When reviewing the Dealership Diagnostics we performed on dealerships of all auto makes across the country, we noticed a common theme: issues in the parts department. The issues include excess supply, no annual adjustment and poor gross profits. It’s important for dealerships to understand and mitigate these potential pitfalls if they want to be more profitable.
Assuming the factory financials are accurate, it’s fairly easy to estimate the days’ supply in parts inventory. For example, assume there is $100,000 in parts inventory and the average monthly cost of parts sales is $50,000. This translates to a 60-day supply. The industry benchmark for supply is 45-60 days.
If you determine that you have excess parts inventory, ask yourself the following questions:
- Are we properly managing the manufacturer’s return policy?
- What is the nature of the excess parts?
- Are the parts obsolete?
- Do the parts include sheet metal or similar parts that cannot be returned?
- Did a breakdown in processes and/or controls cause the excess parts inventory?
- What’s the deposit/payment policy for ordering parts for customers?
How Dealerships Can Prepare for an Inventory Observation
Physical Inventory Adjustments
It’s important to keep an accurate inventory in your parts department. If too much time passes without a physical inventory, a myriad of problems can ensue and be exacerbated.
Best practices relating to parts inventory are as follows:
- Complete a perpetual (cycle) count of all the parts bins each quarter for three quarters.
- This can usually be performed by counting a small number of bins each week.
- Clerks, lube techs and other staff members outside the parts department can complete the counts.
- Complete a full physical of the parts inventory for the fourth quarter.
- This can be performed any time of the year.
- We recommend using an outside parts inventory company every two to three years at a minimum.
- There are a number of parts inventory companies, and their services range from counting to year-round parts consulting. Typically, you get what you pay for.
- One way to reduce the expense is to have the third party facilitate the count and use employees to complete it.
- If the outside inventory company you’re considering does not know your Dealer Management System (DMS), do not hire them.
- You should aim for an adjustment of 3% or less up or down.
- Large adjustments going up may be an indication that the parts manager is manipulating the cost. While a significant pickup of income from the adjustment used to be considered a good thing, this is no longer the case. Large positive adjustments are an easy way to hide theft.
- Large adjustments going down could be due to poor invoicing in the parts department, giving parts away or outright theft.
- Once again, ask about the process and/or control breakdown that resulted in a greater than benchmark adjustment.
“I once worked with a dealership that hadn’t conducted a parts inventory for over 30 years. That is by far the longest stretch I have encountered in my career. I am surprised by how many dealerships do not perform an annual physical. I often see two to three years between full physical counts.”
- Bob Holder, CPA, Eide Bailly’s Dealership Management Consultant
Poor Gross Profit Percentages
The benchmarks for parts gross profit is 30-35% for retail, warranty and internal, and 20% for wholesale.
Gross profits that are below these benchmarks should be analyzed at the individual sales category level. Consider the following questions to identify problem areas in your profit margins:
- In general
- Is the pricing from the factory being correctly updated in the DMS?
- How is freight being charged?
- Counter retail
- What is the policy for ordering parts from walk-up customers? Do we require payment in advance or a deposit?
- What is the refund policy?
- What is the payment policy?
- What is the return policy?
- What are the returns by customer?
- For example, if a wholesale customer is returning a significant number of parts and getting refunded, is it worth extending a discount to them?
- Where is the purchasing rebate from the factory posted?
- A dealership we worked with had such a large wholesale business that they added 5% to gross from the purchasing discounts.
- Is the pricing from the factory within market ranges?
- When was the last time an evaluation was performed to determine if an increase should be requested?
- Are the returns to the factory being processed correctly?
- How is the aging of warranty receivables?
- What is the internal rate?
- Is the pricing fair to the individual departments?
- The used vehicle department is likely one of — if not the — best customer the parts department has.
- Tires and other accessories
- This is typically not a large concern for the amount of volume; however, many dealerships have lost tires to theft.
Theft is an obvious concern when considering parts inventory. Parts are easy to conceal and can go unnoticed if missing. Here are some tips to mitigate the risk of theft:
- Limit parts department access to parts department employees only. Technicians should not be able to pull their own parts from the bins.
- Install cameras in the parts department.
- Perform perpetual counts internally and a full annual physical using a third party.
Eide Bailly can assist with implementing dealership parts inventory best practices, along with process improvements and internal control evaluations. We also have references to assist with parts inventory physical observations.
Wondering how your dealership stacks up in the marketplace? Eide Bailly’s team of dealership consulting professionals can provide a free diagnostic check on your financials.