Written By: Alysha Webb
As fixed operations becomes increasingly important for a dealership’s bottom line, one part of the service department may be getting short shrift– the parts department.
A recent Rosenfield and Co. webinar featuring Parts Girl podcaster, Kaylee Felio, Sales and Marketing Manager for PartsEdge, and Ken Rosenfield, our Founder and Partner, looked at how dealerships can manage their parts department for profit optimization.
It's about having the right mix of fast moving and productive parts to increase profitability.
Dealerships’ service and parts operations brought in some $43.84 billion in revenue in the first six months of 2024, according to NADA. The average dealer carried some $565,520 in parts inventory during that time. That’s a significant commitment of resources.
Managing it properly can be a nice boost to a dealership’s bottom line.
Idle Inventory
Start by taking a close look at what parts may be moving, but not quickly enough to prevent excess carrying cost. “So basically, your DMS says you need five, but you have ten,” Felio said.
That small item – accumulation of idle inventory — often gets overlooked and results in what some call frozen capital.
As those parts accumulate, they trend into obsolescence.
One way to avoid a buildup in obsolescence is keeping a close eye on data from Auto Stock Replenishment Programs from manufacturers such as RIM and ARO. Felio recommended treating RIM and non-RIM inventory as separate categories to get a handle on overstocking.
Parts ordered through ASR programs generally are protected and dealers can return them unsold within a set time frame. Parts not ordered through an ASR program are unprotected and can only be returned using accrual allowances, which are often minimal, Felio said.
By reducing the amount of non-protected inventory, one dealership increased productive actively selling parts by 62% while the inventory investment reduced by over $80,000 in six months, Felio said.
“So, it’s basically taking that idle inventory, shifting it to better use and then returning the inventory faster,” she said.
Gross Turn
Felio also recommended looking at Gross Turn – which tracks all purchases and sales — rather than True Turn, which tracks stock replenishment orders.
Inventory should be generating revenue, not sitting idle. So, a higher gross turn equals more sales with the same investment
The parts that are turning more rapidly are generating revenue more quickly, so a dealership should analyze its parts investment to see which units are selling and which are turning on a regular basis.
“Six to eight gross turns are best for optimized profitability” she said.
Reducing obsolescence should be the focus of inventory management for optimal profitability but it requires more than just relying on the DMS, or at the very least making sure your DMS is set up to handle a dealership’s current parts situation rather than that of the previous management, Felio said.
The DMS “should be constantly reviewed and adjusted to keep up with your growth,” she concluded.
Watch Out For Special Order Parts And Messy Parts Counters
Keep an eye on those special order parts, advised Ken Rosenfield. His firm has discovered clients that have a “significant” investment in special order parts that are sitting around waiting for a customer to come in and pay for them.
He recommended a dealership make an appointment with the client to pick up the part and perhaps require a down payment to encourage the buyer to show up and pay the balance.
“Because I can’t tell you how many times a dealership might not be able to get the part right away and the customer goes somewhere else because they can get the part quicker,” Rosenfield said.
He also recommended tweaking a dealership’s parts ordering matrix often, even monthly, so it reflects the current demand environment.
The Rosenfield team always checks out how neatly a dealership’s parts department is organized. A messy department, with parts sitting around on the counter for no reason, may have hidden fraud, Rosenfield said.
His firm also looks at True Turn and what it calls Dollar Turn. True turn is based on the number of items and computing the maximum base supply. Dollar Turn is based on the investment in the inventory.
If an item is turning quickly, does it translate into dollars? “The dollar signs, when matched with the items, give you what we always call frozen capital or invest. You know, parts that are just obsolete or that you have money tied up in that could be in cash,” Rosenfield said.
If a dealership has many obsolete parts, it should have a system to get rid of them for tax purposes, as a write-off. It needs be like Elvis Presley and leave the building.
Wholesale operations is another area Rosenfield’s team finds could be improved for profitability. They analyze the zip codes wholesale parts are being sold into.
Dealerships may be selling to competitors, or to “lost souls” — service customers that no longer come into the dealership to have their car serviced. “You want to find out why and get the customer retention, the customer loyalty, back,” he said.
No Messy Parts Managers, Either
One of the best ways to stock the right parts in the most efficient way is “through a top-performing, innovative parts manager,” Felio said.
One quick evaluation tool is to check out a manager’s desk.
“If you go into your parts manager’s office and it is very neat, you probably have a really good parts manager because they are very, very neat people,” Felio said.
Want To Dive Deeper Into These Insights?
If you missed the live webinar, you can still catch the full discussion on demand! Watch as Kaylee Felio and Ken Rosenfield, CPA break down the key strategies for optimizing parts management, reducing obsolescence, and improving profitability.
📺 Watch the Webinar Recording Here
Have questions or need assistance implementing these strategies in your dealership? Our team is here to help! Contact a member of our team for questions and expert guidance.