The Sum of All Parts

Parts and accessories are often considered to be a power equipment dealer's best profit opportunity, at least in terms of gross margin. As lucrative as your parts operation can be, however, it can also become a hindrance.

Disorganization, excess inventory and dead stock can add cost, reduce profits and impede growth. Even worse, it can drain resources from other areas of the dealership and impede their growth, as well. In other words, what can serve as a cash cow can soon become an albatross, and we're not talking about the web-footed sea bird.

If you want to start making more money in parts, take a look at these seven areas that can directly improve sales, increase margins and reduce costs.

1. Get a handle on inventory
In an effort to determine appropriate stocking levels, most mid-size and larger dealers make good use of their business management systems to track sales histories part by part. If you're a smaller dealer who doesn't have a computerized business management system, you can still get a better handle on your inventory by working with your distributors. "Your reps should be able to reference purchase histories to help determine future inventory needs," says Scott Harris of Oregon Cutting Systems.

Consultant Jim Yount says it's important to look at your inventory needs on a seasonal basis. If you don't, you could end the year with too much inventory on the shelves. In other words, you probably want to bolster inventory levels during peak season, and then pull back a bit when your off-season starts to set in. Your business management system and/or distributors should be able to assist you here, too.

Yount says you never want to allow parts inventory to grow faster than parts sales. If it does, the inevitable result is a lower gross margin from the parts department. The focus should be on inventory turns.

"I'd say six turns a year is a good goal," Harris adds. One way to determine how many times your parts inventory turned over is to take your total parts purchases for the year and divide it by your average inventory, which is your start-of-year inventory plus your end-of-year inventory divided by two. Some analysts say you can use parts sales instead of parts purchases, and may even go as far as saying you can use end-of-year inventory rather than your average inventory.

Regardless of which formula you use, lower turnover rates may point to overstocking, obsolescence and poor marketing efforts. However, as important as turning inventory is, Yount offers a word of caution: "Trying too hard to increase turns can lead to lost sales due to a lower fill rate. If you don't have a part in stock, the customer may not be willing to wait, resulting in lost sales."

"You don't want to overstock, but you also don't want to use your distributor as an overnight warehouse for inventory you should be stocking," says Scott Summers, vice president of Oregon-based distributor Power Equipment Systems. "Many dealers think they're saving tons of money by not stocking a lot of parts. In reality, when you figure the cost of acquiring the part and the time lost, you may not be saving as much as you think."

This is especially true when the part is needed to complete a repair. Summers says a dealer loses, on average, a half hour of labor when he has to halt a repair, order a part, move the machine aside, and then get the machine back out when the part arrives. "This is a big reason why many of our smaller dealers have shop efficiency ratings below 30%," Summers says.

Keeping a larger parts inventory to ensure a higher fill rate does cost more money to maintain, but Yount says you may be able to increase prices accordingly to make up for it. "Many customers are willing to pay a little bit more if they can get the part right then," he adds.