For most Parts Managers, the end of the year is not only a time of winding down and forecasting the upcoming year, it's also Annual Inventory time!....Which leads me to ask this question..."Are you recounting inventory that hasn't had any movement in the last twelve months"? Of course, we are talking about obsolete inventory, which I refer to as the "Monkey On Our Back"!
Many Parts Managers are fighting this never ending battle with obsolete inventory every year. Factory incentives and/or accruals never seem to be enough to reduce or eliminate this obsolete inventory, so we have to have an alternative solution. The solution is actually quite simple and will not only eliminate any amount of obsolete parts inventory, it will keep your inventory "Obsolescence Free Forever!....or, getting that Monkey OFF Your Back!
Let's say that you have approximately $30,000.00 in obsolescence you would like to get rid of and you've exhausted all other return avenues with the manufacturer. You've tried selling the obsolescence online for maybe even $.50 on the dollar and it's STILL THERE!, representing $30,000.00 on the books. First of all, we have to ask ourselves..."What is this $30,000.00 of parts inventory REALLY worth?" The answer to that question is very simple as well...It's worth NOTHING until it's sold! It's like a $30,000.00 automobile in a Crusher at the scrap yard! We just have to get the right frame of mind and find a way to get that $30,000.00 of dealership asset OFF the books and properly accounted for......Here's how we do it!
If we break it down, this $30,000.00 represents $2,500.00 a month over a twelve month period that we have to absorb. Let's also say that my average month's cost of sales in the Parts Department is $125,000.00 over this same period. In this case, if we add a 2% to our Cost of Sales Account as a "Stocking Fee" to our Inventory Adjustment Account, we will ELIMINATE that $30,000.00 of frozen assets. The percentages may vary pending how much obsolescence you have and your average months parts cost of sales.
So how do we get this "Stocking Fee" back and not sacrifice the gross profit?....also quite simple! By adding a 5% to 10% factor increase in my Retail Parts Matrix in the proper cost ranges, this $30,000.00 of obsolescence can be eliminated over a twelve month time period at NO ADDITIONAL COST or LOSS GROSS PROFIT!...hence the phrase..."Gross is just a state of mind!"
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