NADA MONTHLY DEALER OPERATIONS COMMENTARY: Spotlight on Your Parts Department: The Forced Stock Issue

NADA MONTHLY DEALER OPERATIONS COMMENTARY:

The Forced Stock Issue[/SIZE]

The lower your number of forced stock purchases, the higher your profitability. In a forced stock purchase, parts are ordered and demand never occurs. The part may have been purchased for emergency repairs, due to misdiagnoses, as insurance against recalls, or it may be a part that was ordered outside of the weekly stock order and was not sold to the specific customer for whom it was purchased. Regardless of how the part was obtained, the yearês sale is zero and you have one or more forced stock parts in your inventory. Forced stock purchases are usually unfulfilled warranty requests, wholesale returns, or speculative stock orders.

Calculate what percentage of your inventory is forced stock by taking the total number of forced stock parts and dividing it by your inventory total. To calculate the monthly average of this stock, take the total number of forced stock parts and divide by 12. You should measure the past 12 months because that will give you a realistic depiction of your inventory without getting into the issue of obsolete parts. Calculating the monthly average at the close of each month will help you determine how much of the demand went unfulfilled. About 20 percent of the typical dealershipês parts department inventory is forced stock.

Here is an example to illustrate why it is extremely important to limit the amount of forced stock in your inventory. We will make some assumptions to help with the example.

Assumptions:

à $10,000 in forced stock inventory each month

à All are warranty parts with a markup of 40 percent

à Service labor is $1 for every $0.80 worth of parts sold

à 70 percent profit margin on warranty labor

If you had sold the parts, you would have realized $4,000 in gross profits. [$10,000 x 40%]

Since they are warranty parts, you also lost the labor the service department would have sold for installing the parts for a total of $12,000. [[$10,000 x ($1 – $0.80)] + $10,000]

If lost labor sales are $12,000 and your profit margin is 70 percent, you have lost $8,400 in labor gross profits. [$12,000 x 70%]

Add these figures together and you have lost a grand total of $12,400 because of the unfulfilled demand. In addition, it costs your parts department 2.5 percent in holding costs (of the $10,000) every month to keep the parts in inventory. Over a year, the holding cost is $3,000. Then, if you decide to return the parts, you must accrue the necessary return allowance. Therefore, the total cost of having $10,000 of forced stock in inventory is actually $15,400, and that is over and above the initial $10,000 needed to stock the parts!

In most dealerships, only 20 percent of the forced stock sells. The other 80 percent wreaks havoc on the parts inventory. Performing the forced stock and lost profit opportunities calculations for your dealership will help ascertain if you have a problem with forced stock inventory.