The Season for Parts Metrics
By Marilou C. Vroman, CPA, CFE
As we approach the year end, many dealership’s parts departments are getting more attention than normal. Parts physical inventory counts are often conducted at year end, yielding a closer look at the overall health of the department and its inventory. We find the parts physical is similar to an annual checkup at the doctor. The variance is discussed, obsolescence reserved and then we move forward. But as with our own physical health, the parts department’s performance deserves ongoing evaluation beyond gross profit percentage per the financial statement and evaluating obsolescence; many other key metrics should be monitored throughout the year for a stronger performance outcome.
We often get asked by Controllers and GMs about key performance indicators (“KPIs”) to consider for each department and now may be a good time to build some key parts metrics into your monthly reporting to keep an additional eye on this vital department’s health. Typical DMS’ will provide your parts manager with reports reflecting these indicators. The best parts managers will know what to do to keep these metrics within a healthy range. As with any key performance indicator, it is important to know the fundamentals, and what actions your parts manager can or will take to improve the end result. Here are a few basic parts KPIs and what they represent:
Days Supply – In simplest terms, evaluates how many days your inventory will last if no additional parts purchases are made. Too many days supply could lead to obsolescence and frozen capital. Too little days supply could lead to customer satisfaction issues and lost revenues.
o Parts Inventory Balance / Monthly Parts Cost of Sale x 30 = Days Supply
o Target: 45 Days
Inventory Turns – Taking days supply to a different perspective, inventory turns look at how many times per year the inventory is cycled. Higher days’ supply leads to lower inventory turns. One of my favorite inventory analogies is “Inventory is like produce, if it doesn’t turn frequently enough, it will turn brown.”
o 365 Days Per Year / Days Supply = Inventory Turns
o Target: 8 Turns
Level of Service – Level of service indicates how well the inventory is managed relative to total demand. A key component of this calculation is Lost Sales. Lost sales should be tracked in the DMS by parts personnel when a part was requested but it was not in stock and the order was not able to be filled. The Level of Service is the percentage of total demand that was in stock when it was sold, calculated as follows:
o Monthly Parts Cost of Sale + Parts Cost of Lost Sales = Total Sales Demand
o(Monthly Parts Cost of Sale – Monthly Emergency Purchases) / Total Sales Demand = Level of Service
o Target: 95%
Parts Fill Rate – The basic fill rate calculation shows the average percentage of parts dollars acquired through a stock order relative to the parts sold at cost. Purchases via stock order will typically yield more profit margin and incur less expense than emergency purchases.
o Monthly Stock Order / Monthly Cost of Parts Sold = Fill Rate
o Target: 85%
Parts Frozen Capital – Frozen capital indicates how much cash is invested in assets that are not producing income in an ordinary business cycle. A typical dealership’s parts inventory can have hundreds of thousands of dollars tied up at any given time yielding little to no return. With a target of 45 days supply, the excess investment can be calculated as follows:
o Monthly Parts Cost of Sales x 1.5 = Target Inventory Amount
o Parts Inventory Balance – Target = Frozen Capital
Naturally, there are multiple factors to consider when evaluating these metrics and there needs to be balance. For example, there may be supply chain issues, parts on intergalactic backorder, working capital constraints or the type of dealership you operate – exotics will inherently yield different metrics than high volume domestics. Your parts manager should be able to explain the nuance of your store’s metrics as compared to industry averages. The above targets are NADA guidelines suggested as a baseline.
Understanding the underlying drivers of these metrics is a good exercise to see how well your parts manager is maximizing the return on your inventory investment. Your parts manager is already getting a lot of attention at year end. Why not keep the parts theme going strong and build these KPIs into your monthly operational discussions in the year to come.