Parts managers must constantly deal with unsold special order parts. This problem has been around since the very first customer said, “Can you order that part for me?” and then never returned to pick it up.
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 by whatever means-selling them or returning them to the manufacturer.
When left unsold, they contribute directly to inventory obsolescence. The key to managing special orders is setting up a process to handle them, and constantly monitoring the effectiveness of the process.
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.
This being the case, I'm not suggesting that a lax attitude toward this issue ever be assumed. I'm merely saying that before you admit a problem exists, make a fair assessment to determine the degree, if any. This will help you to better determine a remedy or refine your processes for dealing with special order parts.
This is why I ask how special order parts affect overall performance of the department's business plan. The thinking here is why spend a lot of time on something that isn't as debilitating to your business as you may think it is.
Look at it this way. Let's say you meet or exceed your established objectives, you 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%), you take advantage of all possible 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 certainly, in this context, not a problem.
Surely your efforts would be better focused elsewhere. Besides, if you react unreasonably, harshly or undiplomatically, the attempt may actually bring about another problem that didn't exist before. Above all you would not want to create any barriers between the parts department and the other departments or build barriers higher than the ones already there.
If unsold special orders are not a problem, then why make them 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.
Every time a special order is placed for a customer the investment in stocked inventory has no turnover.
The key point to managing special orders is not to maximize their profit, but rather to minimize their potential as a source of profit-draining obsolescence.
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. Considering that about half of the special order parts will never be picked up, obsolescence can accrue rapidly if they are not dealt with continuously and rationally.
One way to make yourself and others keenly aware of obsolescence as a result of unsold special order parts is to actually calculate their contribution to obsolescence.
Unfortunately, due to the uniqueness of dealerships, there are no industry averages for what is acceptable. Therefore, the parts department should measure its unsold special orders that are 45 days old and older to establish its own baseline. Then, programs can be developed to deal with them. 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 figure out 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.
Whether special orders are a problem, it's a good idea for the parts department to establish this baseline, because it can be used to measure the effectiveness of any programs created to deal with unsold special orders. Conversely, a baseline can alert you to any upward trends in unsold special orders.
Whether you have a problem with unsold special orders, a policy with procedures for dealing with them is a must. Here are some suggestions for that:
Have a documented process in place, that everyone is aware of, for processing special orders, contacting special order customers, and dealing with unsold special orders.
Make sure every department, senior management, and all parts personnel are made aware of the seriousness of holding 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 individual employees who order parts for the customer responsible for complete follow-up of the order.
Develop an agreed upon cost-sharing policy with departments that have ordered parts on a customer's behalf.
Whenever possible, make customers aware of return deadlines for unsold special order parts so they can be routinely returned in accordance with manufacturer programs or returned without penalty.
Make it a policy to review unsold special orders-minimum twice weekly-to avoid the threat of obsolescence.
Gary Naples provides parts consulting and training to dealers and manufacturers. Based in Wilkes-Barre, PA, he's written two books on parts management. He's at 570-824-1528.