ability to move the slides. Okay, here we go. Good morning everybody. This is Bill Mays and I am pleased to be here with you this morning to talk about surplus inventory. What if your surplus inventory were on fire? Let's talk about that. I see that we have a couple of people showing on the screen. I'm told that we have quite a few more actually participating on the call. If you have the ability to raise your hand, whatever, use these calls before. Feel free to type in questions. I will see them as they come up on the screen. This can be a one-way conversation, but it's better if it's not. It's more enjoyable. So if you do have questions and you want to ask them, feel free to do so. I'm going to go ahead and move ahead with this. So what questions might you have about this meeting today? What's the purpose of the meeting, what topics we'll be covering, and who am I? Who's Bill Mays and why are you listening to me? Let's start with the purpose and the topics. What I want to do today is give you information that will help you avoid losses because of your improper stocking or excessive costs related to slow-moving inventory. Slow-moving inventory, surplus inventory, dead inventory, however we want to categorize it is a big problem and it uses a lot of your capital and it doesn't satisfy any customers. We want to raise customer satisfaction, but putting a part in inventory that doesn't sell only ties up your capital and doesn't satisfy anybody. So you want to avoid that, obviously. You want to put dead stock back into circulation by getting money out of it if you can and putting it back into circulation. And then as a result of this, obviously, we want to increase our part sales because at the end of the day, that's really what this is all about. It's about making money by selling parts. Who am I? I've been in business for quite a few years. I started out with John Deere and in the construction division, had more than 20 years with them, ended up at Deere and Company running the parts marketing group for the construction division and so had a lot of parts experience over my years working with dealers and with Deere and Company. I left Deere and Company to go to work for Case and became their director of product support for the construction division. I was with them through the CNH years and spent more than 10 years with them. I ended up actually in the sales group with Cabelco and New Holland Construction. I left them to go to a private firm, a new startup called Machinery Link. It was a rental company and it rented in the ag space. It had combines. I actually had a fleet of almost 350 combines, a combination of John Deere and Case combines. I was responsible for the fleet, for the cost of the fleet, for managing the fleet, for making sure it showed up on time. The idea was that farmers could lease these combines, but we would deliver them like a rental machine when they needed it and we'd remove it quickly thereafter, but it had to run. It had to be in good shape and it had to do its job and it had to be there on time because that's the only way that people in that space would participate with us. Since that time, I've left that space and gone on my own. I now work with original equipment manufacturers and with dealers in the parts, the service, and the sales area to enhance dealer performance and profitability and especially to work with new managers on the skills and techniques to help you do your jobs better. What am I going to do here today? I'm going to review relative departmental profitability and a little bit about the concept of how you fit into the dealership. I want to talk about the life cycle of a part. It's important to understand what you're managing and that all parts are not equal and that they grow and they shrink in their life cycle and that all parts have a life cycle, but it's not a fixed life cycle or the same life cycle for all parts. I want you to understand the true cost of carrying inventory. Carrying the inventory is not just the cost of putting the part on the shelf, but we'll talk about what that part cost truly is. I want to discuss strategies and tactics for reducing surplus inventory so you can maintain a healthier inventory that sales. Let's talk about surplus inventory first. What is it? There are typically two types of surplus inventory. There's one that is too much of a part that does have sales, so the part does sell, but you've just got too much of it, more than you need to have on the shelf at any one time, and that ties up your capital. The other part is inventory that has zero sales in the last 18 to 24 months. I really don't care how you categorize it. Different people use 18, different people use 24. The idea, though, is that you identify that group of parts that is not selling in the last 18 to 24 months so that you can destock those parts and use that dollar amount for other parts. Why don't you just get rid of parts? Surplus inventory is a big problem, but what I found in my years in the business is that parts managers are loathe to get rid of inventory once they've identified that it's not selling. They see it on the shelves every day, but they just don't want to part with it. It comes down to a couple of things. One is budget constraints don't allow you to scrap it. More than your CFO is going to permit you to write off in a year, because obviously when you write them off, you've got to take the hit. That hit goes against your income, and income is the prime moving factor in a dealership, and depending on your covenants with the bank or what other requirements you've got, you've got to be very cognizant of what kind of negative impact you take to your income statement, so you may not have the ability to just write off a sufficient amount of your inventory, even if you know it's dead and won't sell. Second, it's just that you may become emotionally attached to the inventory. What I've seen over the years is that too many parts managers just remember the last few months of their last time they got rid of a part, and then within the next 30 days, someone came in and asked for it, and they always are afraid. I'll just say they. We were always afraid that that's going to happen with every part that we let go, because we can remember paying good money for that part. That part is still totally useful, but if we let it go, what if someone calls for it? I'm going to talk about that. What if your inventory were on fire? How emotionally attached would you be to your inventory if the surplus inventory was actually burning on the shelves right now? What would you do with that inventory? Well, you wouldn't worry about selling it. I promise you that. You wouldn't worry about what might you get for it in 30 days. What would you do is you would get it out of your inventory. You'd do whatever you could. You'd grab that part. You'd grab it off the shelf, and you'd throw it outside just to get it away from the good parts. Well, that's exactly the mentality that you need to start taking when you're looking at your inventory and you're looking at your surplus inventory. It's on fire, and it's damaging your ability to service customers. It's taking up space that you could use for good parts. It's taking up investment space. If you can get any dollars out of it, it's taking up investment space that you could use to replace that part with parts that are going to sell because there's always parts that you know will sell but for whatever reason you haven't been able to bring them in. So pretend that your inventory is on fire, and let's go ahead and think about that as we go forward. I want to talk just a minute about what I call a balanced dealership concept. Construction equipment and lift truck and other industrial types dealerships are in a very challenged environment. We have to mix whole goods, parts, service, rental departments, administrative departments all together, make sure they all work together. At the same time, we have to maintain a high level of growth and productivity and productivity quality. We call this when you do this a balanced dealership because when it's a balanced dealership, you can succeed in your two goals, and that is in the middle, you see repeat customers and high return on assets. That's really all we're after. We want to have repeat customers because these are the customers that we can depend on for our future business. These are the customers that keep us in business when times are tough, and these are the customers that are easiest to sell to. These are the people that we've already created a relationship with, and usually we can create 1 to 4% more gross margin out of these customers because they understand that it's worth doing business with us to pay a little bit more. It costs money to shop around. Return on assets is a good value to look at because you can compare yourself to other dealers and to other businesses because it's how effectively are you using your assets to create profitability. You see in this pyramid that I've got here, on the points I've got quality, productivity, and sales. Those are really what you're trying to use to create the balance, but in the middle of these, I've got processes, which is how we do things. I've got people, which is who does it, and I've got parameters, which is really the measurements of how we're going to measure ourselves. I'm going to concentrate on the processes today to talk about how we integrate all these to make sure that we are doing the right things to create the right repeat customers and return on assets. Let's talk about processes as we go through this. Parts and service should be, in fact, they are the most profitable departments in the dealership, but not only are they the most profitable departments, they contribute significantly to improving market share in whole goods and customer retention because when you get right down to it, it's about making sure the product does what the dealer said it's going to do that brings customers back. There are six major challenges for you as a parts manager. Every day, you face these challenges. I'm going to just run through them real quickly to see if these look familiar to you before we start talking about how you're going to face these challenges specifically as it relates to the surplus inventory. The first one absolutely is a number one challenge and it's obsolescence. This is a big deal when it comes to your surplus inventory and your obsolete inventory because all parts eventually become obsolete. You can't prevent it. As they go through the life cycle, which I will talk about in a little bit, they eventually get to the point that that machine is no longer in the population, that part is no longer used, and those machines are no longer getting hours on them. Therefore, it's a naturally occurring obsolescence and there's nothing you can really do about that except watch it. There's also another type of obsolescence which comes into place by a lack of proper procedures and controls, particularly in your dealer business management system, whether it brings in a part that you shouldn't have brought in in the first place or whether it brings in too high a quantity of a part because it creates an economic order quantity or some other min-max formula that it's using and it will bring in too many. What I've found in my years of working with dealers and in my own experience is that probably half of your parts that are in your surplus inventory or are not selling were not originally stocked intentionally. You need to be taking a look at this. What do I mean by not stocked intentionally? They were either ordered in error and you decided rather than take the hit and return it and pay a restocking penalty, you went ahead and put it on the shelf thinking that you might sell it. In reality, that's not the reason to put it on the shelf. It can also be where the service department ordered in a part because the service department tends to try to bring in the parts that they think they're going to need before they head out to a service job. I understand why. I've been a service manager, but it's a very dangerous practice to get into. You need to work with a service manager on that before you permit that to happen, meaning if it's not a stocked part, don't bring it in just because you might need it unless someone makes a conscious decision between the parts and the service departments to do so. Otherwise, you're going to end up stocking parts that you don't need. Number two challenge is just the wrong mix of parts. There are hundreds of thousands of part numbers and as you all are multi-line distributors, everybody is. Everybody has short lines and the major lines. You need to watch that. You've got thousands and thousands of SKUs that you can look at and it's too easy to have too much of one and too little of the other. So, you get this wrong mix of parts. The two primary controls for this then are looking at this, we'll talk about it in a minute, non-stock parts. You need to be looking at a part to see if it's a non-stock or a stocked part. Another is lost sales. You need to be tracking your lost sales. What's a lost sale? A lost sale is when you had a call for the part, but you didn't sell it because it wasn't immediately available so the customer didn't take it. You need to load that as a sale in your business system or as a sale hit. Not as a sale, but as a hit. It won't hit your financials, but when you look at your stocking parameters, it will show that you did have a demand for that part and it will help you identify that that's a part that you probably should bring in. Number three, and it relates to the others, is excess stock. One of the things that causes this is your seasonality of demand. The other thing is OEM's programs. They do have these stock-up programs. Obviously, it's to help them sell parts, but it's also to help you obtain parts on a seasonal basis at a discount to allow you to have marketing programs for those parts. You want to make sure when you order parts for a program that you have a program in place to make sure that they will sell. You don't want to overstock just because the OEM has a good program. It wastes your capital and it does nothing to increase your efficiency as a department. There's really only two things that you have as a mandate. One of them is to feed your technicians, and I'll talk about that, and the other one is to have 100% over-the-counter fill on stock parts. We'll talk about that. Number four challenge, marketing. You need to determine who you're going to market to, who the customers are, how you want to sell to that market. This really isn't inventory management, but it is of critical importance in maintaining customer satisfaction and maintaining a healthy parts inventory. Number five, the challenge is your own computer system. What kind of technology are you using to manage your parts department? Computer management systems sometimes have technology that's very old, so they can't take advantage of the increases in the information systems and practices that are available. You may not have the information tools that are available for you to properly manage your investment in your parts department. Finally, execution changes by your OE. There have been a lot of changes over the last years in the management practices by originals and the manufacturers. I remember they were bi-weekly stock order was brand new, and you could order twice a month. That was a great big deal. It finally went to weekly stock orders. Now we've got most manufacturers having what we call the daily stock order, which you can receive in probably three days, and you need to rely on this for many of your what would otherwise be immediate demand parts. With a little bit of planning, you can use your daily stock order for a large percentage of the parts that you don't stock. Now the trend is to provide systems for automatic stock replenishment, just like a Walmart did that completely changed the way that that industry handles their stock. These providers now are looking at your inventory, have real-time access to your sales, and will provide automatic replenishment based on criteria that you and they agree on. So it makes it a lot easier for you to spend time doing other things. So what is that time? What is your role? Bottom line is you are a money manager. You are managing an investment of the dealership, which is specifically the parts inventory. Often this is the largest, what I'll call, unfinanced asset in the dealership. There may be other inventories that are larger in the whole goods, but typically those have some kind of financing with the bank or some other financial institution to provide some kind of floor planning at a price for the dealership. Often your floor plan is the dealer themselves using your money to finance to purchase those parts because they're bought on a 30-day basis. So it's often an unfinanced but large asset. You are able to spend that money with few controls. The dealership, the dealer doesn't usually live over your shoulder every day at every parts order. So you've got to invest those parts in a manner that is going to maximize your return on investment and your customer satisfaction. You should be the most profitable department in the dealership. What I'm showing you here is a typical sales mix, typical gross margin, typical profitability income statement of a dealership in this industry showing the whole goods, parts, service, and rental departments. You'll see that the parts department typically has about 20% of the sales. But when you look at the bottom line, 13% total return on sales for the department makes it the most profitable department in actual sales dollars, in actual profit dollars. Here we're showing on sales of just under $4 million or $1.5 million in actual operating profit. After you take the gross margin minus your expenses, what's left is profit. You look at the holders department on $12 million in sales, they actually only return $300,000 in bottom line profit. Service department, but never as much sales, 10% of the total sales. So a little under $2 million in sales, under $300,000 in profit. So you see that the parts department is the most profitable department in dealership. But to do this, you've got to have good processes. You've got to make sure that your inventory is turning. You've got to make sure that you're stocking the right parts. And you've got to make sure that you're managing your expenses. I'm not going to talk about expenses here in this session because we don't have time and that's really outside of the asset side. We're going to talk about your surplus inventory. So what are the two reasons? I'll tell you there's only two reasons to stock a part. The first one is simply customer satisfaction. You need to create satisfied customers. And one of the reasons customers are satisfied or dissatisfied with a dealer is the ability to get a part over the counter. The second one, the only other reason to stock a part is to increase the throughput in the service department. Those are the only two reasons. You can say, well, no, it's to create more profitability. That's actually a sub reason of these other two. Just for satisfaction and increasing throughput are the only two reasons you have to stock a part. So keep that in mind as you are looking at your stock parameters. Talking about satisfying customers, there are four top customer expectations in the industry that's been there for a number of years, but they're continuing to be the top four in the area of product support. First one has been and will be, I think, in the future is parts availability. If you don't have the part now, you can have a machine that's down and you can't use that machine. Therefore, having that part on the shelf is very important. Getting machines right the first time is very important. Now, that's not your job, but you have a right the first time in the cost department as well. What is that? What is your right the first time? It's delivering the right part that actually was the one that the customer needed, not the one they asked for, as the one that's going to fit on that machine based on that machine's age, model, serial number, number of breaks, everything else. So you've got to be accurate and right the first time. Accurate pair estimates are important. That's not your big deal, except that as you participate with the service department in pricing out the parts, you need to make sure that you're pricing out the parts directly for that customer and doing it right, and then having friendly, reliable, knowledgeable, and responsive personnel is important. That is your job. You need to make sure that your camera people and everybody else can do that, including doing that for your service department because your service department happens to be your largest customer. Think about that as you're stocking parts. Think about that as you're selling parts. Think about that as you're deciding what to put on the shelf. Let's talk just for a minute then about increasing throughput in your service department. Service department is your largest customer, and typically for every dollar of labor sales that they have, you're going to have for yourself 70 cents to $1 in part sales. You can do that ratio yourself by just comparing your total part sales to the service department to the total labor sales on those jobs, and you'll get a ratio that you can use for your dealership. Think about this. Putting a technician off of a job and putting them on another job loses at least 30 minutes on that job. Dealers, when I'm doing seminars or working with dealers, say, no, it's not 30 minutes, Bill. It's an hour. I get that person back on that job. You take them off the job. They've got to pull their tools off. They've got to do whatever they have to shut that job down to the point they can walk away, getting them back on, figuring out where they were, getting those bills back in place. They're going to lose an hour starting and stopping a job. What if you could help the service department, Bill, five more minutes a day for a technician? What would that do? Let's think about that. Five minutes a day for five days a week, maybe five is 25. For 50 weeks a year, technicians typically have a couple weeks off, would give you how many more minutes a year? It would actually bill out 1,250 more minutes per year per technician by only building out five minutes. If you can help save five minutes by helping them pay their parts faster, what would that do for you? That's 21 hours a year in billable time. What's that worth, 21 hours a year? For them, it's worth $100. Let's say they're billing out $100 an hour. It's worth sales of $2,100. Since they've already paid for the cost of sales and their technician salary, that goes to their bottom line, $2,100. For you, at a one-to-one parts ratio, you're going to sell another $2,100 in parts for every five minutes that you can save. At five technicians, and most of you don't have just one, that would be another part sales of $10,000 per year for you. If you have 30 minutes that you can save, so you can say, we're not just pulling a technician off the job for one, it's $63,000 a year that you can save, that you can make, that you can sell more parts, $62,000, and at a 30% margin, that's $20,000 plus in margin, the profit that you can have in your department, just by pulling five minutes a day. What's that worth to you? Take the number of technicians that you've got in your shop, multiply that times $2,100. What's that worth to you? Take a minute and think about that. What would that be worth to your total multi-store enterprise if you're able to do that? It's big money, and it's not that hard to do. What are the things that you can do to help save time for the service department? Can you help them look up the parts? Personally, I like the technician to look up their own parts because they're closer to the job, they know what they need, but before they order the parts, they need to work with you to make sure they're ordering the right parts. Delivering parts to the bay, helping the technician return parts to you, that's one of your big problems, isn't it? Getting the parts back from the shop after the parts they don't use, that's something that's got to be important for you guys. Do what you can to help them, and it's going to help you sell more parts. Let's change gears a little bit, and let's talk about retail inventory management of controlled inventory, and let's talk about breadth and fill. What are controlled parts? Controlled parts are the line item part numbers that you should be stocking. For me, the definition of a part that you should begin to think about stocking is a part that's had two or more hits in the last 12 months. Now, what's a hit? A hit is not a sale. A hit is a call from a customer. If you sell it in units of six, one hit of six parts is still just one hit, so two or more hits in the last 12 months, you should begin to look at stocking that. I've got a report here I'm going to show you that looks like this. You can see that you've got a depot and shipwrecked parts, but I'm only showing the parts with hits here, two, three, four, or five or more. What I'm showing on this here, what do they stock, and then what were the two hits of these parts, so then what by category was stocked? What percentage? Let's go back to the other slide a little bit, and let's talk about that. What you want to do is concentrate on those parts that have two or more hits. It should be a non-controlled parts. You shouldn't even think about stocking it. The only reason to think about stocking a part with zero or one hits is if it's a new machine and you need to stock it to support your requirements with that OEM for a new machine or it's a maintenance part for a new machine. Otherwise, don't even think about it because you're not going to be able to guess right. So only think about parts with two or more in the last 12 months. If you want to go to three in 18, that's even a better criteria because you're going to show more consistency. But begin looking at it at two and 12. So what do I mean by breadth? Breadth would then be of those parts that have hits of two or more, what percentage of those are you stocking? And you see that formula down here that says total inventory lines divided by the total lines with hits, you have a target of 95%. Look at that report again. Let's go to the bottom of the report. And what you see here is on the stock side, I show that of the parts that have hits, I'm stocking 4,717 of those line items. Of those, but I had 4,925 that had sales, that had two or more hits a year and had sales. I stocked 4,700 of them. So of the 4,900 parts that had sales of two or more during the year, I'm stocking 95.8% of them. That is a good number. That means I'm stocking for breadth. Stocking for breadth means that you're going to have a higher likelihood of having that part on hand when the customer or the service department asks for it. And you want to stock a breadth, not for depth. Depth means that you're going to have more of that part on hand, which is going to give you more safety stock so that if there's a likelihood that you have a part that will sell two in a short period and then wait three or four months before it sells another one, then you may have to stock some depth because you're going to have inconsistent use of that part. Or a seasonal part, you may have to stock a little more depth. But consistently, you want to stock for breadth. Think about breadth. So now let's think about first pass, fill percentage. First pass fill is what percent of those parts that are called for are you going to have on the shelf at the time they're called for? What you want to have is on stock parts, really, you want to have 100% fill if possible. Realistically, I'm using 98% as the benchmark for stock parts. Why is it not 100%? Simply because there are factors that sometime a part that's will sell not two, one every six months, but it'll sell one. And then before you can bring the other one in stock, or it'll sell again. Or it'll be seasonal, or you'll have some other reason that you'll have an inconsistent use. And therefore, you're not going to have it on the shelf at all times. So it's important that you think about 100% fill, but realistically, 98% is the number that you want to use. On special order or non-ODM parts, it's a little harder. So I use a benchmark of 96% as your goal. For uncontrolled parts, don't use a number. Use actual first pass fill. So don't even think of it. If you're not stocking the part, actual first pass fill is all you want. You want to measure it. You want to see what it is, but don't pay attention. Don't spend time on it, because you're not going to guess right. If you try to think about bringing that part in before it has activity, you're probably going to guess wrong. And I'll talk about that in a minute. So what you want to do on this graph here, start for breadth and not for depth. So retail inventory management. What does retail breadth do for you? Putting more controlled parts in stock, you're going to have better fill, and you're going to have better customer satisfaction, which gives you repeat customers. Better controlled fill means that parts inventory with as low as $2 per year and a trailing 12 months is what you're going to look at. And this is going to be what gives you your repeat customers, which is what we're after. And as your inventory depth decreases, meaning you stock fewer of those parts, you're going to have more parts to put on the shelf. And as that stock comes down, it's going to help you with your return on assets. And as your inventory turns to improve, it also is going to return your return on assets. So let's talk about the retail inventory management process and the lifecycle of a part. A part goes through a natural lifecycle, where originally it sort of takes off, then it'll peak out, and then it goes through a gradual decline as the machines age. Now, it takes off as the machine population builds. So what you want to be doing is looking at your total machine population. Obviously, you're going to be looking at parts inventory, not parts inventory, but parts sales, parts hits, parts demand. And then looking at, as the parts take off, how many of those machines are in the field? Are you putting those machines out? How many of them are in the field now? At what rate have they been put out? How old are the machines that are in the field now that are beginning to use the parts? So you don't want to just look at what parts are selling. You want to look at those parts that are beginning to sell and see what machines are those parts used on. And every manufacturer that I know of can give you a report. It's a used on report that shows you what machines these parts are used on, so you can begin to identify. And that'll help you begin to make a stocking decision. Should you put it in at two or should you wait for three to begin? So your first decision, I'll say there's three decisions that you're going to have. One of them is when to begin stocking a part. The second one is how much of that part should you be stocking at any given time, specifically as that part increases in sales. And then third, when should you begin destocking the part? So when should you begin recognizing that part is going through its natural life cycle and now the part sales are on the decline? One factor I want to talk about is the life cycle itself, the fact that it rises, pops out, and declines. And then there's five phases, and you can see them at the bottom of this. It's when it goes through a new stocking part, a new part introduced to the system, then it becomes a control stocking part, then it becomes a transferable part. And a transferable part means that it then can be used in other locations, and you should begin looking at moving that part to where it's having sales as opposed to just letting that part be brought in to sell at that location. Use your total dealerships inventory for all of the locations that you've got. Then as the part begins to decline, it goes into a surplus phase, you want to begin to transfer that part. You want to recognize that it becomes a non-transferable part, or it becomes a non-returnable part. And as it finally is a non-returnable part, you need to look at scrapping it. Typically, you will get a report from your manufacturer before a part becomes non-returnable. Once you see a part go on the non-returnable list, you need to make sure that you are beginning to think very seriously about getting that part out of your inventory, and taking the money that you can get for that part, and putting other parts on the shelf. So when should you begin to stock a part? New model stocking, I talked about that briefly. Obviously, you're going to get a guide from your original manufacturer. You want to use that guide, but specifically you really want to pay attention to the maintenance parts and the wear parts. Things are going to be used based on the hours of usage on the machine, not based on the life of the machine. Your oil, your batteries, your filters. Obviously, you've got to bring those in. The customer expects you to have those, and you know they're going to be used, so bring those in. Just don't bring them in in too large of a quantity. As the machine then goes through its life cycle, you want to start looking at the other parts that the OE recommends. Obviously, the little parts, the low-dollar parts that you need to have for repairs, your fittings, your O-rings, other things that, the belts and hoses, you need to bring in and have those on. Then start looking at the parts that are selling two or more a year. I talked about that. Pay attention to those. Pay attention to what are the life cycle of the part. Look at seasonality. Is this a seasonable part? And if it is, bring it in for the season, but make sure you only bring in the quantity that you think is going to sell, because, as I'm going to show you, there's a stocking cost, and you don't want to get stuck with the seasonable parts, seasonal parts, after the season's over, because if you have to wait a year to sell them, you're going to use all of the gross margin in those parts, just carrying them for a year. So it's better to run out of parts on a large order in a parts promotion, and then have to order them on a regular stock order to fill out the rest of your promotion than it is to have too much, and then have to carry it for the rest of the year. Order for marketing programs, which is what I just talked about, for seasonal marketing programs, or for targeting the machine population, or for a timeframe window of opportunity, seasonal sale, and then work with your service department for upcoming jobs, or for service department marketing programs. Often, you can bring in parts on a daily stock order for your service department, if you will work with your service department. Your second decision I talked about was how much of a part to stock. This creates your controlled stocking item. Terms in your system are going to be like min, max, minimum, or maximum stocking levels. You need to identify what those are. Be careful to stock for breadth, not depth. What is your reorder point? Reorder point is at what point is the stock brought to before you've triggered a reorder. An optimal reorder point, an economic order quantity, based on what the freight cost is, based on other parameters. You want to look at that, but be careful not to let your system bring in too much stock at any given time, because some of the system parameters will overstock on a part to try to maximize the economic quantity of that part. And if you leave a part on the shelf too long, it's going to cost you money. Forecasting now is done on at least a weekly basis to ensure that your inventory is always up to date, based on your most recent sales. And you can use several methods. Annualized forecasting, where you're using trailing 18, 12, taking or 24 months of unit sales. And you annualize those, meaning you'll take your rolling 12, your rolling 18, your rolling 24 months, your most recent 24 months of inventory sales, part sales to use, divided by 24 to see what your sales are per month. Decision three is when you begin to phase it out of the system. You want to change to an order only as needed basis, and consider it as a surplus part. Once it's begun surplus part, you can then begin to transfer it to other dealerships, other stores of your, or you can begin to let it go, or begin to think about how you're going to get it out of your inventory. You want to look at your parts starting logic, before sale logic, meaning I want to make sure that I have a certain number of them in stock. This again goes back to my breath. How much of your surplus inventory is handled becomes your third decision. Inventory transfers are the best way to get inventory out once it goes into that last phase. You want to make sure that as you get a hit anywhere in your organization, you draw from your own inventory, and not from the OE. So you drop your purchasing parameter, you don't make that an order automatic, and you make that an order as demand or transfer, first before bringing it in by stocking criteria, and then you bring it in on a machine down, or on a weekly stock order, not to put it as a non-stock part. You can order it on a stock order, but as a non-stock part, so that it doesn't trigger itself to automatically replenish. And then you want to use two forms of transfer, a push or a pull, to make sure that you position your inventory. A weekly transfer to reallocate inventory based on the weekly need of a store, is called pull, and that's what I've just been talking about. But you, if you're managing for a central location, and you're managing inventory, you can also push inventory out, or as you have too much inventory in your location, you can push inventory to the other locations, by saying, I've declared too much stock here, and I'm going to reallocate this, and identify another location that needs this stock, and push that. This typically is done by a corporate parts manager, that's going to reallocate inventory to other stores. Here may be one of the most important slides I'm going to show you, and this is your actual inventory carrying costs. Think about the dollars, but think about the percentages as well. Because when you're thinking about getting rid of surplus inventory, typically we're looking at those dollars and saying, how can I afford to take that hit? Well, think about what it costs you to actually stock a part. Well, you've got interest and opportunity costs for that money, which is probably 12% a year. It's about 1% a month to carry that. Both the interest cost that it's going to take for putting that part on the shelf, and the opportunity cost, for what can I do with that money? Rather than have a part sitting on the shelf that's not selling, I could use that money elsewhere for something that is selling, and make money with it. So you've got 12% real costs there. You've got taxes and insurance on your inventory, based on your location. A property tax or other tax, and insuring that inventory, because you've got insurance 1.5% per year. You've got warehousing costs. Warehousing costs of what does it cost? A building is not free. A building, that roof, that floor plan, is 3% a year on average, depending on if you're in the West Coast, it's more than that. Midwest, possibly slightly cheaper. Clerical and record keeping, 1.5% a year. Inventory, counting, tax net inventory. You've got to count it at least once a year, even if you're doing perpetual inventory, where you're counting inventory once a month. You've got less than a percent, but almost a percent a year. Material handling, you're moving that inventory. You're physically bringing it in. You're touching it, 1.3%. Obsolescence, you will have obsolete inventory, 4% a year. Fixed asset depreciation. When you add it up, your carrying costs, goes about 25% per year on a part. Look, compare this then to your average gross margin. Your average gross margin's about 33%. So if that part sells one time per year, and you're carrying that part, 25% carrying costs against 33% gross margin, 75% of your gross margin is used up for carrying costs. You're actually only making about 8% on that part. So that's why, if you're only gonna get to that part once a year, don't even think about bringing it in, because you're gonna use almost all of your margin just having it on the shelf. So don't spend your energy, your mental energy, trying to second guess the system, whether it's gonna sell or not. If it's not selling two a year, don't even think about it. So how do you reduce your inventory? Well, the easiest way is don't bring it in in the first place. That's what I've really been talking about. But be very careful with your stocking criteria. Be careful about your stocking parameters. Be careful about putting an accidental order on the shelf or stocking part that the service department doesn't use. One of the best practices I've seen to prevent this is charge the service department a carrying cost. If they put a part back on their shelf, there's going to be a charge in the service department for doing that. There may be some gaff about that, but frankly, why should they make a stocking decision for you that's gonna end up costing you 25% a year when they're the ones that ordered a part that's not going to sell? So that's one of the things I've seen dealers do that actually makes the service department think twice before they can start bringing in things because they might need them on a job. If you already have it, ship it. What I mean by that is order second, use your own sales first. If you've got too much of a part on a shelf, sell it and don't restock that. Lower your stocking level. If you've got it on the shelf, but you can use it at another location, give it to that other location. So start looking at system-wide inventory and getting it out of your system, system-wide. And if possible, rework it, substitute it. Obviously, often you can use back subs. So make sure that if a part has a sub, that you can back sub and see if you've got a part already in your inventory that you can get rid of that's not selling before you bring another part in, especially if you've got a part that's going to order, that you're going to put it on a machine down, check to see if there's a back sub that you've got in stock that you can use. And then finally, salvage it for cash at a reduced rate if you can. A lot of dealers don't want to do that. They don't want to salvage it at a reduced rate, or they don't want to just get rid of it. And let me show you here what the reason for doing that is, if possible. Let's say that you have a part that is, you paid $120 for it. So it cost you $120, but you can return that part. So here, let's say it's that part that's coming back from the service department or someone that you put on the shelf that cost you $120, but to return it, you got a 16% restocking fee, which is kind of average in the industry. You gotta pay $19.20 just to give that part back to the manufacturer. But you're going to get them $100.80 that you can then use to put back into your parts inventory on a part that is going to sell. So let's say you do that, and then you sell it one time. Let's look at that first sale column. So you're going to reinvest in a part that costs you $100. When you sell that part at a 30% gross margin, you're gonna sell that part for $144. That means you're going to have gross margin of $43.20 for selling that part, but it cost you $19 to get that money. So let's go ahead and charge that $19 against this first sale. So when you do that, your actual gross margin on this first sale is only $24, so you only made 24%. But look at this, 24% on that first part means that you have recovered your annual carrying cost with that first sale. There's the reason you don't want to wait to carry that part, thinking you might sell it this year, because if you sell it one time, you've gotten your money back on carrying that part if you carry it for a full year. And if you carry it for less than a year and you sell it, now you've recouped your money and you can make money. Let's say you then take that money and you reinvest that $100 now. You made $144, but I'm gonna invest in that same part, which is gonna cost me $100. I sell it again for $144. I make the same $43 on my parts gross margin, but now my total gross margin is $67. So it was the $24 I had left from the first one, $43 on the second one. So my gross margin on reinvesting that money is now 33%. Let's reinvest that 100% on my third sale, make another 43. Add that, and now my gross margin is 37. I continue to do that. If that part's gonna be a higher moving part that sells six times a year, I made 40% on that money. I made $240 on reinvesting that $100 that I got. Total sales then, you can see, were six times that $144. So it was worthwhile to send that part back, get my money back, pay the restocking fee, and put something on the shelf that is going to sell. That's why you don't wanna put it on the shelf. Finally, if you can't do anything else, just dump it. If all else fails and you don't need it, throw it away, because you can take that tax write-off. It's gonna lower your profit, obviously, but that's gonna be a hit against your profit. It's gonna lower your income tax, and it's gonna lower your holding costs. So remember, your costs of carrying that part are 25% a year because most of those costs are, even if I can't recoup the opportunity costs for reinvesting the money, I'm still getting my space back. I'm still getting my insurance back because I was paying to insure a part that wasn't going to sell. So I'm still recouping 12% a year, just getting my space back. So then, when you think about short-term profits, it's what can you do now? Get that money back. Get that money put back in your stock. Get rid of those parts that aren't gonna sell, and put parts in stock that are going to sell. Often, I see dealers write down those parts that they know are gonna sell, but they just can't let go of them. They sit it down, write them down to a penny, and just leave them on the shelf. That's not a solution because you're still paying 12% a year for that shelf space, for that building space, for that insurance, for that part sitting on that shelf or not. What you need to be doing is using that shelf space for a part that's going to sell, not buying another Denmark bin, not buying more shelf space, not adding on any other warehouse. You need to do that, get rid of those parts, and free up that space. I want you to think about running your business like a factory, just in time, JIT. We live in a JIT world. Manufacturing is just in time. Right now, think about your distribution system. 85% of the mainland US can be reached by next-day ground transportation, FedEx, UPS, other ground transportation. You can be reached next day. What that means, couple that with a high sale percentage by your OE. You can rely on your daily stock order and ground transportation to get you a high percentage of the parts that you're going to sell that you would normally order on a machine-down basis. Use that, and then have strong processes for expediting your parts, making sure that you stay on top of these if you need that part, working with the service department on a job that they're going to have coming in so that if they need the part in three days, they can have it there in three days. Often, if they'll do a quick once-over on the machine before it comes into the shop, they can put together the parts order, and you'll have two, three days to get those parts in stock, get that order ready to go to the shop, and then use that money, not in machine-down, to restock parts. So, focusing on your service department is a good way to do your adjusting time. Have good service department and parts department processes. Remember, feed the techs, but for five minutes a day, for one technician, increase your parts sales $2,000. Shorten the time for them to obtain their parts. Train their technicians and parts lookups so they can do it faster. Eliminate their errors in ordering parts. Eliminate your errors in ordering parts. These are process things. Manage their recurring unused parts. Obviously, they're still going to order parts they don't need. If they don't need them, make sure they get back to you quickly so they can close the work order, and so you can put the part back on the shelf and not order it again on a stock order, and then have two parts on a shelf that you don't need. Manage your order cutoffs, use daily stock orders, and preview incoming jobs. So, at the end of the day, what should you do? Decide what to stock and forget the rest. Don't think about it if it's not selling at least through the year. Don't worry about it. Feed your technicians. Make sure that they've got the parts they need when they need them. Keep them in their bay. If they're not in their bay, they're not turning wrenches, and at the end of the day, the service manager's probably writing off hours. Help the service manager not have to write off hours. Third, stock for breadth, not for depth. Better not bring it in than to guess wrong because you can recover. If you don't guess right, you can recover with good expediting, and often you can put it on the shelf, or you can go ahead and put it on a machine down order. Have a good de-stocking strategy. Make sure you recognize when a stock is beginning, a machine's beginning to go out of service, and the machine sales and the part sales are beginning to decline so that you can get rid of it, and then live in this new world of just-in-time. Have strong expediting processes, robust processes. So at the end of the day, I want you to pretend that if a part is surplus, it's on fire. You've gotta get rid of it, get it out of your inventory, and make room on that shelf for a part that's gonna sell, that part that's going to sell for you and make you some money. At the end of the day, it's up to you to put that fire out. I really appreciate your time. This has been a great one hour. We've hit it at 59 minutes, so it's nice to have. I have one minute left for questions. I haven't seen any of them coming up. If you do want to know more, I'm always available. My information's on the screen. Go ahead, Bill Mays, bmays68 at gmail.com, bmays68 at gmail.com. I appreciate your time, I appreciate your attention, and I look forward to seeing you in your next AEB webinar or live seminar. Thank you very much.

surplus inventory management

avoiding losses

excessive costs

stocking parts

customer satisfaction

increasing throughput

balanced dealership

parts managers

retail inventory management