Best Practices for the Parts Department

The parts department provides significant contribution to the overall profitability of a dealership.  Good procedures and reviewing performance will maximize the department’s profitability.  Here are a few suggested best practices we have observed:

• Have a physical inventory of the parts on hand performed by an outside service vendor every year. Some dealerships may opt to have an outside company conduct the physical every other year and in that case, have the physical inventory performed by internal personnel in the off year.
• Once the physical is performed the office must reconcile the physical to the general ledger promptly and make the appropriate adjustment.
• On a monthly basis, compare the value of inventory per the general ledger with the value per the PAD.  This deviation generally should not exceed 2%.  Variances in excess of this are indicative that there is either a paperwork problem or shrinkage problem.
• The office should obtain reports from the DMS system that provide the parts appreciation figure and book the adjustment monthly.
• The open parts statement from the manufacturer should be reconciled promptly to the general ledger each month.
• Parts should move from a non-stocked item to a stocked item only after at least 3 demands for the part over a 3 month range.  The parts manager needs to review demand for parts regularly to determine what items are to be kept in stock.
• You should not have a large balance of non-stocking parts.  These items were moved to non-stocking status for a reason.  Excessive balances should be investigated.
• As a rule of thumb, the parts inventory balance should be approximately 1.5 times the average monthly parts sales.
• When possible, items in excess of 12 months aged should be returned to factory for credit or sold elsewhere.
• The dealer should review the parts department’s performance on a monthly basis.  The benchmark gross profit margin for parts department should be 28-38%.  A store’s gross profit percentage will vary depending on the brand and the amount of wholesale parts business.  Deviations from the norm in excess of 1% in any month require investigation.
• The parts manager should check bins weekly and compare to the parts pad.  Significant variances between the pad actual parts on hand should be investigated to determine cause of error.
• Unreturned cores should be kept in a secure area and with an inventory listing maintained.  Inadequate record keeping is common, which allows for theft and shrinkage of these items.
• Wholesale parts should be analyzed to determine profitability.  If a store is not generating a significant amount of sales, the wholesale parts business is probably losing money due to the cost of personnel, parts delivery vans, inventory carrying costs and bad debts incurred.
• Tire inventories are growing at all stores, and this area is highly susceptible to theft.  Physical inventories should be performed at least once a month.
• Due to sophisticated ordering modules most clients are experiencing a reduction in their parts inventories.