OBSOLESCENCE

[scottchatman]

I have heard that if you hold on to a particular part for more than 12 months you lose money even if you sell it at full retail. Is there a way to figure out the true cost of stocking parts?

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Scott Chatman

[Gary J. Naples]

While it might not be 100 percent exact, there is a way you can estimate, with reasonable confidence, the profit loss associated with obsolescence. In fact, in the November 1998 issue of "The Parts Manager" I wrote about this very topic and explained how.

Aside from what you actually pay for a part, there are two other costs associated with stocking parts "visible costs" or what is referred to as holding costs, and "hidden costs."

Holding costs are those relative to keeping the part in stock. Depending on the dealership, holding costs can range from an average of between 2 percent and 2.5 percent per month to 3 percent per month.

Hidden costs are those relative to loss of profit potential due to working capital tied up in a part with no movement. comprising these costs are items like loss of gross profit potential, return reserve and stock order allowance equal to the yearly number of inventory turns.

My article gives examples. I'm sure if you contact WD&S publishing they can provide you with a back issue.

Gary J. Naples