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A plan that should boost PG&A profitability

November 2, 2009
Filed under Features

Best way to combat aged inventory:?Identify it, then make a plan to get rid of it

By Neil Pascale
Editor
It’s probably not a stretch to say Steve Sowden’s parts staff sometimes goes home with fluorescent yellow dots swimming around their heads.
That’s because Sowden’s staff uses small fluorescent yellow stickers — bearing “was and now” prices — to wage a constant battle against obsolescent inventory, parts, accessories and apparel that have aged to the extent that a dealership must discount them to move them off the shelf and reinvest that money in more current and hopefully more profitable PG&A.
“It gets a little tedious. In fact, it gets very tedious,” Sowden said of the sales stickers that are put on each and every one of the items that have sat too long on the shelves.
Sowden, general manager of fixed operations for the five-dealership California Motorsports Group, has used that tactic and others to keep the parts department inventories he oversees exceedingly clean of aged product. Sowden’s stores typically carry 2 percent or less of obsolescent inventory — parts and accessories that have been on a dealer’s shelf for at least a year.
Unfortunately, that slight obsolescent or OBS percentage is not the industry norm. An ADP Lightspeed survey of close to 250 dealers in the spring of 2008 showed the amount of money dealers have tied in stagnant inventory is staggering.
That amount? If the entire U.S. franchise dealer network amounts to at least 6,000 locations — a commonly held belief — then the amount of OBS inventory could exceed $1 billion, said Hal Ethington, the senior analyst at ADP Lightspeed who conducted the study of 248 dealerships and more than 9 million parts numbers.
The dealership PG&A survey found, on average, dealers only sell 58 percent of the parts and accessories they purchase within a year’s time. Meaning more than 40 percent of all PG&A inventories sit on shelves or in backrooms for longer than a year. Further, 26 percent does not get sold within five years, the dealer survey found.
Ethington, a Powersports Business columnist, noted an average dealer PG&A inventory amounts to $400,000, meaning $168,000 is tied up in OBS inventory.
However, that’s an average dealer. The ADP Lightspeed survey found the poorest performing dealerships were in much worse shape. Of their PG&A purchased, only 30 percent was sold in the first 12 months after they received it.

What to do?
Identify it, then make a plan to get rid of it. Industry experts believe, in simple terms, those are the ways to “clean” a dealership’s PG&A inventory and thus significantly improve their profit margins and overall profitability.
For Sowden of the California Motorsports Group, the identifying piece of the OBS puzzle falls into three separate checks, all of which he advises be done at least monthly.
The first of those checks — each of which can be done on dealer management systems — breaks down inventory by age. Sowden advises dealers sort out their inventory in five different age classifications: 0-3 months, 4-6 months, 7-9 months, 10-11 months and 12 months and over. Dealers should then take the results of that and measure them against a benchmark.
Sowden, for example, strives for the following inventory targets: 60 percent of the store’s inventory be 3 months or less, 18 percent be 4-6 months old, 14 percent be 7-9 months old, 6 percent be 10-11 months and 2 percent be 12 months or over.
Save the store’s inventory data after each month, he advised, “so you can see where you’re making progress.”
Secondly, look at your PG&A inventory by product category: helmets, T-shirts, tires, etc. “The more categories you have, the better information you’ll have,” Sowden said.
Last, examine your inventory by source, whether it’s by distributor or by OEM, to take advantage of any product rotation or return policies that a dealership might have access to.
“In the macro view, that tells you what you have to work on,” Sowden said of the three inventory checks.
And that’s where those tedious fluorescent yellow stickers come in. Sowden says his stores are very aggressive about putting slow-moving inventory, especially accessories, on sale once it hits five months old.
“The primary way to move accessories is sale prices, and making sure every single customer who walks through the door can’t miss it,” Sowden said.
His stores, generally speaking, put a 15 percent discount on inventory that is 5 months old. Once the same product hits 6 months, it goes to 20 percent off. Then 25 percent if it’s still on the shelf after 7 months. And so on.
“The discounts get very aggressive,” he said. “Get as aggressive as you have to, or it will sit there for another five years.”
Sowden also advises dealership staff to concentrate more on the inventory that is 5-6 months old vs. product that is twice as old as that. The newer inventory will be easier to sell and more likely to sell at a lesser discount, meaning more profit for the dealership.

An alternative plan
Kent Meadows, a dealership trainer for Assurant Solutions, preaches the same general practices — identify the OBS and have a plan to move it — with a slight twist.
In some cases, Meadows, a regional vice president of dealer development for Assurant, advises parts staff actually take the time to find the OBS inventory and move it into easily identifiable bins.
“In the hard parts section, the biggest problem you have is if you don’t identify the part,” he said. “In other words, if I don’t touch them, see them, make everybody realize there is a problem with those parts, than they sit on the shelf another 30 days.”
Meadows also advises any staff meetings be held around these bins, sending the message of how important it is that the store reduce the volume of OBS product.
Planning to rid the dealership of OBS inventory shouldn’t be relegated just to in-store sales. That planning should extend to online outlets as well. Meadows suggests parts manager consider having prearranged online sales. For example, a part or accessory that is placed on eBay that has already been at the dealership for 9-10 months could be set with a minimum bid of cost plus 50 percent. A month later that product could be placed online at cost plus 25 percent. Finally, before the product hits its OBS date — its 1-year birthday — the price could be further cut to cost plus shipping.
Once the OBS product is identified — Meadows suggests this happen no later than 90 days before the product hits its first “birthday” — and a plan is put in place to move it, Meadows suggests the PG&A manager ask a crucial question: How did these parts and accessories get to be nine months old anyway?
Meadows believes in most cases the answer to that question lies in either a process error or a behavior problem.
“If the process is followed and the behavior is correct, but we still end up with that problem (of a high level of OBS inventory), you have to say something is wrong with my process,” Meadows said. “I’m not ordering correctly.
“But if my employees won’t follow the written process that I have, they keep short-cutting the system, then I have a behavior problem that I have to modify and somehow get them back on process.”

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