Whenever customers want parts that you don't have in stock, special orders become a fact of life. Unsold special orders become a problem when they accrue faster than the dealership's ability to get rid of them.
When left unsold, they contribute directly to inventory obsolescence. When managing special orders, the trick is not to maximize their profit but to minimize their potential for profit draining.
When viewing your department's monthly profit and loss statement, the unsold special order parts may show no real bearing on the parts department's performance or its contribution to the dealership.
Let's say you meet or exceed established objectives, have less than 5% of the total dollar investment on the shelf in excess of 12 months no sale (a good rule of thumb is no more than 10%), take advantage of all return programs offered by manufacturers, and your return reserves always equal or exceed your actual returns. But you still have unsold special order parts. Are they a problem? They are annoying of course but, in this context, not a problem.
But what if there is a high level of unsold special orders? That hurts every facet of parts department performance.
Here's what happens:
- The aging process of a special order part occurs much faster than a stocked part, because parts ordered for specific customers have little to no chance of selling to customers other than the original ones who requested the part.
- Obsolescence is almost a guaranteed result of a special order part that has remained unsold or unclaimed beyond 45 days.
- The risk of obsolescence grows proportionate to the amount of time a part is held waiting for the customer to purchase it.
A part placed in stock after the third demand has about a 93%-95% chance of selling at a profit. But a special order part has no prior sales history. For every month it sits in inventory unsold holding expenses further erodes its profit potential.
One way to make yourself and others keenly aware of obsolescence as a result of unsold special order parts is to calculate their contribution to obsolescence.
Because there are no industry averages for what is acceptable the parts department should measure its unsold special orders that are 45 days old and older to establish its own baseline.
In the following sample, one month is used to illustrate the calculation. You may want to use the average of three-four months' data. Calculate as follows:
Divide the $1,900 by the total inventory value, then times that by 100 to calculate the percentage. Let's say in this case the total inventory value is $105,000. (1,900 ~ 105,000 = .018 × 100 = 1.8% per month) So, by this example, unsold special orders represent an obsolescence value of 1.8% per month and 21.6% per year.
Establishing this baseline will help measure the effectiveness of any programs created to deal with unsold special orders.
Also, develop a policy with procedures for dealing with special parts.
- Create a documented process for processing special orders, contacting special order customers, and dealing with unsold special orders.
- Use all methods available (cards, telephone, e-mail) and make at least three attempts to contact or notify the customer about their special order.
- Consider deposits or payment in full for certain special order parts.
- Consider shipping the order to the customer freight prepaid.
- Consider delivering the order to local customers.
- Make employees who order parts for the customer responsible for complete follow-up of the order.
- Develop a cost-sharing policy with departments that have ordered parts on a customer's behalf.
- Make customers aware of return deadlines for unsold special order parts so they can be returned in accordance with manufacturer programs without penalty.
- Install a policy to review unsold special orders-minimum twice weekly-to avoid the threat of obsolescence.
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].