This is the age of information. Business is smarter and agiler than ever before thanks to insights and analytics that were not available in the not so distant past. When it comes to new and used vehicle sales, most dealers do a great job of implementing analytics to improve efficiency and sales. Now it’s time to devote that same attention to your parts department.
There are many ways to decipher and view analytics pertaining to your parts department. Your DMS may even be able to add key indicators to your daily dashboard. No matter how you do it, you need to become more familiar with the age and makeup of your parts inventory as well details about your parts sales. If you view your parts inventory in much the same way as your vehicle inventory, you will start to opportunities for improvement.
Here are some key indicators to keep a close eye on.
Gross Turnover is simply the Cost of Goods Sold divided by the average inventory value over a defined period of time. For example, if you sold $500,000 in parts and your average inventory value was $100,000 over the last 12 months, your Gross Turnover would be 5.
Gross Turnover can be used to interpret a number of things, but in a general sense, it can help you visualize how much sales revenue you can expect from inventory on hand. A low Gross Turnover can also indicate much bigger problems lying beneath the surface.
Stock Order Performance
This metric will tell you what percentage of your total sales came from inventory-on-hand vs. special order or emergency purchases. For example, if total sales were $500,000, but only $400,000 came from inventory-on-hand, then your Stock Order Performance would be 80%. Obviously, the higher this number, the better your inventory coverage, and the less money you lose to special orders and emergency purchases.
It is important to note that Gross Turnover is slightly skewed because it takes into account special orders and emergency purchases. True Turnover is a much better indicator of inventory efficiency because it only takes into account sales that were sold directly from inventory-on-hand and therefore can show you exactly how well your inventory is performing.
True Turnover is calculated by first calculating your Stock Order Performance and your Gross Turnover. Next, take your Gross Turnover and times it by your Stock Order Performance percentage. This will tell you exactly how many times your inventory turns over.
Fill Rate compares the sales that come from inventory-on-hand vs. all parts requests. For example, if you receive 100 requests for a part, but you were only able to fulfill the request from inventory-on-hand 80 times, then your Fill Rate is 80%. A low fill rate is an indicator that you need to stock more inventory.
The last metric we will look at is Parts Obsolescence. This is not a simple ratio like the other metrics we have looked at, but it can be extremely useful if you are looking to purify, or purge old inventory from your shelves and from your balance sheet.
The fastest way to identify obsolete parts in your inventory is to run a report that shows days-without-a-sale for each SKU in your inventory. Any inventory that has not had a sale in 360+ days is likely obsolete and should be liquidated and not reordered.
So, what does all of this mean for Parts Department profitability? First off, it doesn’t mean anything if inventory counts are not accurate, or if lost sales are not being recorded properly. However, if proper procedures are in place, this analytics can substantially impact your bottom line.
Work with your parts manager to ensure that the data is being collected properly and schedule time monthly to discuss these key performance indicators. These metrics are certainly open to interpretation, to determine what these numbers mean to your dealership, set goals for improvement, and consistently monitor results to reach your goals.