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A Comprehensive Review of Inventory Management (Part 2)

3 Sep, 2013 By: Ken Staubitz, BEI Services

In Part 1 in last month's imageSource, I touched on the independent study we (BEI Services) provided highlighting the percentage of aged inventory occupying valuable space and tying up precious cash reserves.  I also touched on a few of the common factors through our 20 year experience that we have found contribute to a dealer’s parts inventory obsolescence.

The final portion of this series will focus on the importance of parts inventory accountability.  Throughout our tenure in the industry we have worked with varying sized dealers all of which have a diverse degree of inventory accountability and logistic sophistication.   Generally speaking, the majority of dealers we have worked with over the years have processes for receiving and transferring inventory items, and require the technicians to write off parts for each particular service call, but few have specific expectations  for these job functions.  Additionally, fewer actually monitor these expectations to ensure these processes are being followed.  Those taking it a step further by holding the logistic and technical team accountable for inventory discrepancies are definitely in the minority.  We have even come across a few larger (greater than $30 million in total revenue) dealers that simply purchase, receive and expense the parts inventory as soon as the goods hit the warehouse before the items are given to each technician to use in the appropriate equipment.  Unfortunately these companies struggle when analyzing contract profitability.

Consider, all the items (parts specifically) the organization has in inventory, be it on the shelf in the warehouse, located at a remote warehouse, sitting in a technician’s car, etc… are items purchased with company monies which is essentially cash located in these various locations.  So as a business owner, if you handed someone in your organization a handful of money and asked them to hold on to it for you, or use this money to ensure your customer’s equipment performs as it should, wouldn’t you want to know where your money resides and where it was used at all times?  In addition, as a business owner would you not want to ensure your employee was held accountable for any lost money?  Regardless of size, every organization should track the purchase, receipt, transfer and consumption of items in order to not only account for each part, but also to tract the profitability of the equipment serviced.  That being said, inventory items lost, misplaced and generally unaccounted for are essentially lost, or unaccounted for dollars.

Account & Identify

Cycle counting (depending on the size of your organization) and quarterly inventory audits are a must to account for those items in your facility and in your technician car stocks.  Not only should these items be physically counted, but all discrepancies should be researched in order to identify any underlying processes causing these discrepancies.  If one finds a technician missing items reported to have in his/her inventory it is critical to identify the machine(s) these items were said to have been used in and apply these items to the particular machine(s) parts usage.  Failure to do so can drastically understate the profitability of this equipment.  It is also important to identify other causes for the discrepancy and develop process to avoid this situation in the future.

Both parts logistic personnel and technicians need to understand the impact these situations have on contract profitability and must be held accountable for discrepancies resulting from mismanaging (your money) their job function.  We have worked with many organizations to develop incentive programs specific to inventory personnel.  Below are a few of the common expectations for parts personnel:

•             All items received must be put in its appropriate location by end of day (EOD)

•             All parts received must be transferred to the appropriate location by EOD

•             Must maintain 3.5 parts inventory turns and 5.5 car stock turns

•             Maintain an inventory accuracy of 95%, or better

•             Maintain a technician inventory fill rate from the main warehouse of 95%, or better

For those that are utilizing the BEI Services technician compensation plan (Tech Comp), one is provided the means to apply discrepancy dollars towards a technician’s bonus, creating a vested interest to manage one’s inventory.  We even had a customer of ours implement a process to hold technician’s accountable for any warranty items, or high dollar items, that were not returned to the warehouse in time to be sent back to the vendor for credit.  Consider providing an incentive to your parts department personnel for warranty returns.  If they are rewarded a small percentage of successful warranty claims, they will work hard to track claims and follow up with your technicians accountable to ensure the return goals are met.  A few of the common inventory expectations for technicians are as follows:

•             Weekly review the appropriate reporting to ensure accountability of one’s car inventory

•             Maintain an inventory accuracy of 95%, or better

•             All warranty & high dollars items must be returned to warehouse within 3 days of date issued

•             Return items to main warehouse (above a dollar threshold) not used within 6 months

•             Return all items to main warehouse not used in over 12 months

Although it is a best practice to hold technicians accountable to their inventory discrepancies, the organization must first ensure each technician is given the appropriate reporting on a timely basis in order to manage his/her car stock inventory.  All the major ERP’s provide the following reporting in order to help the technician account for their car stock inventory.

•             Snap shot of inventory on hand

•             Item transfer report showing items transferred to/from the technician’s inventory

•             Packing list of items given to tech along with the corresponding parts

•             Parts usage report for the given period

Providing these reports alone to the technicians is not sufficient.  Each technician should understand the reporting provided and also understand how to use these reports to help ensure the accuracy of their inventory.  In addition, each technician must know who to contact in order to rectify any discrepancies that arise.

Machine and parts performance analytics can also be greatly understated when parts have not been applied to a particular machine’s usage.  For example, BEI Services allows an organization to track both the original and replacement part performance.

 Should a company choose to simply write a part off without applying it to the appropriate machine, it would lose the opportunity for various analytics allowing them to pinpoint various opportunities in contract profitability, machine performance and part performance.

The benefits from proper inventory management financially are many.  Besides, it provides a great opportunity to catch an employee doing a great job when expectations are clearly defined and inspected, this way everyone can share in the success.

Before joining BEI Services, Ken Staubitz was an operations & service consultant for Strategy Development, training hundreds of executives in best practices to maximize productivity & effectiveness. He was the director of client services for Modern Office Methods (MOM) in Ohio, managing more than 60 service personnel in various locations. Exceeding various operational benchmarks has allowed him to consult for both the dealer channel & manufacturers to improve their service operations. At ken.staubitz@beiservices.com / http://www.beiservices.com

About the Author: Ken Staubitz

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