Identifying the Hidden and Profit-Draining Costs of Your Parts Inventory

WithMark DeLucia, Founder of Dealermine

Moderated byMike Bowers, Executive Editor of DealersEdge

Thursday, May 31, 20121 – 2:30pm ET

Mark De LuciaFounder of DealerMineMark started PartsVoice over 22 years ago. He pioneered the idle stock relocation industry in 1997 and also developed the Chrysler locator, which later evolved into Mopar national parts locator. His extensive sales and marketing background has formed thousands of industry contacts over the past 22 years.

Identifying the Hidden and Profit-Draining Costs of Your Parts Inventory

and the Largest Profit Increasing Opportunities

Mark De Lucia, President of DealerMine Corporation

�The founder and president of DealerMine Corporation(founded in 2006).Has served over 13,000 dealership parts departments over 25 years in the parts industry;�Co-founded PartsVoice in 1985, the largest automotive parts locator of its kind. PartsVoice had over 10,000 participating dealers and provided national parts locators for 7 different manufacturers. Mark was instrumental in the development of the Chrysler parts locator for PartsVoice which later evolved into the ‘Mopar National Parts Locator’ for Chrysler Corporation. Mark also initiated the "Idle stock relocation" industry in 1997 which later evolved into Ca$h Discovery Program after PartsVoice was acquired by The Cobalt Group in 1999. �Over the years, Mark has spoke to 1000’s of parts managers thru local, regional, and national parts associations and has built numerous industry relationships throughout the years. Mark remains passionate and focused on the long term interest of each of the dealerships and individuals he works with.

About the Speaker

Overview�Look at some interesting stats & financial trends

in the industry�Hidden costs & opportunities in the parts

department�Costs associated with having wrong parts on shelf�Parts manager roles�Case Studies-Including CPA analysis� Identifying & Measuring Missed opportunities�Action Plan

Dealership Parts Industry Statistics(a)� Total parts inventory: $4.87 billion� Total parts sales: $43.8 billion� Total inventory turn per year: 9� Total gross profit: $12.92 billion� Total obsolescence (10% avg.): $487,000,000� Total excess (20% avg.): $974,000,000� Total obsolescence + Total excess: $1,461,000,000� Total USA dealers: 17,700� Avg. inventory: $275,370� Avg. Total obsolescence: $27,500� Avg. Total excess: $55,000� Avg. Total obsolescence + Avg. Total excess per dealer: $82,611

Sources: Mike Nicholes Capital Management; NADA Industry Analysist Division;PartsEdge Incorporated

Dealership Parts Industry Statistics(b)

Dealership Financial Trends(a)

Dealership Financial Trends(b)

Dealership Financial Trends(c)

Penske Automotive – Publically owned group of 335 dealers(symbol=PAG)

All dollars are represented in thousands

The Seven Hidden Costs That Drain Your Profits

� Theft� Insurance� Depreciation� Cost of Capital� Storage� Administrative� Obsolescence

The first 6 comprise holding costs (representing 28% total cost*), the last we will discuss later in presentation.

Source: *Mike Nicholes Capital Management

The Parts Manager’s Roles

We will just look at three roles today

�People Manager

�Hiring Manager

� Investment/Money Manager

People Manager� People Manager

• Managing people is a fine science

Hiring Manager

� Hiring and Firing• Cost of not having enough people• Cost of having the wrong people

• Value of pre screening tests(a few stories)

Investment/Money Manager� Investment Manager

• Stock broker analogy• Which one are you?

The Biggest Drag on Your Profits: Opportunity Cost

Definitions: �Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the cost of the forgone products after making a choice. Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice". The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs

Opportunity Cost –Simply Put

In terms of parts:“Money is a finite resource so it can NOT be in two places at one time. When your money is tied up in one place, it can’t be invested in another.”

High Stakes Opportunity Costs� How Big Businesses take lost Opportunity Costs very seriously

� Wal-Mart: The Model for Inventory Management Efficiency� Costco: Actually Beating Wal-Mart in Stock Turnover� Grocery Stores: A Battle for Every Inch of Shelf Space� High End Retailers: Nordstrom and Macy’s � Priceline: You can’t go back in time

�The model for inventory management efficiency

�Uses data infrastructure to increase the supply of best-selling items

�Uses computer forecasting to predict the exact quantities of each item to be delivered, based on inventories in each store

�Sell its whole inventory roughly 12 times a year (on average)

�Outperforms Wal-Mart in inventory turn-over(14 times vs 12 per year)

�Warehouse stores carry only 4,000 items

�Focuses on bulk-sellers

Grocery Stores�What’s more perishable than fruits and vegetables?

� Every second that passes by is a lost opportunity

Priceline.com� Sells available travel related items for last-minute deals�Any amount is better than an empty room

Nordstrom� In-demand items receive prominence in the store�Non-selling items are quickly discounted to make room for hot-sellers�Nordstrom opened Nordstrom Rack stores to move heavily-discounted slow moving fashions

Bringing it Home: Opportunity Costs� Examples in the dealership: Used Cars and Service Department�Used Car Illustration

The first step is to calculate your average vehicle turn, then assume every space on your front lot could be holding a vehicle that would turn at that average. Then apply your net on the deals to that space. To illustrate: assume you have an average turn of 60-days. That means you could turn over six cars a year from that space. If you net $1,200 per deal, then the annual opportunity cost for each space is 6X$1,200 or $7,200. Divide that by 365, and you get $19.72 per day. So every day that a car sits over the 60-day average, your are losing $19.72 that you would otherwise be making with an average turning car. *

* Source: autodealerpeople.com

Lost Service Department Opportunities

1)Don’t have the part for particular service job so customer decides to go elsewhere.

2)Not open at a time or day when customer can bring car in.

Identifying Opportunity Costs� How you can calculate your own profits by eliminating Opportunity Costs in your parts department:

�The cost of having the wrong parts on the shelf;

� How much is it costing my dealership,ie, can we actually assign a monetary value to the opportunity expense in my parts department?

�Run the Numbers …. Because they don’t lie…..

Opportunity Cost of ‘Wrong’ Parts� What are ‘wrong’ parts?

�Obsolete or Idle Parts Inventory�Excess Inventory�Special Order parts not picked up by customer�Various and sundry NS or Phase Out parts lower than the MNS used for obsolescence definitions

Obsolescence Definitions� Slow-Moving Inventory Doesn’t Help Your Bottom Line� 9 Months Idle = 85% Chance of NOT Selling*� 12 Months Idle = 95% Chance of NOT Selling.* Holding costs become more than profit on

part IF you sell it.

� Most ‘non protected’ parts within ASR(automatic stock replenishment) programs

* Taken from Mike Nicholes “Professional Inventory Management” (2005)

Excess DefinitionsParts that have an on hand quantity that exceeds the high days setting of month or days supply(sometimes referred to “Best Stocking Level”). Example, let’s assume you have a 30 day high days setting and a given part number sells 30 a month, or 1 per day. For the sake of understanding the reordering process, let’s assume that the low days supply setting is 15 days. (Best Reorder Point) Therefore, on this given part, your reorder point would be 15 and the system would wait to get to 15 before reordering it back to 30 (ordering 15 more) to get it back to the best stocking level. Now, let’s assume two more things. The current on hand is 150 and the cost is 3.00 each. Your total value of the 30 that are at best stocking level is $90.00. The other 120 filters total $360.00. In short, you have a 5 month supply and $360.00 worth of inventory that could be spent or redirected elsewhere. Start adding this up and you can have a considerable amount in wasted or idle inventory looking good but not turning.

(Source: Partsedge.com Incorporated)

What Does This Mean…Wrong Stock

=Lost Sales

=Reduced Profits

What the Experts say About Obsolescence

“Get rid of Obsolescence

�Maximize all existing programs� Request ‘Special Returns’ from every supplier� Use every opportunity to sell obsolescence

What does not calculate is to keep it and allow it to appreciate in value while it is only becoming more expensive to hold on to it. If it were used cars that were not selling what would your dealership do? Send them to the auction and take the loss before it gets worse. But then reinvest in better inventory to make it up as quickly as possible” – Richard Owen, ROI Consulting

What the Experts say About Obsolescence

“The word “obsolescence” is a dirty word in any retail business. As the years have gone by, in the Automotive Franchise Industry, we are learning what many other retail industries have dealt with all along. The Manufacturer doesn’t want inventory back! We were trained to return our unwanted and obsolete parts back to the Manufacturer based on earned return allowance. As economies have changed, so has the amount of return accrual from the Manufacturers. With that being said, it is no wonder idle inventory in the typical dealership inventory has grown by 5% over the past several years and it continuing to grow. Thousands of parts needed each time a new model comes out means part number proliferation. You just can’t take your obsolete parts and throw them in a bin and mark them down as a “discounted” part in the dealership parts department. Now is the time to start working on a long term plan to accrue money to keep obsolete parts purged on a consistent basis. And the good news is that there is a network of dealerships out there looking to buy some of those obsolete and hard to find parts” – Chuck Hartle, PartsEdge

What the Experts say About Obsolescence

“Obsolete parts, sitting on the shelf with no sales history for over 12 months is like cash in a sealed can; you aren't using it and you don't have access to it. To make matters worse; when a part that has over 12 months no sales, does sell, the gross profit "you think you made on the sale" has already been spent in the holding cost of the part; which in most cases is about equal to the holding cost of the part. A prime responsibility of the parts manager is having the controls in place to keep obsolescence from getting into the inventory in the first place. Second, is finding a ready outlet for the obsolete inventory to free up space, and whatever cash one can glean from it” – Mike Nicholes, Capital Management Inc.

WBC Case Study70 dealers representedAverage Obsolescence per dealer in case study: $57,000Obsolescence in WBC = $14 mill $ 4 million of $14 million considered for this case studyAmount sold in WBC = $600,000% sold of WBC Obsolescence sold = 15% Sold at Net 42% = 252,000Amount re-invested in fast movers = $252,000(YRSL = 10)Additional Revenue generated = 2,520,000Additional profits generated = $720,720(Rev x 28.6% ave Gross Profit)Net Gain from above transaction(s) = $372,720 Net Gain % from above transaction(s) = 62.12%

XYZ DEALERSHIPPROFIT AND LOSS STATEMENT AS OF DECEMBER 31, 2011

Keeping Idle Parts

Selling Idle Parts

Inventory Inventory Difference

Sales 1,000,000 1,000,000 -Cost of Goods Sold

Beginning Inventory 150,000 150,000 -Purchases 400,000 400,000 -Less: Ending Inventory -180,000 -130,000 -50,000Cost of Sales 370,000 420,000 -50,000

Gross Profit on Sales 630,000 580,000 50,000Operating Expenses 500,000 500,000 -Net Income Before Extraordinary Items 130,000 80,000 50,000

Extraordinary Item - Sale of Inventory - 25,000 -25,000Net Income Before Taxes 130,000 105,000 25,000Income Taxes at 25% -32,500 -26,250 -6,250Net Income 97,500 78,750 18,750Extra Cash Provided by

Proceeds of $25,000 less 25% Tax - 18,750 18,750

CPA

ANALYSIS

Source: Rogers Financial Services, Oregon

Action Plan� Determine your acceptable amount of obsolescence and excess inventory

A few questions must be considered: When dealing with a hornets nest, is your goal to get rid of half the problem or the whole problem? Or, How long will the dealer put up with a 0% ROI on a portion of the parts inventory? Or, more appropriately, how long can the business afford NOT to make high % returns on frozen capital when those kinds of returns are available? Don’t panic AND …..

DON’T FAIL TO PLAN�Look at factory incentives�Review your investment regularly�Consider an Ad budget�Consider aggressive Obsolescence Reduction

Methods

Dealership Advertising Statistics

Dealership Advertising Statistics

BLOW ‘EM UP!

FLUSH ‘EM

MAKE FLOTATION DEVICE

Disclaimer• DO NOT TRY PREVIOUS METHODS AT HOME

• TRY THE ONES ON THE FOLLOWING SCREENS

☺

Idle Inventory Reduction Methods�Auction services� Pros-good exposure� Cons-high maintenance, ie, time consuming to manage, usually discount price� Future trends- you see more and better auction sites

� Donating parts� Pros-write off, goodwill in your local area� Cons-no cash value other than reduced tax impact

� Throwing parts away� Pros-immediately resolves problem creating additional shelf space for fast movers� Cons-only financial benefit is write off, filling landfills but not your pockets

� Obsolescence Liquidation Services� Pros-get something for a portion of your unneeded parts, bigger return than throwing them away� Cons-you have to assign resources to pack them up. Discount price� Future trends you see-OEM’s creating controlled (or biased) marketplaces

CONCLUSION�Would you think differently of non moving parts If each

one had there own warehouse stacked to the ceiling with just that one part?� If you had a warehouse for each part like that, you would

dump it as fast as you could� Now think of that number as the only part in your

inventory and the bin as a warehouse that only stocks that one part number. � If you don’t sell it, dump it and put a higher producing

part in its place. A short term loss will produce a much higher long term gain.� Don’t forget the secret weapon.

At the End of The Day

Answer Questions� Any questions?

Contact InformationWeb - www.dealermine.com

Call (888)-BUY-PARTS x 101

(503) 936-9908 cellEmail

mark@dealermine.comTHANK YOU!!!