Fact: The typical parts department has more investment and returns less profit than any other department. Every other department can be financed, leased, depreciated, or leveraged. Automotive parts require cash—paid in full, every month. Many parts departments are sinkholes, sucking resources from the dealer, tying up capital in un-saleable inventory, maintenance, and personnel. This needs to change. Today’s parts department must be an asset to the dealership. Analyze your parts department’s profitability. Look at the ratio of net profit to inventory. A well run parts department can generate annual net profit ratios of 50% or more, based on your inventory investment. Then show the dealer principle your inventory is an investment, better than the bank when it comes to the rate of return. This should be your goal. Every inventory dollar working to produce more profit and every employee’s time managed to maximize their productivity.
The first step is to analyze your inventory. You can easily check your month-end management report for stocking part numbers. I have found that an inventory of 1500 part numbers is all you need to cover your daily sales. This is based on a requirement that stocking parts should sell at least three times in a year, or for new models, two times, in six months. You can rationalize stocking dollars this way: After a part has sold three times, you have made enough profit to purchase the fourth part, effectively investing profit, not capital. A twenty-one day supply is more than adequate for all normal needs. All other parts should only be ordered when needed and when the sale is guaranteed. No money should be tied up in speculation. All excess inventory; all items unsold for twelve months or more, need to be converted to cash. Return them to the manufacturer as obsolescence if possible, or donate them to the nearest tech school for a tax credit. All they do now is collect dust and absorb valuable resources.
With today’s freight system, you can balance inventory vs. freight. A small dealer will have smaller inventory with higher freight charges; a large dealer will have more inventory, but smaller freight bills. Never absorb all freight charges, do the paperwork necessary to recover charges from the manufacturer and always charge your special order customers for their freight. A flat percentage with a minimum starting charge will keep your costs at a minimum. Example, 10% with a $2.00 minimum. Remember, that is ten percent of your selling price, not your cost. This should allow you to make a profit on your freight. Find out what your manufacturer charges are and post your freight policy where your customers can see it.
These simple guidelines will start you on your way to a department that is valuable to the dealer, and a steady source of needed revenue. In part two I will discuss the physical layout of your parts department, how to make it more efficient and profitable.
Larry Williams is a former parts manager with national awards and over 40 years of experience in creating profitable departments. He can be reached at email@example.com.
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