Inspecting your parts department will tell you where your inventory — and your money — is going. The magazine’s resident accounting expert shows you what to look for.
David Keller is a partner with the accounting firm of CliftonLarsonAllen, a Top 10 nationwide accounting firm with extensive experience in serving new- and used-vehicle retailers, heavy truck and utility trailer outlets, and BHPH dealerships.
4 min to read
When was the last time you walked through your parts department? Did you just cut through, or did you walk every aisle and look at the shelves and in the bins? If not, you might be surprised to learn what you actually own and where your cash is tied up. Here are six more reasons to take a closer look:
1. Organization Organization is central to a well-run parts department. Your employees should be able to find parts quickly. Every minute they make a technician wait costs you gross profit. If parts bins are not organized and labeled, how are any new hires or temporary employees ever going to find the parts to sell them?
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2. Cleanliness Dirt and dust are necessary evils in the parts department. Everything is stored in a large, open area adjacent to the service department, and people and parts are constantly moving in and out. But that doesn’t mean you shouldn’t try to clean up and dust on a regular basis.
3. Special Parts Special-order parts not picked up by a customer or installed on his or her car will cost you a lot of money over time. Special-order parts can burn through your return allowance very quickly, which could spell problems for those parts that are becoming obsolete.
Special parts should be stocked separately so they can easily be tracked. Doing this also helps you quickly calculate the total dollars you have sitting on the shelves. You should also try to obtain prepayment on special-order parts as often as possible to try to minimize the parts return allowance they use up.
4. Used Parts Where are all those used parts your techs have removed over the years? Did you personally keep track of the $2,000 worth of tires and wheels you took off that three-quarter-ton pickup? I don’t know many dealers who can tell me the value of their used-parts inventory. In fact, most dealers don’t know whether a removed part is still in stock, has been installed on another used vehicle or was sold to a customer.
Used parts also should be tracked on the parts counter pad and have a price attached to them. You should be able to run a report of these parts to physically check if they are still in stock. Failure to track these parts means they can easily disappear out the back door and no one will ever know.
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5. Idle Hands How busy are your parts counter employees? You don’t have to walk through the department to find out. Just look at your financial statement, take your total parts sales and divide that by the number of employees you have in the department. I have seen average sales of $30,000 to $75,000 per employee, which is quite a range. Some stores find themselves in the predicament where sales aren’t enough to add another person, but they’re too much for the amount of people they employ.
6. Wasted Space Daily parts orders and factory stocking guides have reduced the average parts inventory. With that in mind, do you really need all the room you used to need back there? Can it be put to better use? Could it become a special tool room or a work area for the technicians that would free up a bay in your service department? Could you use the room to expand your customer waiting area or service write-up area?
You also should run your parts management report on a regular basis. This report will show you how your parts inventory is aging, how many dollars of adjustments have been made to the inventory value, how much you have on your parts pad vs. your general ledger, what your projected obsolescence is, negative parts and dollars on hand, your parts turn and how many dollars are more than 12 months old. Map the information out on a month-by-month basis to find out if you are going in the right direction.
Lastly, check your parts grosses on your financial statements. Are your internal parts grossing at least what your customer-pay parts sales are grossing? If not, why not? You are giving up gross profit which can help increase your parts and service absorption of fixed expenses. Have your parts manager increase the parts matrix to a higher markup until you achieve at least the customer-pay gross profit percentage. This should not negatively affect your average used-vehicle gross profit. If anything, it should do the opposite.
Take a chance and spend some time with your parts department. Maybe you will find out why they never seem to have the right parts in stock.
