2.Get a handle on margins
To maximize total parts department profitability, you should be examining the profitability of each part you sell anyway. Your business management system should be able to report parts sales by line item. For every part you stock, you need to know the price you paid for it, the price you sell it for, the gross profit dollars and the gross profit percent. For example, if you paid $5 for a part and sold it for $10, your gross profit dollars is $5 and the gross profit percentage is 50%.
Yount says this information is vital because you need to sell your parts not only at a fair market value, but also at a value that allows you to cover your overhead costs and generate a profit. "A 30% average is not sufficient with today's cost of doing business," Yount points out. "If parts account for 20-25% of total dealership revenue, we seldom see profitability when the gross margin on parts is less than 35%. We believe it should be at least 40%, and have actually seen dealers who make more than 50%." (See "Playing within the margins" for a look at what dealers say they are earning on parts.)
3. Manage Vendors
As pointed out earlier, your vendors can help you tailor your inventory levels by referencing your past purchases. They can also help you identify fast-moving parts with their "Top 50" list, for example. These "wearable" items such as belts and spindles are SKUs you always want to have in stock.
Summers says you have to "read the fine print" so you can take full advantage of a supplier's programs. For instance, booking with dating and terms helps you bring in the fast-moving inventory you need to maximize retail sales and keep the service department trucking along.
Another way some suppliers can help you is with a parts return (obsolescence) policy. Yount and Summers concur that you should take advantage of these programs as often as they will allow.
"Every time a part becomes obsolete you lose money," Yount explains. "We have seen obsolete parts total tens of thousands of dollars. Don't let it happen to you. Do not allow your inventory to grow because you didn't take the time to return slow-moving parts."
"Try to keep the fast-movers in stock at all times, and then rotate the rest of your inventory on an obsolescence program every year," Summers advises. "Return your obsolete parts so you can order more fast-movers. There will still be those instances throughout the year where you have to order an oddball part. Do so as a special order and pass the freight along to the customer."
If possible, it's a good idea to tie a special-order part into a larger, perhaps weekly order so you can minimize freight charges. Understanding your vendors' freight programs is another key to making more money in parts. Harris says, "Try to balance your desire to qualify for prepaid freight with your desire for inventory turns."
Summers, who used to be a dealer before joining Power Equipment Systems, suggests ordering twice a week; maybe on a Monday/Thursday schedule. That way you're hopefully placing large enough orders to qualify for prepaid freight, but you're not spending too much time placing and receiving orders.
Prepaid freight falls under the umbrella of a broader concept known as "buying power." According to Mitzi Hedinger, marketing manager for Stens, some dealers cut themselves short by always looking for "the cheapest vendor" on a given part. At the end of the day, though, the dealer may not be saving as much as he thinks because he's limiting his buying power. He can't take advantage of a given vendor's volume discounts because he's spreading his purchases across several vendors.
"By having a single partner in the replacement parts business, a dealer can consolidate his buying power, often get the same or better warranty, and gain access to product lines he otherwise may not have," Hedinger says.
4. Maximize space
The first three steps have dealt with reducing inventory cost and improving gross margin. Step four deals with creating a more efficient, productive environment that will help keep the parts department's net profitability from tanking.
"Look around your parts area, along with your shop, showroom, offices … everywhere," Hedinger advises. "It's amazing how much space can be found once all the waste and clutter is eliminated. We see a lot of dealers who are holding onto old equipment, obsolete parts and other odds and ends that are just sitting around collecting dust. Cleaning those things up will create more room for storage."