Gary Naples and Parts Department Inventory Control

Some thoughts on Phase-In

2009-07-08T08:47:00.002-04:00

Of the many issues facing Parts Managers those of Phase-in/out and days supply seem to be the most confusing. On the phase-in side the two factors are time and the amount of sales occurring within the specified time. The two questions we attempt to answer with our phase-in setting is “When do I actually start stocking the part?” and “What is the probability of resale of the phased-in part over the next 12 months?” Phasing-in too soon can cause needless tie up of working capital (frozen capital) and a lower probability of sale of the item over the next 12 months. Either way, its working capital you can’t invest in selling product. You can try and guarantee your probability of resale over the next 12 months by using a more restrictive or conservative phase-in. The problem is, by utilizing the conservative setting, you may be missing out on stocking opportunities. For example, if my phase-in test period is 4 months and I need 3 separate months of sales (a 3/4 phase-in setting—which some industry folks say should be used) the resale probability of selling the item over the next 12 months is 99.8%. If on the other hand, I only require 1 sale within the 4 month test period the resale probability is 92.6%. Both have better than a 90% chance of reselling in the next 12 months, but the 3/4 setting is almost a sure bet.

Unfortunately, due to the restrictive or very conservative nature of the setting, only those items with high activity will ever meet the 3/4 criteria. To further emphasize the point if the test period is January, February, March, April the sales will have to occur 3 out of the 4 months, or January, February, and March. Otherwise, phase-in does not take place.

As for longer phase-in test periods we must also consider opposite implications. For example, if we use a setting of 2 months sales in a 12 month test period the probability of resale over the next 12 months is 87.5%. This is still a good opportunity. However, additional scrutiny or testing of the item may be warranted if the 12 month test period is say January through December and the months of sale are January and October. What I’ve found that works best, as a starting point, in these times for the U.S. market, and I share this thinking with others, is a 9 month test period. My standard recommended setting is 3 months of sales in a 9 month period. The 3/9 setting yields a 97% probability of resale. Consider though, in any setting case, we are applying a cookie cutter approach. But you must have a starting point, thus the 3/9. Once this setting or any setting for that matter is in place review of appropriateness to market activity (customer demand) is crucial. If you desire greater flexibility of phase-in supportive of building inventory width or breadth try a more relaxed and aggressive initial phase-in of 2/6 or 2/9. Some parts that meet these criteria may be worth stocking, if not move to another source with higher demand (3/9 or 3/12) for additional testing. This method is really nothing new. It’s been around a long time and works. In the end, regardless of the setting, it’s the Parts Manager with the last say as to whether the part is placed in stock or not. Other circumstances must be taken into consideration like facility capacity, mfg. stock codes, return eligibility, time lapse between last and previous to last sale, etc. Additionally, some of the newer systems in service, such as Arkona, may warrant a different twist on the phase-in setting. As a final note on phase-in, the 12 month view is still the norm even outside of the U.S. OE automotive segment for evaluating parts inventory performance. We know this to be the case based on our aftermarket and international customers.

You Can't Take A Cookie Cutter Approach to Days Supply

2009-06-03T08:54:00.002-04:00

The problem with guidelines, like those provided by manufacturers to their dealers for parts inventory days supply, is that some folks see them as hard and fast rules. Guidelines are just guidelines. During the training and consulting services that we've provided to thousands both nationally and internationally we emphasize that each guideline or operating indicator is just a piece of the puzzle. You can't take a cookie cutter approach and apply it rigidly to all dealerships. Every business operates different. This applies squarely to guides for parts inventory days supply. Guidelines or performance indicators help you determine if you're operating below, at, or above the norm. So, when I speak to dealership management about how much days supply is sufficient I pose these questions:

Is Return on Inventory (ROI) on target or better?
Is inventory obsolescence at or below guidelines?
Are inventory levels matched to customer demand (no excess inventory?)
Are gross and true inventory turns at or above guides?
Are customer service scores (CSI) at or above guidelines?
Are emergency purchases at an acceptable level?
Is fill rate to the Service Department at or above target?

If the answer to all these questions is Yes, then whatever your days supply is, that's what you need to operate. If it's 30 days or 120 days that's what you need.

Keep in mind there is always room for improvement and improvement should be continually sought. However, to arbitrarily increase or decrease the level of days supply just because it's not at factory guide or it is simply deemed too much doesn't make good business sense.

A final recommendation on analyzing department performance guides such as days supply. Don't panic if you're below or become complacent if at or above. Use out of guide situations as red flags to assess performance. Look at what information makes up the formula and follow those paths. Then look at the big picture. If all is in line then being under or over a guide is no big deal.

A final thought. Make sure the information you are using to analyze your performance is accurate and correct. As George Fuechsel, an IBM technician/instructor said in the early days of computers, "Garbage in; Garbage out."

Lost Sales: To Post or Not to Post

2009-03-13T18:06:00.005-04:00

When I train folks in the parts supply industry or when I'm contacted for advice, particularly when it involves the subject of lost sales, I like to challenge their thinking. There are soooo many schools of thought when it comes to lost sale posting. Trying to determine the best thing to do can get a little confusing. It can even cause you to take the gas pipe (a favorite saying of mine when things start to spiral out of control or get confusing beyond comprehension.) Anyway, here's another log on the fire. Think about the special order parts that are not prepaid that customers never come back for. You don't know why the customer didn't come back. But, you do know there was a demonstrated demand for the part, particularly if it was determined that the part was needed when the problem was diagnosed in your own service department. So what now? Does it make sense to record this unsold special order part or parts as lost sale(s). Some say, no way! A certain percentage of these customers are going to return and now you have overstated demand possibly leading to stocking errors and overages. Some say, Yes! The idea is to capture total demand. This is the only way you can keep your inventory customer responsive. Besides inventory control system settings and good judgment can help manage aggressive lost sale posting. Some say, no clue. This gray area of whether or not to post unsold special order parts as lost sales can be perplexing. But, think hard and carefully about it. It can be the difference between a profitable inventory and a unprofitable inventory. What do you think?

Know Your Phase-In Settings

2008-02-25T11:57:00.004-05:00

I recently read online an inventory management article where the author recommended using an aggressive parts inventory control phase-in setting of 3 months sales in 6 months. BE CAREFUL! This is not an aggressive phase-in setting. It’s quite the opposite! My experience has shown that by using this setting you’ll likely miss a lot of stocking opportunities. Sooo many folks in the parts supply chain industry, whether OE or aftermarket, get confused about product phase-in. The basic formula is 'demands over time.' When you’re looking to add parts, based on total customer demand (sales + lost sales) to your stocking inventory, using an optimum phase-in setting will help. Depending on your objectives, market, and how aggressive you want to be, some phase-in options to consider are: 1 month sale in 6, 9, or 12 months; 2 months sales in 6, 9, or 12 months. The percent probabilities of resale over the next twelve months associated with these phase-in settings are: (1 month sale in 6, 9, and 12 months; 87.7%, 80.5%, and 74% respectively) and (2 months sales in 6, 9 or 12 months; 96.3%, 92.2%, and 87.5% respectively.) Add more demands to the same period, and the phase-in is more conservative. Less demands are more liberal. Lengthening the time period for demand testing is more liberal, while shortening the time period is more conservative.