Check Your Parts Department's Vital Signs - Product Support
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Check Your Parts Department's Vital Signs

By Steve Uible

Article Date: 07-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Begin diagnosing the cause of substandard performance with three basic measurements.

When you go into a doctor's office, whether for a routine visit or because you are not feeling well, what are some of the first things the doctor wants to check out? Quite likely he will start with these three:
  • Blood Pressure (120/80)
  • Body Temperature (98.6 degrees)
  • Heart Rate (60-100 beats per minute)
Those three items are referred to as your vital signs. And these numbers are approximately what are considered normal for a healthy adult. Surely medicine is much more complicated than that but those three simple measurements give the doctor some indication of your health. He always does that before he would even consider more in-depth tests, right? The vital signs give your doctor a 30,000-foot overview of what is going on inside your complex body. That is the normal starting point at your visit.Based on what he finds with your vital signs he can make some decisions as to the next steps to take. Each of those three items can be indicators of a much more serious problem that will require deeper investigation. But at first glance the doctor can begin his analysis of your health and, based on these findings, your doctor can probably eliminate many possibilities.That is pretty neat stuff - to be able to quickly analyze a very complex situation. The human body is the most complex organism on earth and far more complicated than the world's largest computer. But here, with three simple little vital signs, a physician can start a very interesting analysis that provides a road map to an accurate diagnosis.It is my contention that we can do exactly the same thing with a dealership parts department. We can use our own set of vital signs to start an accurate analysis and diagnosis of the health of a parts department. In fact, as consultants, that is one of the skills we have polished through necessity. We have to very quickly and very accurately analyze a complex situation of the strengths and weaknesses of a parts department in a short period of time.Sometimes we go into a dealership's parts department that has a long history of poor performance, either financially or poor customer relations, and management has struggled not knowing how to determine the exact cause and, even more important, what to do about it. Many times we are so close to a situation or to the people involved that we can't see the forest through the trees. Other times we are dealing with a well-oiled machine that has a parts department achieving market dominance and producing excellent returns for its owner. In either case we have to start analyzing our patient.So what is the connection between our doctor's visit and our parts department and what are the vital signs of a dealership's parts operation? These three "vital signs" can provide the same kind of first-glance analysis that clue a physician in to your overall health.
  • Percent Fill
  • Inventory Turn
  • Net Operating Profit
These three items will give you an overview of the health of your parts department. They won't give you all the answers but they will definitely help you to start to ask the right questions. And just as the doctor can start his more thorough diagnosis, we can do the same with a parts department. There are many other valuable and necessary measurements, but these three will very quickly give you the parameters of the health of your parts department. Now let's look at them individually and see what we can learn from them. We must remember that all measurements are interrelated and affect each other, but for our better understanding here we are going to look at them independently of each other.Percent Fill is the measurement of how often a customer or a technician can request a part and be supplied that part off your shelf without a special order or a transfer. After all, isn't that the primary function of the parts department? "You need a part. Here it is."From the customer's standpoint it is, without question, his most important expectation from the dealership parts team.He is always busy with his own business and trying to run it efficiently and profitably. But when he is faced with a downed machine he is probably paying people who are not producing - every minute that he's missing the part or the repair for his down equipment is costing him. The customer has built his business and makes his living by being productive and having his people, his tools and his equipment being productive. But he can't be productive if he has equipment down waiting for a needed part. It is bad enough that he desperately needs the part, but if he has to wait for it the situation gets even worse. He very likely has a job that is not getting done. Having the right part on the shelf is immensely important to him.In most cases, getting the part is much more important than price.A few years back I had a former dealership employee tell me this story in a very pointed fashion. He had worked in the dealership parts department for a number of years. He needed a new challenge so he quit that job and took one at a large contractor in town. After a few months he made the comment to me about how important it was for the dealership to have the right parts for him and to respond to his needs more quickly.He summed up his analysis like this: "You have no idea what it is like here in my new job. When I call the dealership for a parts order I probably have people standing around me waiting to know when the part will be here and a boss wanting to know why the job we promised is not getting done."Now that is pressure that many dealer parts people probably do not appreciate.And for our service department customer the same principles apply. Technicians' time, in most cases, is being billed out at $1.25 to $2 a minute. Who is going to pay for that if he is unproductive waiting for a part that is not in stock? And will it now make the service manager reschedule a job and delay a job completion? What happens if he doesn't have another job for the tech to work on? The ramifications to the service department are many.Measuring Percent Fill is an early indication of how well the parts department is taking care of their two best customers: the counter customer and the dealer's service department.What should a Percent Fill be for a healthy department? Depending on the vendor and system used usually a Fill Rate of above 70 percent for all parts is a sign you are stocking the right parts. But there can be some huge variables to know what a respectable expectation is for a dealership's Percent Fill. For example, how many vendors do you represent? Where are their warehouses? What is your product mix? What is the complexity of your represented lines? And there are a few more. So at this point let's just say that if can you move the needle and improve your Percent Fill and you are meeting or exceeding your customers' expectations you are making real progress. If not, Percent Fill might be a serious problem for you.The next vital sign is Inventory Turn. This is the relationship of average value of your inventory, at cost, to your parts sales. In other words, are you utilizing the vast assets at your disposal in an efficient way? If you have a very low turn you have too much inventory or too much dead inventory for the sales you are generating, and that is not good for your financial performance.Conversely, if you have a high turn, you probably
don't have enough inventory and are not satisfying your customers' expectations and needs. (See the first vital sign.) The customer is only peripherally affected by
Inventory Turn. The owner is the entity most interested
in Inventory Turn because of the utilization of the assets
in your parts inventory.
What is a good Inventory Turn? If your dead stock is under control, we like to see a turn of between 3.5 and 4.1 in most cases. That provides a nice balance between financial performance and customer satisfaction. However, there can be extenuating circumstances in which a Turn outside that range can be acceptable.The third vital sign is the profit the department is generating for the dealership. Now this can be measured in different ways but we prefer to use Operational Profit, also referred to as Net Operating Income, or NOI. That will include your expense control, as well, but does not include administration costs over which the department typically has no control. Making a profit is the name of the game so including it as a vital sign is, well, vital.What NOI should you be getting for the parts department? That is so dependent on your internal variables that it would not be fair or feasible to set a goal for all dealerships. Here are just a few of the variables that affect the parts department's Operating Income:
  • Internal discounting
  • Management structure
  • Expense allocation
  • Market competition
In most cases we like to see an NOI of 12 to 18 percent, but that also is highly dependent on your internal systems and internal allocations. Don't use these numbers for every situation. One size definitely does not fit all. Every dealership is different.If you look at these three parts vital signs you can get a quick snapshot of your patient. There are also other important measurements such as:
  • Zero Sales of Dead Stock
  • Zero Sales of Slow Moving Stock
  • Gross Margin of Parts Sales
  • Average Sales Per Employee
  • Freight Recovery
  • Average Invoice Amount
  • Upsales, and many more
These additional measurements become important in a more thorough analysis and should definitely be included in a complete survey and study of a parts department. They can indicate some possible areas for improvement. But if the vital signs are in line with your expectations you have a strong parts department to work with and can start to tweak the operations to achieve even greater results. If they are not strong you will need an action plan to improve your parts performance and profitability.
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