June 2011, Auto Dealer Today - WebXclusive
The parts department is the only department in the dealership that can place an order for almost any type of part and never be questioned about it. Who is watching the parts department? Now, I am not picking on parts managers specifically, but rather the parts department in general. It is the only department which has the open checkbook of the dealer. Kind of scary, isn’t it?
Most dealers and office managers don’t get involved in the parts department details. They are focused on vehicle sales. The parts department is complicated and many don’t really understand how it works, especially on paper.
I try to look at the parts department during tax season. One reason is to see if there is obsolescence which needs to be addressed as a year-end adjusting entry. I do this first by running the management reports in the parts logon of the dealership software system. I then compare what the parts report says you should have in inventory versus what is on the general ledger and look for any large differences. There will almost always be differences like work-in-process tickets not closed in accounting but removed from the parts pad and assigned to an RO. Miscellaneous parts, used parts, chemicals for the technicians, in transit shipments or shipments received by parts and stocked in but no accounting invoice from the vendor has been entered into the accounting system will also cause you differences..
This tax season, as with most, I am shocked to see some very large differences between the parts report and the general ledger, along with other troubling facts on the reports. The differences are too large, for the most part, to be caused by some of the usual reasons just listed. The parts counter pad is just off from the general ledger and may have been off for quite a while.
After I compare the inventory totals, I move to other parts of the report. I review what the appreciation/depreciation was for the year. This is the amount the factory has changed the cost of existing parts currently on hand when a parts update is applied to your system and you can’t control it. This is an amount for which the accounting office should be recording an adjustment on the general ledger as changes occur. Appreciation would record income on your books, whereas depreciation would record expense on your books to the cost-of-sales account for parts adjustments. When you record these adjustments, you are affecting the overall parts gross profit. Look for this account in your financial statement in the sales/cost of sales area. It is on most factory financial statements.
The next thing I review is the adjustment section. This can be positive or negative, but it is normally negative. This is caused by manually adjusting the counts or cost of a current part in inventory. This means you wrote off quantities of parts or adjusted the cost. Either one is not good news. If it is negative, you just took a hit somewhere in dollars. Why are these total adjustment amounts so large? Most systems have a report you can print to list these adjustments by part number.
I also look at the obsolescence of the total parts inventory. Most reports tell you the number of parts and dollar amounts of parts which have not had a sale in ranges of months. For example, the ranges may be zero to three months, four to six months, seven to 12 months and over 12 months. If you look at the dollars in each category, it can be pretty scary (especially in the 12-months-and-over-with-no-sale category). Some of these over-12-months-with-no-sales seem to range from a low of two percent to 40 percent of the total inventory value. These parts are definitely heading towards obsolescence. You probably don’t generate a large enough parts return allowance to ever return these parts. You can print a list of these part numbers and amounts from most systems.
Another problem is a large dollar amount of parts with negative on-hand balances. This should be very small and should be investigated because you can’t sell a part you don’t have. Either the correct part was stocked with and sold under an incorrect part number or someone is just not watching the inventory and correcting or hiding these problems. Again, you can run a report of these part numbers to clean them up.
I also see an increase in the amount of non-stocking parts not sold. You should not have a large balance of non-stocking parts. Think about it. They were coded to non-stocking for a reason. You shouldn’t be carrying an inventory of these. Sometimes this balance is made up of special-order parts. Again, if this is a large balance, print a list and go find them in the bins and ask why they are still there if they were ordered for someone. These parts should be in a separate source in the parts pad and segregated in the parts department from the normal parts so you can print a checklist to see if they are all there. Also, ask if the parts department received a deposit or payment in full from the customer when the parts were ordered. If they are paid in full, they should be billed out and not on the parts pad.
I will leave you with a few suggestions:
1. Have an outside inventory firm count the parts annually without any help from your parts people. The parts firm should also keypunch in the physical inventory. The variance report should be given to the dealer for review with the parts firm and the parts manager.
2. Have your parts personnel complete perpetual physicals of various bins weekly, and occasionally have someone from the office present when they are counted and checked on the parts pad for accuracy.
3. Run the management reports ASAP, check out what parts are not on the pad, determine why they’re not on there, locate where the used parts are shown, compare the parts pad to the general ledger, and check out the obsolescence, parts with negative on-hand, adjustments, appreciation/depreciation, etc.
4. With daily-stock order deliveries, find a way to reduce the cash tied up in the excess days supply of parts. Contact some of the companies who will buy the parts for a discount. Some cash is better than no cash and obsolete non-returnable parts.
Learn your parts department and how to read the management reports, and set goals to clean up the parts department.
Vol. 8, Issue 4