How Important Is Effective Parts Inventory Management? In today’s business climate, it is critical to wisely manage cash investments and drive technician productivity to optimize bottom line financial results. One dealer operational area that involves cash and directly impacts technician productivity is parts inventory management. Based on my experience, effective parts inventory management is the result of monitoring and managing the following operational metrics: • Inventory turns • Incomplete service calls for parts • Aged/obsolete inventory All three elements are interrelated and if any one metric is ignored or managed too aggressively, the result can be inefficiencies which can adversely impact profits. For example, if parts inventory turns are pushed too high, driven by lowering inventory levels, the outcome can be an excessive number of service calls being rescheduled for parts, which is costly from a labor standpoint. When parts inventory turns are too low, meaning inventory levels are high, we risk parts inventory aging and obsolescence, ultimately resulting in inventory write-offs with a hit to the bottom line. Let’s first explore the result of having an excessively high incomplete call rate for parts. Each incomplete service call for a part results in a return service call to replace the part - effectively doubling travel and labor cost. The benchmark for incomplete parts calls is 10 percent, and if not managed effectively, you will in essence be expending excessive labor to counteract an inventory effectiveness problem. Making matters worse, when an unavailable part must be handled as an “emergency order,” there can be incremental freight costs to expedite the order. Driving excessively low parts inventory levels, to conserve cash, is false economy. Remember, ideally, on average your techs should have the right part 90% of the time to complete the service call. An excessively high incomplete for parts rate, say 20%, can over time actually result in technician overstaffing, especially if you base your staffing requirements on gross service call rates (not a good practice to begin with). Moreover, excessive incomplete service calls for parts can also drive excessive machine downtime, which adversely affects customer satisfaction, and ultimately loyalty. On the flip side, increasing parts inventory levels to lower incomplete parts call rates beyond benchmark levels is equally as costly: You will tie up cash in inventory that could be used to drive company growth. What is required is an effective balance between inventory levels, turn rates, and incomplete call rates. It is important to establish a targeted overall parts inventory value level which is monitored on a monthly basis. An ongoing comparison between purchased inventory and consumed inventory is a critical process. The idea is to avoid inventory creep being driven by a purchasing process that is not aligned with consumption or other valid factors. There can be several legitimate reasons for purchasing more inventory than you are using, such as taking on new product lines, new models, adding technicians, or even purchasing to meet discounts or rebates. Your management systems (ERP) should be set up to monitor usage trends and adjust either restocking or purchasing accordingly. Logic should be set to adjust purchasing or trunk stocks levels up slightly on items that have an ascending usage trend, while a descending trend should decrease those same levels dramatically. The inability to identify a downward trend and adjust accordingly will surely result in the eventual write off of obsolete inventory. Another critical factor in maintaining inventory effectiveness involves managing inventory turns. By definition, ‘turns’ means turning your inventory over – inventory coming in and then being used or consumed. Purchasing parts only once or twice a month as well as erratic trunk restocking can spell trouble. An industry best practice focuses on restocking technicians twice a week. Restocking technicians on a daily basis, while increasing trunk inventory turns, eats up available technician productive time. Last but not least, you should determine the dollar amounts of your obsolete parts inventory – those parts that have not had any usage in, say, 2 years or more. Remove obsolete inventory from your active stock before assessing inventory value and calculating inventory turns. You may feel you have adequate inventory on hand when in fact, a portion of it is obsolete and you may actually have the right inventory level to support current activity. Equally important is managing excessive and slow moving parts inventory at the tech level. General rule of thumb is if a part has not shown usage in 6 months remove it from the trunk and put it into warehouse inventory. By doing this, the slow moving parts can be managed and consumed to depletion thereby avoiding, or minimizing, unnecessary obsolescence. So here are the questions: are you managing and optimizing your parts inventory effectiveness? What are your current incomplete calls for parts percentage – is it over 10 percent? What is the trend? What are your turn levels and how often do you purchase and restock? How much labor are you expending to deal with a parts inventory deficiency? Mike Woodard is a consultant with Strategy Development, an imaging industry management consulting firm. Mike has 30+ years experience in all aspects of field service operations and service strategy development. During his 20 years with IKON Office Solutions, Mike held key regional and national service operations positions including National Vice President, Field Service Strategy; National Vice President, Field Services and National Vice President, Field Service Operations. Prior to joining IKON, Mike spent 18 years with Xerox Corporation in multiple field service assignments. Mike advises companies on critical success factors including target service metrics and goals, performance management, technology application, service growth strategies, and compensation and incentives. In addition, Mike provides leadership and management development training designed for the service professional. Mike can be reached at woodard@strategydevelopment.org , or 610.742.4701.