I like museums. It is fascinating to see history preserved and I appreciate the tireless efforts of the people who do this work. However, in our industry, we are not in the business of protecting history. We are in the business of selling and supporting equipment. What would it look like if your total parts inventory were on display? Would it look like you are supporting a product or running a museum?
When we work with a dealer, we usually create a parts inventory profile. With this tool we can see their parts inventory stratified by velocity. There are no “official” velocity groupings, but I typically use something like this:
- Fast-Moving – The top 40% of the hits and usually around 5% of the parts numbers in inventory;
- Active – Parts that sold in the last 18 months but are not in the Fast-Moving category;
- Dormant – Parts that did not sell in the last 18 months but have sold in the last 36 months;
- Dead – Parts that did not sell in the last 36 months.
With the inventory profile created we can discuss Inventory Health. We start at the top with the fast-moving and active parts. Do they have all the fast-moving and active parts they should have? We measure this with a breadth or compliance metric. Simply put, are they stocking the parts that meet their stocking parameter? We normally set our stocking parameter around 2 or 3 hits in the last 12 months. Occasionally, we will look back 18 months if there has been seasonal variation. This is a critical parameter for your business. It ensures you have the right parts in stock and deliver a good fill rate to your customers.
Next, we look at the dormant and dead categories. How much of their investment is tied up in these two categories? Dead is an easy one to advise on – get rid of it. Hopefully you can still return the part or find an outlet to recoup your cost. I have worked with dealers who have up to 40% of their parts inventory investment tied up in dead stock. The financial investment is only part of the problem, space is usually an even bigger issue.
The dormant category is up to the dealer. Some are comfortable stocking parts in this category. They know some of those parts will sell again and they will be ready to support the customer. This all comes down to an inventory parameter that is frequently ignored: the phase-out parameter. We talk a lot about its counterpart: the phase-In parameter, commonly called the stocking parameter mentioned above.
Back to the phase-out parameter. If you have not been actively “destocking,” I would recommend starting at zero sales in 36 months. This aligns with the above dead classification. It will take time, but you will see your inventory turns increase and your space utilization in the stockroom will improve. Clean up the dead inventory first. Then take a hard look at the category called dormant. We know some of these parts will sell again, but do you have the space to keep those on hand? How much cash and space could you free up if you cleared that stock? Start by changing the min/max values in the system to zero to make sure they do not get restocked. If the part velocity increases, it will naturally be converted to the active category.
I am always glad to help dealers improve their inventory health. There are more than 35,000 museums in this country. Let them curate the relics.
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