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A Comprehensive Review of Inventory Management

29 Jul, 2013 By: Ken Staubitz, BEI Services

Unfortunately, a silver bullet to fix all the financial and operational pain caused by parts inventory mismanagement does not exist. However, at BEI Services, we have identified various key processes that when managed properly, can dramatically decrease a dealer’s risk of parts obsolescence and will result in financial gains due to improved operational efficiencies.  (Upcoming articles will focus on some of the key components of parts inventory management.)

By using our Advanced Inventory Management (AIM) analytics, BEI Services analyzed the parts inventory of 185 dealers nationwide ranging from $1.5 million to over $200 million in total revenue.  In this study, each organization’s parts inventory was divided into 3 main categories:

A – parts that had not used in a six-12 month period;
B – parts that had not been used in 12–18 months;
C  -those parts not used in over 18 months.

Using this methodology, BEI Services' stack ranked these dealers according to the totals of category C items as a percentage of total parts inventory.  The results of the study were staggering.  This study reported the top third of the dealers average 15% of their parts inventory was not used in 18 months, the middle third of dealers averaged 31%, while the bottom third averaged 51% in parts inventory that had  not been used in over 18 months.
With the introduction of our new AIM product we have been able to provide additional reporting to help organizations better manage their parts inventories, and have also drawn the dealer community’s attention towards improving its inventory management. In working with, and analyzing hundreds of organizations, we have found that no matter the size, every dealer struggles with managing its parts inventory to a varying degree.

Based on our experience working with hundreds of organizations over the last 20 years, the following are a few of the common underlying factors contributing to a dealer’s parts inventory obsolescence and can have a dramatic financial impact on any size organization.

1. Parts inventory and purchasing personnel with little, or no, logistics training
2. Poor processes for: stocking, restocking, and distribution
3. Identification and planning for obsolescence

Parts inventory and purchasing personnel with little, or no, logistics training.  When hiring individuals to fill a purchasing, or parts fulfillment role, it is critical that these team members are detail oriented, able to learn your current ERP and have various other skills to meet the demands of this position(s).  Possession of inventory management knowledge is a plus.  It is also important to provide these employees, as with all employees, a “line of site” on how their job function impacts other departments and the entire organization. 

Parts personnel can have a profound positive, or negative, impact on service hold for part (HP, or Reschedule) percentages depending on their effectiveness in identifying and restocking technician car stock inventories.  Service staffing levels can be inflated if the processes are not in place to frequently replenish a technician’s car stock items on a regular basis, resulting in return trips to a customer site and creating unnecessary workload because the technician does not have the needed parts in his car stock. 

The following is a common example.  An organization performing 500 total service calls per month that has a rescheduled for part rate of 20%, is making 100 (500 X 20%) return service calls because they do not have the part needed to complete the service call on the first visit.  Keep in mind the industry benchmark reschedule for part rate is 8% of the total calls.  In this case the inefficiencies in proper stocking are causing an extra 60 (100 reschedule calls – (500 X 8%)) service calls per month, which is over half of a technician’s monthly workload.  We consistently see dealerships with rescheduled parts rates well above 20% and at times even above 30%.  As you can see from this example, the parts person could be responsible for a significant amount of your service man power needs due to lack of planning, tools or training.

Aside from the service financial impact described above, untrained parts and purchasing personnel can contribute to excessive general and administrative expenses. Excessive shipping cost due to inadequate stocking levels and multiple orders can also impact the workload on your staff (logistics and accounts payable) by not consolidating shipments causing multiple purchase orders.  It is also not uncommon for an organization to experience excessive next day air shipping expense by routinely ordering high mortality parts next day air for parts that should normally be kept in stock.  It is imperative that parts personnel understand the impact their jobs have on your organization, and it is crucial to invest time and training to develop these individuals.
Poor processes for: stocking, restocking, receiving and distribution.  Previously I covered some of the financial impact inefficiencies in stocking and restocking can have on the organization.  It is also important to note that even though your organization may have the processes in place to stock and restock the inventory, is your logistics team ordering the right items (those historically used)?  If so, your organization will have a high probability to be in the top third of dealers averaging 15%, or less, in parts not used over 18 months.  Whatever the case maybe, the AIM software quickly identifies both overstocked and under stocked items allowing one to also hone in on the processes affecting these areas.

Even if the organization is appropriately stocking and restocking items, it is important that expectations are set and met to receive and distribute these items on a timely basis.  All parts that are physically received in the warehouse need to be received into your ERP and distributed to the appropriate locations by the end of each business day at the latest.  This will ensure that your ERP is current and will crease the data integrity within your ERP.  This will also reduce technician inquiries for ordered parts since the technicians will be accustomed to receiving the parts in their parts bin and into their reported inventory on a daily basis.

Identification and planning for obsolescence.  Let’s face it, in our industry an organization is going to have some amount of parts obsolescence; the key is to have the various processes in place to minimize the risk of obsolescence.  Our twenty years of experience in working with dealers has proven that each organization is different in the manner and degree in which one is identifying and planning for aged parts inventory.  Some dealers are diligent in identifying and financially reserving for parts inventory not used within a specific time period, while others have not taken as much of a vested interest in managing this area.  Whichever of the former best describes your organization, I would suggest you take advantage of the new free AIM program BEI Services is offering.  These tools will quickly allow your company to assess your aged inventory, but moreover will help your organization sell that inventory, freeing cash.

As I stated previously, unfortunately there isn’t a silver bullet that will take away all the financial and operational pain parts inventory mismanagement can have, but incorporating the proper measurements, processes and procedures can provide a recipe to improve your inventory management.  We will explore these topics further in future articles.

Ken Staubitz has experience in all levels of service and operations. Before joining the BEI Services team, he was an operations and service consultant for Strategy Development, where he trained and coached hundreds of vice presidents and service managers in best practices to maximize productivity and effectiveness. While working in the dealer channel, Staubitz was the director of client services for Modern Office Methods (MOM), Cincinnati, Ohio, managing more than 60 service personnel in various locations. He consistently exceeded various financial and operational benchmarks, which allowed him to successfully train and consult for both the dealer channel and various manufacturers to improve their service operations. He can be reached at http://ken.staubitz@beiservices.com or (513) 200-2169. Visit http://www.beiservices.com

About the Author: Ken Staubitz

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