Issue Date: Parts Manager Mar 2007, Posted On: 3/1/2007
How do you define obsolescence in the parts inventory?
Obsolescence can mean a lot of things. Here is some information for you to digest. From a financial point of view, an obsolete part is one that does not yield a return on investment; yet it makes the customer happy that you have one. Obsolete, perhaps, but if a part sits on the shelf (the part being similar to cash on the shelf or a used car on the lot) there comes a point in time when the part (used car) simply must go. There are a lot of estimates, but the one I find that makes the most sense is that when a part has gone 12 months with no sales, the total holding cost (total cost of running the parts department to support the inventory IN the parts department) is about the same after 12 months. So do we wait until we know it's gone bad from a profit production point of view? I don't think so. This is where the mathematics of probability kick in. When a part goes 6 months without a sale the probability of a sale in the next six months is about 65 percent. If the part goes 9 months without a sale the probability is about 85 percent that the part will not sell again. Another approach is done by asking; "how many units in operation are there in my market that use this part?" If the answer is many, the likelihood of the part satisfying a customer at some point in time increases. If there were limited units in operation, the probability decreases that the part might be a good deal to have on the shelf. I believe that all of these have merit. The challenge is to identify those processes and functions that contribute to the obsolescence heap. Policy on returns, especially from body shops is a prime example. If a customer returns more than 20 percent of what they buy (20 percent being an average margin) you don't have a good customer, you have a mooch using your money for their failure to properly run the shop right. There is some normal obsolescence that will happen and not much can be done to prevent it. About 6% of the part numbers in a dealer's system (not the investment) will float off the charts as a normal course of events. A good obsolescence return policy will usually clear these up; that is if we don't have other 'bleeders' feeding the problem. The course that I have found works best, most of the time, is to identify those parts whose probability of a subsequent sale is here or near and stop the automatic buy/sell process on that part. Hence the <1 sale in six months and the part goes to AP (automatic purchasing on the next sale prevented). The part manager can always override the action if some specific condition demands it. A caution here. One DMS, be-cause of the failure to fix a flaw in the logic of the system cannot, under normal conditions, allow you to phase out a part in six months, and also facilitate the testing of the part, at the same time. The flaw has a patch, but not much is said about it until it is pointed out to the user of the DMS that it is available. For instance <2 in 12 months is not the same as <1 in 6 months no sale. Whoever dreamed that one flunked 4th grade fractions and college Statistics 101. But the fix is available even though it sometimes comes with a price tag. It's like paying for a warranty repair when the fault is in the design.