTAL 28-35% RO Mechanical 40-44% Counter Retail 40-44% Wholesale 20-24% Internal 25-30% Warranty 25-30% (cost +40%=28.6%) Body Shop 35-40% 54 27

Pricing & Profit Margins List Escalators Cost Plus Matrix But be careful! 55 ROI Indicator #6 Inventory Variance The Difference Between the F/S and ICS Inventory Value Guide: < 2% (Reconciled) 56 28

Monthly Parts Inventory Reconciliation MONTH OF 2012 ACCOUNTING GENERAL LEDGER Month-End Inventory Report Cores in stock (New) Cores in stock (Used) Claims Monthly Returns Core Returns $ $ $ $ $ $ $ 57 Month-End Work in Process R.O. Customer Pay Work in Process Warranty Work in Process Internal Work in Process Retail/Wholesale TOTAL ADJUSTED INVENTORY VALUE $ $ $ $ $ 58 29

Month-End MFG Packing Slips (plus) $ Misc. Vendors Purchases (plus) $ Prepaid Special Orders (Not Received) (plus) $ Parts Invoiced (Not Received) (minus) $ Appreciation/Depreciation TOTAL INVENTORY DIFFERENCE $ $ $ 59 Variance Review Root Causes WIP Database Issues Parts NOT in Database Security Issues Pricing Issues Inaccurate Paperwork Parts Accounting 60 30

The primary cause of shortages is poor paper flow. 61 Month-End Clean Up Negative On Hand Items Correct All No Cost Items With OH Take a Dirty Core Inventory Ensure All Paperwork Is Up to Date Ensure Work In Process Is Verified Ensure All Invoices Are Closed 62 31

Daily Review -Credits & Returns -Open Invoices -Voided Tickets -Parts Accounting -Invoice Approval -Overrides 63 ROI Indicator #7 Lost Sales What is a Lost Sale? The Lost Sale Rule (Sell it, Order it or Post it!) Guide: 2-3 PN/Counter Person/Day 64 32

ROI Indicator #8 Total Non-Stock PN (%) Guide: 65%+ 65 ROI Indicator #9 NS/Special Order Parts On-Hand ($) - Special Order Controls - Return Policies - Ordering Habits Guide: < 5% 66 33

ROI Indicator #10 Off-The-Shelf Fill Rate ($/PN/PCS) What % of customer demand was filled from Off-The-Shelf from your own stock? sales (customer & emergency receipts) (Sales + lost sales) (Code Orders Properly!) Guide: > 85% 67 ROI Indicator #11 Parts No-Sale > 12 Months (%$) Absolute Obsolescence! Guide: < 5% - System Set-ups - Special Order Controls - Ordering Habits What can you do with it??? 68 34

Visible Holding Expenses Interest on capital investment Space expense Inventory control system expense Physical inventory costs (annual/perpetual) Insurance Personnel Taxes on inventory worth Utilities 69 Invisible Holding Expenses Loss of Gross (low true turns) Loss of Obsolescence Reserve Loss of Order Discount Increased Costs In Obtaining Parts 70 35

ROI Indicator #12 Parts No-Sale 7-12 Months (%$) The Pipeline! - 2 types of parts here: 1) Seasonal or New Model Parts 2) Obsolete Parts Guide: < 8-15% 71 Ideal Aging Analysis 0 to 3 4 to 6 7 to 9 10 to 12 12 + 50-60% 20-30% 8-15% < 5% 72 36

ROI Indicator #13 Productivity (COS) Guide: $28K-$32K (Based on 4+ employees) Note: Personnel Expense Guide: 40-45% (G.P.) 73 ROI Indicator #14 ROI (Return On Investment) (Net Profit X 12)/Inventory Value Guide: 75-100% Note: Net Profit Guide: 8-15% (G.P.) 74 37

ROI Indicator #15 Stock Order for Stock ($) What portion of parts purchases were made the most economical way..on a stock order? Guide: 80%+ Total Receipts (Cust. & Emrg. Receipts) Total Receipts 75 ROI Indicator #16 Stock Order for Stock (Pieces) An Excellent Fill Rate Indicator! Guide: 90%+ Total Receipts (Cust. & Emerg. Receipts) Total Receipts 76 38

ROI Indicator #17 True Turn Indicates Quality of YOUR Inventory! Gross Turn X Stock Order Performance Note: Gross Turn = (Avg. COS X 12)/Inventory Value Guide: 6-9 77 ROI Key-6 Indicators Frozen Capital Guide: < 20% of investment Use of Lost Sale Posting Minimum 2 per person per day NS/Special Order Parts OH Guide < 5% of investment 78 39

ROI Key-6 Indicators Off-The-Shelf Fill Rate Guide: 85%+ (Pieces) Stock Order for Stock (Pieces) Guide: 90%+ ROI (Return On Investment) 75-100% of inventory investment 79 Month-End Manager Meeting Parts Manager Summary Reconciliation Review of Performance Trend Analysis 80 40

Managing the Parts Manager Inspect What You Expect! 81 THE PLAN: FOR YOUR PARTS MANAGER TO USE EFFECTIVE OPERATIONAL MANAGEMENT PROCESSES AND PROCEDURES 82 41

Focus on the Basics FIRST! The 4 Corner Stones : - System Set-ups - Perpetual Inventory - Posting Lost Sales - Effective Spec. Order Process 83 If you do, YOU will have An efficient profitable Parts Department with a high fill rate which makes. An Efficient Service Department that satisfies Customers and makes a profit.. And satisfies service customers who are more likely to buy vehicles from you. 84 42

Questions??????? 85 MANAGING PARTS PROFIT FOR EXECUTIVE MANAGEMENT (The keys to Managing the Parts Manager) Richard Owen Fixed Operations Specialist ROwenROI@aol.com 404-791-6365 THANK YOU FOR ATTENDING 43

Special Order Process The goal of this special order process is to: - Maximize the sales and installation rate of special order parts - Maximize parts gross profits - Minimize the build-up of obsolescence - Maximize CSI - Minimize freight expenses The #1 rule is that the service advisor MUST set an appointment date for the installation of the special order part prior to the parts being ordered. The appointment date will be written on the special order form (4 parts). Parts personnel will order the parts in the most advantageous method possible in order to satisfy the appointment date. In most cases the appointment date should be made 7-14 days in the future in an effort to maximize stock order utilization. Service personnel need to become familiar with ordering cut-off dates and times in order to maximize efficiency. The service manager MUST approve ALL special orders that do NOT have a pre-set appointment date. Any part being ordered overnight must have the approval of the service manager. In many cases rental car costs are associated with these repairs. The service manager must have the opportunity to minimize rental and freight costs in these circumstances. Customer Notification Process: 1) The advisor will pre-set the appointment date with the customer for the installation of all special order parts. The appointment date will be written on the special order form. Advisors will be given a copy to be filed by date (day) in a 31 day expandable folder. This copy is also their notification that the special order part has been ordered. 2) Parts personnel will give the service advisor another copy of the special order form when the part arrives at the dealership. This copy is to be stapled to the original and again filed back in the 31 day expandable folder. 3) Service advisors will call customers two days prior to appointment date to remind customer of appointment. This means that service advisors should be calling their customers daily. 4) If the pre-set appointment date has been missed, the service advisor will call to re-schedule. All communication attempts must be documented. Parts personnel must be informed of the re-scheduled appointment date at this time. An Urgent Notification letter should be sent to the customer after the first appointment has been missed. The parts manager must maintain a log of customers that Urgent Notification letters have been sent to. 5) Special order parts must be aged weekly (every Monday) and this list of missed appointment, special order parts, will be given to the service manager for immediate follow-up. 6) All aged/un-installed special order parts will be returned back to the manufacturer within the timeframe allowed under the manufacturer s return program guidelines. THIS PROCESS WILL HELP TO MAXIMIZE THE SALES AND INSTALLATION RATE OF ALL SPECIAL ORDER PARTS. ADDITIONALLY, IT WILL ASSIST IN MINIMIZING THE PURGING OF THESE PARTS INTO INVENTORY, THUS REDUCING THE FUTURE BUILD-UP OF OBSOLESCENCE.