AUTOMOBILE DEALERSHIPS

Five Ways to Keep Parts Inventory Under Control

Benjamin DeForest Manager, CPA, MBA

28 March 2019

Parts inventory is a complicated and challenging area for dealerships to manage. With different personnel involved from both the parts and accounting departments, as well as having two separate systems accounting for parts inventory, it is no wonder why this area can be so difficult.

Although complex, the importance of maintaining accurate parts inventory cannot be understated. With significant cash tied up in parts inventory, it is a considerable investment for the dealership and can be an expensive problem if not properly maintained.  Think of this example: let’s say a dealership has parts inventory on hand of $300,000 but there is a $30,000 variance after a physical inventory is performed. This is only a 10% variance, which doesn’t seem problematic at first glance, however the real issue arises when attempting to recoup that investment loss in parts. If gross profit margins on parts are 30%, recouping that lost $30,000 investment would take additional parts sales of $100,000! As you can see, recovering losses from poorly maintained inventory can be costly.

Parts inventory variances are not unusual and often occur due to obsolescence, shrinkage, poor record keeping, or poor communication between dealership personnel – particularly the accounting and parts departments. While discrepancies in parts inventory will almost always occur, there are ways to identify the issues quickly, improve procedures, and minimize or avoid some of the common pitfalls.

1. Physical Inventory by Outside Inventory Firm
Having an outside inventory firm perform an annual parts physical inventory can provide an independent perspective on the status of the parts inventory.  The parts manager should obtain the report provided by the external company and investigate any variances discovered.  The outside inventory firm may also provide suggestions for improvements to the parts inventory process.

2. Weekly Bin Checks
During an annual parts physical inventory, the outside inventory firm will check total ending parts inventory but what about throughout the rest of the year? This is where weekly bin checks can help. Selecting random bins to check for accuracy each week can be an easy but effective way to maintain an accurate parts inventory throughout the year. Parts employees should check physical parts in a bin and compare the counts to the parts pad to substantiate the number and location of each part.

3. Hire Good People and Train Them Properly
As with many other facets of a dealership or business in general, people drive the quality of the work. Finding a trustworthy parts manager is a key step toward keeping an organized parts department. The parts manager is overseeing the vast majority of the parts inventory operations so this person should be highly knowledgeable about the inventory itself as well as in-tune with the day-to-day activity of the dealership, knowing what inventory is needed at any given time.  Hiring detail-oriented receiving and shipping personnel helps to reduce mistakes when parts are entered or removed from the inventory management system. These employees, once properly trained, can be a strong line of defense against vendor errors and other accuracy issues that often occur in the parts inventory receiving
and shipping processes. Identifying discrepancies before entering parts to the parts inventory management system can reduce accuracy issues in the future.

4. Identify Fast-Moving Parts
It is no surprise, but some parts move faster through the dealership than others. Focus on identifying those fast-moving parts and make sure they are on the shelves and available for customers to purchase. Knowing the parts that not only sell, but sell quickly, can help reduce obsolete inventory. The longer a part sits on the shelf, the likelihood of selling that part decreases substantially and after approximately twelve months it can become virtually impossible. Having a knowledgeable parts manager who understands the parts life cycle can be critical to identifying the trends and
knowing what parts to buy at any given
time.

5. Controls Over Inventory
Shrinkage due to employee theft causes variances on parts reconciliations and can cost the dealership a considerable amount of money. If the dealership employs proper internal controls and safeguards around parts inventory, the opportunities for employee theft are greatly diminished.

For example, all parts inventory should be stored in a locked or secured area after hours to prevent easy access to employees or others. Also, segregating the duties of parts employees prevents an employee from having full control over the inventory process.

For example, have different employees order, receive, and record parts inventory.

With so much daily activity in the parts department, accurately tracking parts inventory is as imperative, and difficult, as ever. Implementing new procedures is never easy but applying some or all of these suggestions can assist in improving parts inventory accuracy in the future.

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