By David Dubois, Ann Torno, Joe Bueti and Automotive Dealerships Team
The intent of benchmarking is to generate ideas to help improve business processes. Benchmarking can be applied against any product, process, function or approach in business. As we already discussed in Part 1 and Part 2 of this series, taking the time to see how your dealership is performing in key business areas, like sales, F&I and service, can make an enormous difference to your business performance and bottom line.
Benchmarking your inventory operations can also provide important insights into operational improvements.
Day supply of inventory (COGS / Average Parts Inventory * 365)
This performance indicator measures the number of day’s that capital is tied up in parts inventory. Too high of a metric in this area could suggest an excess obsolescence in parts. Obsolescence in the parts department is the equivalent of having money sit in a bank account without returning any interest to you. Dollars invested into parts that are turning over are well invested dollars, however when parts become obsolete, they do nothing for you other than lower your return on investment. Too low of a metric might be attributed to poor stocking levels and could lead to emergency purchases at a markup or vehicles tied up in the shop waiting for parts to come in. Taking advantage of a daily stock order process would be a very efficient way of bringing this performance indicator down to a healthy level. Ordering parts as they are needed would help maximize both your capital, and cash flow. Sometimes, this metric being too low is not necessarily a bad thing, it could be due to a high volume of wholesale. Therefore, first consider why the metric is low.
Percentage of non-stock/special order parts of total inventory (Special Parts Inventory / Total Parts Inventory)
This performance indicator measures the amount of special order parts you carry in your parts inventory. Too high of a metric could mean you are ordering parts and not getting customers back in to install them. This could be a process issue in scheduling appointments with customers. Scheduling appointments when the part is ordered, instead of when it arrives, could lower this metric to an optimal level. Too low of a metric could mean special order parts are being returned too quickly and - before the customer has the opportunity to come in and get the work done. This could lead to upset customers who now have to wait for the pats to be re-ordered and the appointment rescheduled.
As you can see, using key performance indicators and benchmarking can dramatically help you dealership become both more efficient, and effective in its operations. At Citrin Cooperman, we have already worked with numerous automotive clients to implement procedures to keep them informed of these key metrics and how to use them to make informed, responsive, decisions. Ask your professional accounting advisor to discuss key performance indicators and benchmarking with you, to get your business headed in the direction you want it to.