Value of Effective Parts Management

By Walter J. McDonald

The wise and skillful Parts Manager learns how to satisfy, simultaneously, the conflicting interests of his two primary constituents: dealer ownership and dealer customers.

Customers demand high off-shelf fill rates which tend to increase inventory investment. Dealer Ownership demands high asset productivity. The challenge is to do both extremely well.

The figure below illustrates how a $100.00 inventory investment is impacted by relatively small changes in parts gross profit margin with small changes in inventory turns. Improvements in asset productivity can be achieved through two steps:

  1. Careful attention to optimizing inventory turns by diligently controlling inventory stock levels and preventing excessive obsolescence and excess stock.
  2. Pricing optimization through the elimination of unnecessary discounts. Parts purchasing and replenishment strategy should focus on obtaining quality products at the least cost including inbound freight discounts.

Impact on $100.00 Parts Investment at Various Gross Profit Margins and Inventory Turns

A dealer with $700,000.00 average inventory and selling at 27.5% Gross Profit Margin and 2.5 turns over the past year generates $481,250 in Gross Profit. If this same dealer improves parts performance from 27.5% Gross Profit Margin to 30% and increases turns from 2.5 to 5 the next year, he will generate $1,050,000.00 in Gross Profit, a $568,750.00 incremental increase from last year.