We now know that the top one percent of your part numbers produce 34% of your total sales — the Doo-Bees. And the bottom seventy percent of your part numbers — the Drones — produce only 5% of your total sales!
I looked at 160,000 part numbers that created $450 million in sales at six different dealerships (5 regular, and one mega). I found that the top 1% of part numbers generates 34% of total sales, while the bottom 70% of part numbers create only 5% of total sales in a twelve month period. Percentages varied only slightly from dealership to dealership. All were within five points of each other.
We are all familiar with the 80/20 rule. It was first recognized by Italian economist Vilfredo Pareto (1848-1923), who, in a study of Italian wealth found that 80% of the wealth of the county was owned by 20% of the people. Others studies followed, and soon the 80/20 rule was found to hold true in a multitude of situations. Quality management pioneer Dr. Joseph Juran referred to this same principle as “the vital few and the trivial many,” and saw its effects in a multitude of situations: 20% of the product creates 80% of the defects. 20% of the project consumes 80% of your time. 20% of your stock takes up 80% of your space. 20% of your staff will cause 80% of your problems, and 20% of your sales people will produce 80% of your sales.
Look at the attached chart. This study of our industry shows that 20% of our part numbers produce 90% of the sales. OK, we are off a little here, but the message is clear. We are just like the rest of the world. And it is a management problem that we must deal with.
Why? Because it costs you a lot of money to maintain that drone 80%. You have thousands of part numbers that simply don’t carry their weight. They cost you to buy them, they cost you to ship them in, and they cost you in maintenance. They have to be heated and cooled. They have to be protected and insured. They have to be counted and accounted for. They cost us time, and they cost us money.
So why do we keep them? We keep them because (first) we don’t know that we have them, and (second) because our techs say that they might need that part some day!
For years here at Lightspeed we have taught classes on inventory control through the Lightspeed system. Now, as part of the ADP companies, we are offering a new level of parts management classes that are not Lightspeed specific, but rather high-level principles of parts management that apply regardless of your computer system. Seasoned instructors with years of experience in both Automotive and Powersports are teaching these classes and initial response has been positive. We have needed this for years, and it is finally here.
How many of you track lost sales? Do you know what an emergency purchase is? Do you know what that emergency purchase costs you? What chance does a part have of selling if it has been here 6 months without a sale? What if it has been here 12 months without a sale? How many of your part numbers are active? Inactive?
The chart below is a wakeup call to every dealership that has gotten to the end of the year and found that all their hard-earned profit is tied up in obsolete parts! Get off the dime, start analyzing your parts inventory using the tools that are now being taught, and prove Mr. Pareto wrong. At least in your store.
Get the training. Learn how to lose the Drones, and focus on the Doo-bes. Make Mr. Pareto squirm.
– Hal Ethington has been associated with the powersports industry for more than 30 years, and he brings to this column his experience as owner, accountant, financial analyst, and computer program developer. For the past 10 years, he has been a ProQuest classroom instructor.