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The Impact of Parts Inefficiencies on Service Cost

1 Jun, 2006 By: Jack Duncan imageSource

The Impact of Parts Inefficiencies on Service Cost

With today’s business models
placing more and more importance on aftermarket profits, we need to keep a close
eye on one of the largest contributing factors to its success or failure: parts.
If you were to draw a pyramid with success in the middle, the points would be:
Inventory Turns, Rescheduled or Incomplete Service Calls due to lack of proper
parts, and the waste that comes from Inefficient Purchasing. Each one of these
areas has its own cause and effect as well.

Inventory Turns

Tracking inventory turns will give you a gauge to tell how effectively you are
turning your parts inventory. To calculate the turns, divide your parts cost in
one month by the value of parts inventory on hand and then multiply by twelve to
annualize the number.

A common business model provides a target of 2.5 inventory turns for parts,
while 3.0 or slightly higher is achievable. A contributing factor is the amount
of “dead” or non-moving inventory included in that total part inventory value.
Develop a method for determining which parts are no longer useful and write them
off or remove them from inventory on a regular basis.

Be aware that as turns move upwards from 3.0, so does the reschedule or incomplete
for parts percentage of service calls. As the turn ratio rises, the need to
increase the investment in the proper parts also rises. Done properly, you are
not simply adding to inventory but are purchasing the necessary parts just prior
to the need for them instead of after you’ve already gone to the customer which
causes incomplete service calls and lowers customer satisfaction. Another factor
is the increased cost that comes from emergency ordering such as overnight
freight charges, etc.

Rescheduled or Incomplete Service Calls

Here again there is an industry standard for incomplete service calls of 8 to 10
percent when compared to the total number of service calls run. Once you have
determined that inventory turns are in order, you need to insure that you have
the correct parts in the technician’s stock to get this 8 percent incomplete
percentage. After all, the goal is to have the right part in the right place at
the right time to avoid incompletes. You can not afford to have an incomplete
percentage that is below 8 percent or we will have excessive waste due to
obsolescence in the future.

It has long been accepted that each incomplete service call for parts will drive
the cost to maintain that equipment up by approximately $100. Simply stated, if
you have ten technicians with a reschedule rate of 20 percent, two of your
technicians have a full time job addressing incomplete service calls. One of
them could be used for growth if you lower that reschedule rate to 10 percent.
Recent audits have shown the potential savings from lowering incomplete call
percentages to 10 percent could be as much as $10,000 to $30,000 monthly in
labor costs, depending on the size of the dealership. (See Figure 2)

Inefficient Purchasing

Because there is not a direct and immediate connection between parts purchased
and parts usage, dealers do not realize the opportunity to make a major impact
on profits two to three years from now by NOT having to write off or throw away
parts purchased that have gone unused.

One cost saving measure is to determine how many dollars were spent to purchase
parts and how many dollars were expended in parts usage monthly. Place this in a
graph and monitor it while looking for trends. Purchasing $10,000 in parts while
using $15,000 means that you are consuming more than you are purchasing to

The opposite, however, would mean that you are increasing on-hand inventory
levels. Factors affecting this could be additional technicians or new models
that are being serviced. It is critical to develop a warning system that informs
purchasing of usage trends to allow them to make adjustments in on-hand
quantities. Examples would be to slightly increase on-hand quantities as usage
increases on a given part. Perhaps more critical would be to dramatically lower
quantities as usage drops off due to population age. Failing to lower inventory
quantities on items for machines which are becoming obsolete will guarantee we
must write off these parts at a later date. You are now throwing away money.

The Final Word

The final word on parts is that you should set goals of 2.5 to not over 3.5
inventory turns while maintaining an incomplete call percentage due to parts
availability of from 8 to 10 percent, and keeping parts obsolescence at 10
percent or less. Too many turns wastes manpower due to high incomplete call
percentage while too few produces waste at a later date. Inefficient parts
practices guarantee wasted profits either in the form of manpower or write-offs
due to obsolescence, or higher operating costs due to excessive emergency

Distribution is also a factor in keeping incomplete calls at proper levels.
Develop a system to regularly monitor technician’s stocks for necessary parts
that are not stocked and also parts that have not been used in the last six
months. Conduct inventories and make adjustments to stock levels at least on a
quarterly basis.

The parts purchasing and restocking process can be one of the biggest “Silent
Killers” of profits in a dealer’s service department. They often go unnoticed
because we don’t connect the dots between purchasing, usage and incomplete
calls. Improving the accuracy of these processes will increase efficiency,
profits and service to your customers.

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