Top Metrics to Watch
While many dealers focus on top-line sales and gross margins, turnover rates and the impact it has on profitability and cash flow are often misunderstood or overlooked.
Turnover rate is a financial ratio that measures the efficiency of a dealership’s use of its assets to generate sales revenue.
In a parts department, it measures the efficiency of the parts manager to turn the parts inventory into sales revenue.
Due to the seasonality of our industry, we often break the parts inventory into categories. All parts turnover rate looks at the total department sales on a rolling 12 months (R12) compared to the average R12 inventory.
Calculation: R12 parts sales at cost divided by R12 average monthly inventory.
Example: If a dealer sold $2,500,000 worth of parts at cost and had $1,000,000 R12 average monthly inventory at cost: $2,500,000 / $1,000,000 = 2.5 times turn.
Put another way, the dealer has turned the $1,000,000 asset 2.5 times on a 12-month basis.
Seasonal items, such as planting or harvest parts, may have high turnover rates at certain times of the year while maintenance items, such as filters, may be sold 12 months of the year. Some individual parts may have an extremely high turn while others will not.
We recommend dealers use categories or separate financial “warehouses” to track mainline parts from shortline or to separate attachments and portable power equipment items that may be sold through your parts department.
How does parts turn impact profitability and cash flow?
- $50 part at 30% GM = $71.42 or $21.42 GM @ 1 x turn = $21.42 in annual gross margin
- $50 part at 20% GM = $62.50 or $12.50 GM @ 2 x turn = $25.00 in annual gross margin
- $50 part at 15% GM = $58.82 or $8.82 GM @ 3 x turn = $26.46 in annual gross margin
In all three examples, we had $50 invested, however, the higher turn allowed us to convert the investment into revenue to increase profitability and cash flow. If you can maintain a 30% GM with a three-times turn rate, it can have a major impact.
If the turn rate is too low, it may indicate poor stocking or return policies. This can have a huge impact on cash flow. If turn rate is too high, it may indicate you are not stocking the right parts, relying on suppliers too much and may not have the inventory on hand when customers demand it.
Many financial experts will say the higher the turn the better, however, timeliness of parts availability is a major customer satisfaction issue. Many high-performance dealers are happy with parts turn rates between two and three times, as long as they have the right inventory at the right time.
In our Dealer Institute Parts programs, we encourage dealers to not only look at the turn rate, but to also focus on dead stock or parts inventory items that have not sold in 18 to 24 months. Many large dealerships have millions of dollars in parts inventory on their shelves. If 10% of that is in dead stock, the focus should be to turn that into parts inventory that will sell.
Best practices to improve parts turns
- Set parts turn targets.
- Set guidelines on minimum and maximum stocking levels, taking into consideration seasonal demand.
- Work with your suppliers to take advantage of stocking and return policies.
- Monitor dead stock / zero sales inventory. Make a plan to sell off, scrap or return dead stock.
- Return parts ordered in error, especially items that you would not commonly stock.
- Conduct rotating inventory stock takes, or at minimum, an annual inventory count.
Editor’s Note: Please check out www.dealerinstitute.org for upcoming programs. The DI also creates specific customized on-site or virtual training programs for multistore groups.
Kelly Mathison is a former dealer and current trainer and management consultant for the Western Equipment Dealers Association’s Dealer Institute. Mathison specializes in parts, service, and aftermarket training. Please send questions and/or comments to email@example.com.