Parts for Profit—Obsolescence
The hardest problem I ever solved with a dealer was defining our understanding of the word “obsolete.” I was the new parts manager and my definition consisted of stocking status, months with no sale, return allowance, and other inventory specific terms. This dealer’s viewpoint was simple…how long do I wait to get my money back?
We finally arrived at a mutual understanding, driven into my head, and I was given the task of eliminating all inventory that had not sold in the last six months. This figure is not in any inventory manual ever printed. I didn’t even know if it was possible. As it turned out, I surprised myself and succeeded. It took a year and a half, but using a combination of every tactic I’d ever known, my inventory was reduced to the bare minimum.
I do not recommend this to any large parts department, in any large city, with any competition whatsoever. This is an inventory philosophy that only works for small dealers in small towns, where efficiency and economy are the goals. I learned that small dealerships need to work with different guidelines, ones not covered by conventional theory. A small dealer needs a careful and quick return on their investment. Waiting a year to get their money back is bad business.
This “obsolescence policy” for this dealer resulted in sales of $70k per month, gross profits of $20k, from an inventory of less than $100k. These figures, of course, are nothing compared to sales in larger cities, but to a small dealership, just trying to stay open, they can have a large influence on the amount of working capital a small dealer needs.
I learned a surprising fact while involved in this project; half of the dealerships for this manufacturer made no obsolescence returns at all! Thousands of dollars, gathering dust, forever. I can only guess at the reasons, but the main one is probably lack of experience and training. Obsolescence returns are performed infrequently, and can be complex procedures. A manager who has never done a return can be put off just reading the procedure manual.
Dealers need to get involved. Check the monthly management report, talk to your parts manager and the manufacturer’s representative. Make sure schedules are set and deadlines met. Make sure your parts manager has the necessary training. It is a lot of work, but the result is a cleaner inventory and money in your pocket.
Larry Williams is a former parts manager and consultant with national awards and over 30 years of experience in creating profitable departments. He can be reached at firstname.lastname@example.org.