Let's face it, there are lots of ways you can mess up your parts business. One is by establishing a days' supply for inventory based strictly on an industry guide or some other arbitrary level.
I've spoken to many parts managers who operate fine with low days' supply. Yet, they complain about pressure from the auto maker to get their supply of parts up to the manufacturer's guidelines.
I've also had a parts manager tell me that he had enormous pressure put on him by his dealer principal to lower the days' supply. It seems the dealer's motivation to decrease the parts days' supply was driven by his positioning relative to other members of his benchmarking 20 Group. The dealer wanted to be No.1, at the top of the 20 Group ranking with the lowest days' supply.
The best approach to establishing the parts inventory days' supply is to align it, as appropriately as you can, to customer demands and your marketplace.
If you cut your parts inventory investment simply to cut expenditures, you could be eliminating selling parts that earn profits. You could also be increasing your acquisition costs by having to place more emergency purchases. That lowers profits on the sale of those parts, not to mention the customer dissatisfaction stemming from too long of a wait for a repair part.
Yet, if you do the opposite and increase your days' supply willy-nilly, you can be tying up working capital in unproductive inventory and excess stock, possibly leading to more obsolescence.
The problem with guidelines, like parts inventory days' supply, is that some folks see them as hard and fast rules. But guidelines are just that: guidelines.
During the training and consulting we've provided to thousands of people in the auto industry, we emphasize that each guideline or operating indicator is just a piece of the puzzle. You can't take a cookie cutter approach and apply it rigidly to all dealerships. Every business operates different. This applies squarely to guides for parts inventory days' supply. Guidelines or performance indicators help you determine if you're operating below, at, or above the norm. So, when I speak to dealership management about how much days' supply is sufficient I pose these questions:
- Is return on inventory on target or better?
- Is inventory obsolescence at or below guidelines?
- Are inventory levels matched to customer demand (no excess inventory)?
- Are gross and true inventory turns at or above guides?
- Are customer satisfaction service scores at or above guidelines?
- Are emergency purchases at an acceptable level?
- Is fill rate to the service department at or above target?
If the answer to all seven of these questions is yes, then whatever your days' supply is, whether 30 days or 120 days, that's where you want to be.
Keep in mind, there is always room for improvement, and improvement should be continually sought. However, it makes little business sense to arbitrarily increase or decrease days' supply levels just to conform to a factory guide or because an auto maker is prodding your dealership to stock more parts.
A final recommendation on analyzing department performance guides such as days' supply. Don't panic if you're below or become complacent if you are at or above. Use out-of-guide situations as red flags to assess performance. Look at what information makes up the formula, and follow those paths. Then look at the big picture. If all is in line, being under or over a guide is no big deal.
And make sure the information you are using to analyze your performance is accurate and correct. As George Fuechsel, an IBM technician and instructor, said in the early days of computers, “Garbage in, garbage out.”
Gary Naples is a parts industry consultant to dealers and manufacturers. He's authored two books on parts management. He can be reached at: 570-824-1528 or [email protected].