How To Calculate Inventory Turnover In Automotive Parts Department8 min read
How To Calculate Inventory Turnover In Automotive Parts Department
It’s time for an inventory turnover calculation when a product flies off the shelves and you can’t keep up with demand, or you can’t seem to discount it deeply enough to sell it. The inventory turnover calculation tells companies what is moving and how quickly they’re selling (or not). The turnover ratio also reveals whether strong sales are due in part to good market demand, the manager’s ability to forecast and manage inventory.
Parts managers understand the need to measure their parts inventory turns, which helps them determine how well they are at controlling their department’s spare parts stock. Still, they must also understand between “gross” and “true” turns.
There are three different types of inventory turnover calculates; Gross Inventory Turnover, True Turnover, and Fill Rate. Each type tells you something different about the efficiency of an automotive parts department. Let’s take a closer look at each!
Inventory Turnover Ratio – What Are Gross Turns?
Gross Inventory Turnover is the most basic inventory turnover, and it simply tells you how many times your inventory has been replaced in a certain time period. To calculate, take the annual cost of goods sold (COGS) and divide it by the average inventory (including stock purchases, special-order parts, and emergency purchases).
Inventory Turnover Formula – Gross Turns
Annual Cost Of Parts Sold ÷ Average 12-Month Inventory Value = Gross Turns Per Year
Why is the average inventory value used instead of ending inventory balance? Because the average inventory accounts for the fluctuation of stock over the year. The average reflects the true stock purchased and sold within a particular time frame.
For example, if the annual cost of goods sold is $900,000, and the average inventory value over 12 months is $150,000, the gross inventory turnover ratio would be 6.0, or six times per year.
The ideal ratio benchmark is an inventory turnover ratio of 4 to 6 for parts departments with daily stock orders.
A low ratio points out that there might be problems such as low part demand, weak sales, or too much inventory in stock. A high ratio or fast turn suggests that sales are strong and insufficient inventory is on hand to keep up with demand.
Using the gross inventory turnover method includes all parts in inventory, stock purchases, special-order parts, and emergency purchases, so it doesn’t give an accurate picture of the parts department’s efficiency. We suggest using another measurement called true turns to calculate the return on the investment of the parts department.
Inventory Turnover Ratio – What Are True Turns?
True inventory turns are a better measure to find out how profitable the dealership’s inventory investment is and its operational efficiency. Since gross turnovers include the entire inventory, including emergency purchases that fill an immediate need, in the long run, they can increase the acquisition costs of parts, reduce manufacturer-earned discounts, and do not add to your return reserve. Whereas parts sold from stock generate higher gross profit margins, which translates to higher net profits.
Inventory Turnover Formula – True Turns
To calculate your “true” inventory turns, take the annualized cost of your parts, minus any special or emergency orders, and divide by your current parts inventory amount.
Stock Order Purchases – Special orders – emergency orders ÷ Average 12-Month Inventory = True Turns Per Year
The annual cost of parts purchase is $300,000
The annual special-order and emergency order parts purchases are $30,000
The current parts inventory value is $60,000
The inventory true turnover formula is as follows:
$300,000 – $30,000 = $270,000
$270,000 ÷ $60,000 = 4.5 turns per year
The ideal inventory turnover ratio for true turns per year at dealerships is:
- Daily stock orders: 5-7 true turns per year
- Weekly stock orders: 4-5 true turns per year
Part Inventory Fill Rate
It’s a scene that’s all too familiar to parts department employees at dealerships across the country: You’ve got a customer or technician who needs a part for their car, but you’re out of stock. Now what?
If you’re lucky, you might be able to find the part from another dealership in your area. But more often than not, you have to tell the customer that it’s not in stock, and if they still want the part you need to order it. This means the customer has to come back again the next day. With counter sales, a lack of inventory translates into lost sales or lost gross.
We all know that a quick, smooth flow of parts is essential to keeping the shop running like a well-oiled machine. When parts are out of stock, it creates delays that can ripple through the entire service department. resulting in repairs carrying over into the next day. The lost time reduces technician efficiency and increases lost labor sales.
This is where the fill rate metric comes in handy. Fill rate is important because it tells you the ratio of sales that come from your inventory on-hand (off-the-shelf) vs. special orders or emergency orders. In other words, it measures how well your dealership is doing at meeting customer demand for parts.
Part Inventory Fill Rate Calculation
There are a few different ways to calculate the fill rate, but the most common is simply the number of parts sold divided by the number of times the part was requested.
Parts requested ÷ Parts on-hand = Fill Rate
So a part is requested 10 times. The counterperson retrieves the part from inventory on-hand 8 times before ordering it again = 80% fill rate.
Ideally, you want your fill rate to be as close to 84% or 90% as possible. But the reality is, it’s often quite difficult to keep track of every single part in your inventory and make sure that you always have it in stock. That’s why fill rate is such an important metric to track – it can help you identify areas where your dealership needs to improve its inventory management.
If you’re finding that your fill rate is consistently low, it might be time to reevaluate your inventory management practices. There are a number of different ways to do this, but one of the most effective is to implement a parts lost sale tracking sheet.
Tracking lost sales can help you keep track of every single part someone requested and was not able to fill with inventory on-hand. Most DMS systems do not have the ability to track this metric, so you and your staff will most likely have to record lost sales the old fashion way, with a pen and paper. By reviewing the lost sale tracking sheet daily you always know what needs to be ordered. This can greatly help keep your fill rate high and ensure that your customers always have the parts they need.
Implementing a parts tracking system is a great place to start if you’re looking to improve your dealership’s fill rate.
9 Tips To Improve Parts Inventory Turnover Ratio
- Keep a close eye on inventory levels and run fill rate reports to order more parts when necessary to avoid running out of stock.
- Make sure that all parts are properly inventoried and bin locations are accounted for in the DMS to avoid ordering mistakes.
- Keep a lost sales tracking sheet to reduce non-stock order part requests and emergency purchases (also improves gross profit retention and cost of goods sold).
- Revise your pricing strategy on low and high inventory turnover with matrix or velocity pricing.
- Develop a routine to track true turns and regularly analyze the data to identify areas for improvement.
- Educate employees on proper handling of special-order parts procedures to ensure that customers or technicians are informed promptly.
- Implement a process for returning obsolescent parts to suppliers to reduce inventory levels and improve holding costs.
- Know when to phase-in and phase-out parts. Parts can be phased-in if there have been 3 months of sales or 3 requests within 9 months. Parts need to be phased-out if it has not sold in 6 months.
- Run volume-based promotions. Encourage your customers to buy more parts. Here are a few promotional ideas:
- $10 off any order over $250
- Buy one get one half off
- Buy three get one free
Inventory Management Software (DMS)
Even though your DMS can calculate the inventory turnover ratio for you, it is a good idea to understand where the figures come from and what they mean. Measuring the parts inventory turnover helps protect the overall investment by controlling obsolete parts. This can be done by measuring the true turns of the parts inventory, reducing the amount of cash needed to maintain healthy inventory levels and meet customer demands.
Inventory Control Processes
Routinely review the parts inventory amount (the “parts pad” amount) against the financial statement on a monthly basis with the controller and look for plus or minus discrepancies on the balance sheet. Include any variances that occur, such as work-in-progress, unposted retail parts invoices, accounts payable invoices, and in-transit parts. Finally, take into consideration parts appreciation and depreciation activity. If any significant variances still exist, they should be investigated, and a physical inventory should be performed.
When it comes to parts management, it’s important to consider the cost savings associated with having a healthy inventory. You’ll avoid paying additional incurred expenses such as the cost of drivers picking up parts and the counter staff’s time spent tracking down parts from other suppliers (wages, gas, vehicle wear, tear, etc.) and improve department efficiencies by tracking inventory turnover.
Online Automotive Parts Manager Training Course
Parts managers play a critical role in overseeing the inventory of parts and supplies and working with suppliers to get the best prices. Additionally, parts managers must be able to efficiently manage the workflow of their department’s workflow and work with other departments within the dealership. In order to be successful in this important role, it is critical that managers have the proper training.
The online Automotive Parts Manager Course offered by Service Drive Automotive Training will provide you with all the information you need to be successful in this role.
- Step-by-step guide on inventory control & parts forecasting
- Maximize parts inventory turns & reduce obsolescence
- Controlling & troubleshooting obsolescence
- Comprehensive financial metrics & profitability lessons
- How to apply matrix, velocity, & gross profit margin correctly
- Easy to follow automotive parts manager workflow guide
- Annual parts sales & expense forecasting spreadsheet
- Measure monthly parts performance spreadsheet
- KPI formulas to measure your monthly performance
- Earn a parts manager certificate of achievement in just 10 hours