Inventory obsolescence is still one of the leading problems parts managers face. So what is a good strategy to follow to eliminate it?
One I recommend involves best practices for inventory management, estimating future obsolescence expectations and treating obsolescence like a tumor.
First, be sure that your management practices are not contributing to the problem. By carrying inventory, you incur the inherent risk of accumulating naturally occurring obsolescence. Ideally, this is dealt with by utilizing the manufacturer return programs.
Circumstances beyond your control such as buyouts and similar situations that contribute to an obsolescence problem notwithstanding, this mechanism — the ability to deal with normally occurring obsolescence — breaks down when:
- Unsold special order parts are allowed to accumulate
- Dealer Management System (DMS) guides and setups for phase-in/phase-out and days' supply are improperly set
- The part manager makes poor buying decisions
All existing adverse management practices, DMS settings and the like must be remedied. Here are suggestions for doing that:
- Conduct a complete review of your special-order processes. Is the parts department getting stuck with unsold special order parts? If so, examine your processes and drill down to identify the problem areas. Then correct them.
- Examine your DMS guides and setups. Not phasing in the right part at the right time will cost sales and harm customer service. Not phasing out the part at the right time will add to obsolescence. Improperly set days' supply settings will result in inventory levels that are too low or too high.
- Review your buying and purchasing habits. Eliminate speculative buying to the greatest degree. Maintain a purchase policy that incorporates a properly calibrated DMS as a tool to help logically guide your purchase decisions.
Assuming your management affairs are in order and not contributing to the problem, next determine your future obsolescence potential and ability to deal with it. Use a budgeting approach I outline in my June, 2005 column headlined, "Play Odds in Ordering." (To see it online, go to the Ward's Dealer Business section of WardsAuto.com.)
Finally, what's the best way to deal with obsolescence that continually exceeds your return dollars?
The method I recommend is akin to a medical approach of shrinking tumors.
Consider true obsolescence (stocked parts that haven't been sold in 12 months or more) as a tumor. In the medical world, an option for dealing with tumors is to choke off the blood supply. If blood cannot supply the tumor it shrinks or eventually dies.
This is the same principal applied to an out-of-control obsolescence problem. Parts in the seven to 12 months-no-sale category are the blood supply. These are parts that are eventually heading for what is considered true obsolescence, or the tumor.
Common practice among parts managers is to throw return dollars and associated remedies at the true obsolescence to eliminate it as quickly as possible.
While this reduces the dollar amount in that category, it does little to stem the flow of aging parts that keep adding to the problem.
Instead try allocating 75%-85% of the return dollars toward the parts in the 7- to 12-months no-sale category and the remainder to the true obsolescence or the parts in the 12 months plus no-sale category.
Like cutting off the blood supply to a tumor, this will drastically reduce the flow of parts heading for true obsolescence.
This is a long-term method that requires persistence and patience. I've used it myself as a parts manager. It works, once all departmental practices and procedures that contribute to the problem are eliminated or corrected.
Gary Naples is a parts consultant to dealers and manufacturers. He's authored two books on parts management. He's at 570-824-1528/[email protected].