Parts Habits: Demand Inventory
By Bennett Whitnell
Last week we talked about inventory integrity: the importance of making sure the parts in your system are in your inventory and where you think they are. Finding them on the shelf is only half the battle - you need to get them off the shelf and turn them back into money. This is a task that is easier said than done. With that complexity in mind we’re going to tackle that idea in two parts. Understanding demand (or demand integrity) and pricing to meet that demand.
So what do we mean when we say “demand integrity?” KEA Advisors defines demand integrity as follows:
- Understanding what part you will need
- Understanding where you will need it
- Understanding how many you will need
- Understanding when you’ll need it
Why is this so important to you as a dealer? There are three big areas where misunderstanding your demand will affect your ability to achieve total dealership absorption. First, your retail parts capacity is no longer only judged against other dealers. Increasingly you’re getting measured against players like Amazon, who are very good at getting customers the part they need in a rapid fashion. Customers aren’t used to being told “you’ll have to wait,” and that expectation increasingly bleeds into their professional lives as well. Second, not having the parts you need to support your service department is going to create a negative experience for service customers and hold up the most profitable dollars available to your dealership. Finally, when you buy inventory that you keep on the shelf but DON’T need, you’re impacting your cash flow and return on inventory investment.
So how do we advise you to keep an eye on your demand integrity? Here are two big numbers that should be a part of your measurement cadence for the parts department
1.
First Time Fill Rate (measured daily or weekly)
This is a measure for how often your parts employees are able to walk back into your warehouse and pull a part off the shelf for a customer. First time fill rate is a leading indicator for customer satisfaction at the retail counter and throughput for the service department.
First Time Fill Rate Equation:
- Pieces sold minus special order pieces equals estimated pieces sold from inventory
- Pieces sold plus lost sale transactions equals estimated inventory demand
- Estimated pieces sold from inventory divided by estimated inventory demand equals estimated first time fill rate from inventory
2.
True Inventory Turns (measured monthly):
This is the measure for how much of the parts you’re ordering for stock are actually leaving your shelf and not coming in on emergency or customer pay tickets. If you’re consistently placing special and emergency orders for customers, there’s no need to tie up capital by keeping parts on the shelf that no one is going to buy.
True Turn equation:
- Cost of sales minus special orders cost of sales equals
- Estimated cost of sales from inventory divided by number of months reporting times 12 months equals annualized estimated cost of sales from inventory
- Annualized estimated cost of sales from inventory divided by physical inventory value equals True Turns
Both of these measurements can take some work to get properly set up in your business system, and can steer your dealership in the wrong direction if your inputs are incorrect and/or inaccurate. If you’d like some help in understanding the demand integrity of your parts department or an assessment of your business system to make sure your measurements are reporting correctly KEA Advisors can help.
Join Keith Ely for a webinar on Absorption Habits in the Parts Department on February 28 at 12:00pm Central.
