testing current methods

[johnnyo]

I write this with some trepidation as so many experts are constantly pounding the pavement with the song and dance routine of days supply. Yet I suppose at one time most seemed to feel the world was flat and with sincere conviction and convinced the masses that this was so.

It is interesting that part of the promise of Daily stock orders was to lower days supply, yet is this really happening? Or possibly, are we honestly fooling ourselves into the belief that this is occurring?
I see very little change in our industry as a whole. With many inventory managers baffled why they dont see this happening. Even this web site has many people commenting that they are struggling to achieve this promised drop. Most seem to feel it is their system or inventory management style that must be at fault. Yet it does not seem to occur to any of us that perhaps the basic philosophy and foundational thinking of days supply is perhaps skewed.

One cannot say that days supply does not have some validity or that it is of no value. It is noted that as far as current knowledge of inventory theory it can be said, we stand on the shoulders of giants. Yet we can become complacent and too quick to accept the easy solution.

We have an automotive industry that mandates and uses (just-in-time) JIT with countless expert systems in place that utilize state of the art in mathematical modeling. Yet in the automotive inventory management systems we are still using 1950 s and 1960 s basic methods. This includes days supply theory.

Why is this?

Case in point One of the dealerships I consult with has a very a low days supply (as calculated by their GM representative). The DPM comment to the dealer principal and the Parts manager was that Western Canada dealerships average 63 days and that he was concerned that this dealership was not managing inventory as well as it could be. So here in lies the mystery, as there are TWO GM stores in this city with this dealership having 5 sales for every purchase (between the stores) and a higher fill rate. Why then would a responsible person wish the dealership to increase inventory days? The only reason I can think of is pressure from above (management not God) to sell , sell , sell to the dealerships. Yet if the same management worked in the manufacturing sector and suggested increasing 20 to 30 days supply they would be questioned as to sanity.

Part of the move to the common parts system and the daily stock order format was detailed in a memo to all parts managers that we would be going to a PULL system and not a PUSH system as was previously done. Yet how can this happen when current automotive parts suppliers still have the mind set to place 60 days supply on the shelf?
Perhaps we have not progressed as far as we are lulled into believing.

Thoughts

Days supply can only be valid on 20 percent of any inventory that is the inventory that sustains profitability and is classed as high turn over.

Average days supply is virtually useless on its own if being used to determine if an inventory is healthy.

It is not days supply that is the important aspect to consider rather it is the IDLE TIME that occurs from when a part is placed into inventory and the time it is sold that determines if an inventory is vibrant and alive.

As long as inventory managers allow main parts Supplier(s) to continue to use days supply as a sales tool succesfully , we can expect to have too much stock.

So I leave it to you to remark and consider is the world flat or round? Can we at least challenge the status quo and test the validity of our current thinking ? Or will this web site still have us remarking five years from now that our inventory seems high and we still are having trouble with days supply ?

[This message has been edited by johnnyo (edited 11-15-2002).]

[scotstrong]

Some additional food for thought:

If your phase-in criteria is set to require 3 sales in a 12-month period before you begin to stock, then the first time you add a part to inventory based on qualifying criteria, one piece equals 120 days suppply.
What percentage of any inventory is part numbers that barely meet the criteria and result in 120 days supply? If the 80/20 rule applies, stating that 20% of your inventory is responsible for 80% of your sales, then the flip side is that 80% of your part numbers are likely to result in a higher days of supply.
Also, days of supply is a $$$$ based calculation; not a part numbers calculation. Once again, the so-called experts (including dealer associations), try to imprint the "cookie-cutter" "one-size-fits-all" mentality to a formula that can be extremely complicated. High-line dealers are going to find a $$$-based calculation makes their days of supply look high compared to "averages" simply based on the average part cost being higher. Multiple-line dealers have more models to stock for. Manufacturer's "programs" force additional parts into inventories. Campaigns force additional parts into inventories.

I'm with you, johnnyo, days of supply is a very antiquated method and overly simplistic measurement of inventory performance and/or return on investment.

[jazdale]

I feel compelled to write something - minimally to say how eloquently you laid out your point, John.

The days supply looks at inventory in a macro point of view - and yes - I agree that days supply is not a fair comparison to measure the varied markets of parts departments.

From a micro view (a per part number basis)- Days Supply seems to be a very rounded number that equates number of sales into 365 days.
If a part sells 12 times a year - thats a nice 'n easy 30 days supply.
Cut the sales in half (to 6) and we're talking a 60 days supply to have one on the shelf.
At what point do we not round up the stockorder calculation to one in the shelves?
If a part consistently sold once every other month - would you stock it? How many days would you be willing to run with zero on-hand?

In these days of fill rates and CSI, we are forced to treat every part that sells from 3 to 15 times a year as if its got a 30 day supply. But we know what that does to the aggregate days supply.

I believe the intent with daily orders was to move from depth to breadth. One can stock less of the fast movers (lowering days supply) to make room for more of the slow movers to minimize the emergency orders (raising days supply). So, why would the days supply be any better going from a weekly to a daily order?

So, maybe the promise of a lowered days supply was just the marketing spin to get your attention - and not really the end goal.
The end goal was CSI - get the car in and out in the same day. That is where I believe the daily orders had a payoff.

[jazdale]

Since my reply to John's post of the mirage of increasing breadth over depth, John and I have had a few private chats on the subject.

My question to all of you.

Since you went on daily orders - did any of you make changes that increased breadth over depth?

What kind of reporting, mind-set, procedural changes did you have to adopt to achieve this stocking change?

Thanks for your replies.

Dale

[Richard]

Never ending point of contention between me and my service manager, and my parts Rep. If you go by the 3 sales, ect guideline, you will have a very shallow pond of parts to work with. We are forever having to pick up an alternator, starter, ect that we have sold once before in 12, MAYBE twice, but never 3. The Service Manager and factory rep want me to have that part on the shelf, but I know better. Let me ask this another way, how many parts do you stock that have don't sell at least once in 30 days? How much excess stock are you REALLY carrying? I know that the 20 group we are a member of now declares everything over 9 months is Obsolete. Next step is probably anything over 6 months. What do you think about this. Is this REALLY living out of your PCD/AC Delco warehouse, or is it doing your best to turn the best profit for your Dealer, and reduce the chance of having Obsolete parts?

[joe r]

Chrysler's new 5300 Stock Order program is based on hits in different weeks instead of months. If you have phase-in set for 3 hits in 12 weeks and the third hit comes in week 5, it phases in. The phase outs are similar. I'm not on the program yet because we are a new dealer and nine months of history are required. I know there were some concerns when the program started but now the reports are that it works well.

The depth of fast moving parts is again reduced and phase in is quicker for new parts. The system also will scan sales from other dealers in your area and phase in parts based on sales of new items at those dealers. I don't know the formula for that.

The program also will create parts returns. Feedback on the returns have been very positive. The D2D locator will make any item in stock for over 90 days available to any dealer if their facing depot has no stock.

Perhaps this is the next step.

Joe R

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[scotstrong]

joe r:

Just a heads up about some of the questionable logic behind letting any manufacturer "allow" parts to qualify into "your" inventory: Phasing parts into your inventory based on demand at other stores is questionable at best; and quite possibly a recipe for trouble with overstock and obsolescence. In many market areas, stores as little as five miles away have a very different product mix that they sell and have sold; and their parts demands are very different. Much of the non-moving stock in any inventory is part numbers that have just barely qualified into inventory. Why would we want to arbitrarily add more part numbers into this segment of the inventory without the bonafide demand from our own customers to justify its presence? Yes, some of these parts will eventually qualify to stock into your inventory, but historically the majority of them will not. When we now add this to the non-moving inventory that naturally occurs in any inventory, and unsold special orders, etc.; how is the return reserve we generate going to be sufficient to handle this, too, when it turns into obsolescence?
The manufacturers are using a "false demand" mindset when they try to extrapolate one store's demand over other stores' inventories.

Let's try an example here: Suppose a PDC has 40 stores in a major metropolitan market area. Store numbers 7 and 23 have part# xyz qualify into their inventories; yet the other 38 stores don't yet have the sales history to justify stocking it. Yet, if we follow their "suggestion", all 40 stores will now stock part# xyz. The market area now has at least 40 pieces in stock in 40 stores for a true demand of far, far less pieces. The PDC now shows sales history of at least 40 pieces; and then tries to justify to everyone else that "we have sold over 40 pieces in your market area; so we think you should stock this part." (Sounds like a self-serving, self-fulfilling prophecy, doesn't it?). But the fact of the matter is that the 40 pieces have not truly sold until they are sold at the dealership level.

For us to add inventory based on this mindset is contradictory to sound, proven inventory management concepts. Let's look at another related example: Suppose that this arbitrary "PDC demand" suggests that we add 100 not-yet-qualified part numbers to our inventory. Over a 12 month period, only 5 of these part numbers have sufficient demand to truly qualify their way into our inventory. Which is going to be the better business decision: A)Stocking all 100 part numbers in the "interest" of customer satisfaction and facilitating same-day repairs? or B) having to make an "emergency purchase" for those 5 parts numbers and some of the other 100 part numbers until they qualify (and still repairing the vehicles the same day)?

Which scenario resulted in additional obsolescence? Obviously A.
Which scenario resulted in a better return on dollars invested in inventory (spelled dealer principal satisfaction)? Obviously B.
Which scenario resulted in less, not more, man-hours invested in managing your inventory ? Obviously B.
Which scenario resulted in customer satisfaction? Both A nd B.
Which scenario is a better business decision?


Also, just some additional food for thought about the logic of considering obsolescence to be no movement in 9 months or 6 months (instead of 12): If we blindly follow this without applying a good dose of common sense to it, we will find ourselves phasing out seasonal items that truly need to be looked at over a 12-month period (and maybe 15 months in some climates). To call an item "seasonal", you have to look at the experience of at least 2 of the same season to determine if their might be a "seasonal" pattern. When we try to ascribe to the philosophy that 6 months no movement now constitutes obsolescence, we have gotten to the point where we are "over-managing" our inventory.

Time is the only true test of the success or failure of any change we make to inventory control parameters. When we continually try to shorten this time frame in which we are trying to pass judgement on the success or failure of changes, we haven't used sound logic or science. Yet, all too often (and often at the behest of our "partners" with the manufacturer) we make changes; and then make changes to the changes; and then change them again and try to say we succeeded or failed. Even the perceived "successes" are often short-lived when we look at the long-term picture. Many of these "successes" are nothing more than wishful thinking.

[This message has been edited by scotstrong (edited 11-21-2002).]

[johnnyo]

In response to your question Jazdale there are several techniques that may be used to increase width of inventory without adversely affecting days supply and reducing the chance for obsolescence. Here is one suggested way this may be accomplished.

Step one: Do your homework (data collection)

Here is the scenario.
At the start of a new model year when the first new car or truck appears on the lot, or even just before these new models are delivered (IE: as of now 2003) The parts manager would have a chat with the sales manager and ascertain what vehicle(s) are on order for the dealership. This includes knowing what engines and transmissions are ordered. Second to this is determining the forecasted sales / order quantity for the next few months of each vehicle.

Knowing this information equips the inventory manager to know exactly what TUNE-UP parts will be required for future sales of these vehicles. This information can then be used to research the parts catalog and determine if there will be any new air filters, spark plugs, oil filters, transmission filters and the rest of the required tune up parts that will be needed in the future. THIS POINT IS IMPORTANT USE THE FOLLOWING ONLY FOR PARTS THAT ARE TUNE UP PARTS OR PARTS THAT ARE 100 % KNOWN NOT TO GO OBSOLETE FOR SOME TIME. Ok J

Now here is where one can be clever in making sure this material is available when it is needed.


1)Set up a calculation / source / guide group that you can set these parts into. (Perhaps CALL this D or DELAY) so that it will do the following

a) If no further (must have one more sale) sales occur on the part then delay the order for 9 months (or 6 months at your preference) then when 9 months passes order one piece. . However.
b) If one current (real) sale does occur (which usually indicates the item is beginning to move) then phase the item in immediately.

2)Post 2 hypothetical sales of each of these researched items into the sales history under test (as there will be a negative 2 on hand now balance stock to zero) placing the item into the D calculation. The analogy here is like the old hand water pumps that needed a bit of water in the housing in order to work; its called priming the pump.
NOTE: The reason for posting 2 is that when one item is finally phased in and placed on the shelf it will become the third item (when sold) and trigger a reorder (if stock 3 sales 9 to 12 months is min calc.).
Be sure your source D has a trigger of 2 sales at the 6 or 9-month point in time.


3)When you approach the 6 to 9 months (after the posting) the stockorder will show perhaps 20 to 30 new items suggested to be ordered. These of course are the entire selection of tune up parts that will likely be needed shortly (as the cars and trucks sold from the dealership have now been on the road several months).

Several benefits occur from this.

1)Only has to be done about once a year.
2)Computer will look after, with no further labor required.
3)No parts sitting on shelf for weeks with no sales.
4)Phases in prior to most anticipated sales.
5)Will increase inventory width.
6)Virtually no increase in 3 month 6 or 9 month no movement. (Compared to bringing all parts in immediately where they sit on the shelf have no sales for an extended period).
7)Only one real sale or lost sale was required to bring in the part. Compared to 3 normal sales for all other testing items.
8)Scary the first time you do this.

There are exceptions to the above, for example oil filters are brought in 6 weeks after a new vehicle is sold. Items like spark plugs or air filters are usually purchased in the unit pack quantity rather then as a quantity of one.

This is a RULE OF THUMB a suggestion and not cast in stone, however the basic idea may be easily modified to fit each managers specific needs.

For those systems that cannot produce the necessary source or calculation I recommend the following. Put your researched parts list in a binder and use a memo reminder such as found in Microsoft outlook that will pop up and tell you to order the complete list at a predetermined future point in time. You will have still posted 2 hypothetical sales of items that experience dictates (i.e.: TUNE UP parts) will sell at a later date.

Because the parts Manger did their homework, the parts that will eventually phase in will EXACTLY fit the sales features of their customers needs. This is because they match the known vehicles being sold at their location. This doing ones research is a definite must as it reduces the chance of obsolescence.

Several variations of this method may be used to successfully manage an inventory. This will allow the parts staff to have the right stock on the shelf, but just as importantly at a point in time when it is most likely to be needed for the customer.

However, it is noted that this method does not magically increase width, as these parts are ones that in time would likely be stocked under normal phase in conditions. It is a tool that will allow the parts manager to reduce inventory holding costs and work efficiently.


Hopefully, this is what you where looking for and is of assistance.

[This message has been edited by johnnyo (edited 11-22-2002).]