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Increasing Service Margins by Properly Managing Inventory

3 Nov, 2014 By: Bud Karakey

In the copier and printer industry 68-72% of a dealership’s profits are achieved through service and supplies.  With this in mind, there are only two areas that can directly impact margins in the service department, those are parts and labor costs.  In addition, it is important to understand how inventory management can significantly impact labor expense.  This article focuses on how mismanagement of inventory can dramatically affect service costs attributed to parts obsolescence, improper warehouse inventory levels and inaccurate technician car stocks that lead to increased labor costs.  

Proper inventory management requires a skilled logistics person who understands processes impacting warehouse inventory turns, machine parts usage statistics and returns to customer calls due to technicians not having the needed parts in their car stocks.  In addition the logistics person must understand the various reports needed to properly adjust inventory levels every month.

The parts logistics person not only manages parts (the second highest service expense) but in many circumstances can significantly impact much of the labor costs (the highest service expense) as well.  Providing the required training and tools are critical to ensuring greater profit margins in the service department.

General Study of Dealer’s Inventory

BEI Services performed a study consisting of 201 dealerships. By analyzing the age of each dealers unused parts inventory, BEI uncovered that there is a true epidemic of aged and obsolete inventory in the dealer channel.  To accomplish this study BEI segregated aged inventory into 3 categories (buckets) as shown in the graph below.  Inventory that had not had ANY usage at the dealership for 6-12 months was in bucket A (blue),  no usage in 12-18 months in bucket B (red) and no usage over 18 months in bucket C (green).  The percentages represent the total aged parts inventory per category as a percentage of the dealers’ total parts inventory.  As one can see below, an average of 33% of the combined dealer’s parts inventory was older than 18 months.  Imagine, nearly a 1/3 of the inventory (meaning dollars) on the shelves will be written off and trashed at some point in the future.  Regardless of dealer size, the amount of potential write off is significant to a dealer’s cash flow.

Causes For Inventory Obsolescence

In order to provide good customer service, some degree of inventory obsolescence is inevitable and acceptable, however should never exceed 10% of your annual inventory expense.  Mismanagement of the following areas will cause or contribute to parts obsolescence:

  • Improper Min/Max settings in the dealer ERP system
  • Technicians carrying stock they have not used in over 6 months
  • Over ordering to receive manufacture discounts
  • Lack of monitoring parts usage statistics
  • Ineffective service territories
  • Not creating specialized service territories when possible
  • Ordering items that are already in stock
  • Ordering un-needed parts due to technician misdiagnosis

How Inventory Affects Labor Costs

Anytime a technician needs to return to the customer location due to not having the parts needed on the original service call adds labor expense to the company because of the return trip.  The technician cannot always carry every part needed but should never need to return to the customer location more than 12% of the time to install parts.  If a company has a return for parts rate greater than 12%, then it is excessively using the most costly resource (manpower) due to ineffective inventory management.  Here is an example of how much labor can be reduced by decreasing return for part calls just 8%:  Let’s assume a company completes 1000 service calls per month and 20% of them are incomplete due to technicians not having the needed parts.  In other words, the technician returned to 200 calls because he/she didn't have the needed parts. If the company were able to reduce its return for parts calls to 12% (120 calls) through effective inventory management, then it would reduce its call load by 80 calls (220-120) or the equivalent of one technician’s workload.

A current study of 229 dealers shown below displays the national dealer average for parts returns is 22.6%.  In this study more than 75% of the dealers are above the target of 12%.  In all likelihood, given these statistics your dealership would be in the 75th percentile.   Knowing where your company stands in this area is critical to understanding and correcting issues that could be increasing your labor expense.

Managing Technician’s Car Stock

Properly managing technician’s car stock is crucial to maintaining good customer service, reducing service calls and reducing labor costs.  Creating car stocks is generally a very tedious task often not analyzed and implemented frequently enough to ensure a 12% or less return for parts rate.  Also culling inventory a technician is carrying that is not being used and placing those items back on the shelf to be used by other technicians is necessary to reduce the risk of ordering items that already are in stock.  Below are a few of the best practices for properly creating technicians car stocks:

  • Technician to machine assignments in ERP
  • Machine parts usage statistics
  • Service call integrity of 85% or greater
  • Proper Min/Max settings for warehouses (car stock)
  • Effective and timely restock processes

There is an extreme inventory management opportunity that is costing dealerships thousands of dollars in aged inventory and parts obsolescence.  Additionally, inventory mismanagement has a significant impact on service labor costs that can well exceed 30 to 40% of labor requirements due to improper technician car stock inventory.

Regardless of your company’s level of sophistication in managing its parts inventory there are opportunities for additional savings.  For additional information or whitepaper, or to receive a free inventory assessment of your company, contact BEI Services, Inc.

Bud Karakey has 22 years of experience in creating & designing software solutions that help imaging industry’s service department’s productivity & performance increase. A founder of ADS Communications, acquired by EFI, he became ADS’s Director of Service; later a VP of Customer Support and New Business Development when it had spun into MWA intelligence. In 2009, Bud Joined BEI Services as VP of Operations. He is an Executive Committee member of CompTIA’s MPS community.  Contact:  info@beiservices.com or 307-587-8446.">info@beiservices.com or 307-587-8446 or visit www.beiservices.com

About the Author: Bud Karakey

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