Parts departments need to have set programs in place to help sell old, unsold parts and accessories. Discounting, while painful, remains favorable to keeping old inventory.
It is one of the worst aspects of the RV parts business, but inventory will become old, out of style and obsolete. The key is not to become married to your old inventory and to recoup as high a percentage of the initial investment as possible.
You cannot get emotionally involved with this old inventory and you must accept the fact that its value is lessening. There is a cost in keeping old parts on the shelves. You have to inventory it, clean it and maintain its display. It also ties up valuable capital that could be better used to purchase the latest and greatest new products.
A program needs to be in place not only to sell this bad inventory, but also to ease the pain of taking the loss that is inevitably going to be realized. A parts department that takes a proactive approach to this problem will be money ahead at the end of the year.
A successful approach to discontinued inventory needs to have the following steps:
1. A progressive inventory value “write-down” system.
2. A “Special Price” area to try and increase demand.
3. A “Clearance Area” for more aggressive price reductions.
4. A “Discontinued Area” for final recovery of any investment.
These four approaches will help to identify and spotlight special needs inventory. It will make these products more visible not only to your customers but also to your sales staff. If a parts manager follows these steps with all parts and accessories, owners and general managers will see an increase in the bottom line as well as customer appreciation.
Writing Down Aged Inventory
One of the toughest jobs a parts manager has is to sell the idea of losing value on inventory to upper management. GMs and owners do not want to hear that a $200 power supply board is not going to sell and must be thrown away. “That is $200 of my money being thrown in the trash” is a common reaction.
It is a much easier idea for the GM or owner to swallow if you tell him it is only $20. So how do you write off a $200 part for only $20? You write it off a little bit at a time.
Computerized inventory control programs have made it relatively easy to keep track of the age of your inventory. Most programs will tell you when the last time something was purchased, when the last sale occurred and how many items have been sold in the last year. This information will give you all you need to write off obsolete parts.
I recommend writing down all inventory that was purchased more than a year ago and has shown no sales in the last 12 months. This is a part that should not be stocked anymore and thus should be eliminated from the current inventory.
Once all “dead” inventory has been identified, it should be reduced in cost value by 10 percent each month for the next 10 months until its cost value has reached zero. This will allow you to reduce your investment in a $200 board at $20 a month. This reduced cost factor also will make it much more likely that the part will be sold at a reduced price. A member of your sales team is more apt to sell that $200 board for $150 if the cost has been reduced for six months and is down to $80.
This write-down amount should be added to cost of goods sold for the month. This will reduce the gross profit your parts department is showing for that month, but it will avoid that horrible loss that most departments show at the end of the fiscal year when they dispose of bad inventory.
It is easier to swallow the problem a bite at a time instead of eating it all in one month. If you establish this policy and stick to it, your carrying cost of inventory will always be more accurate to the age of your inventory. Inventory will get old; it is time to set up the proper steps to deal with it.
Special Price Now, No Markdown Later
Deciding to watch the age of your inventory is a giant step in the right direction. If you can catch parts before they get too old, it is much simpler to rid your parts department of these bad seeds. It is much better for the company to designate a part as a non-mover early and sell it off than to have to start the markdowns after the part has been in inventory for over a year.
You should target parts that have been in stock, with no retail sales, for more than six months to put on sale. Taking a smaller margin on these items now will make cost reductions no longer needed later.
All retail stores, no matter what items they are selling, need to have areas for specially priced items. This is expected by customers and helps build strong relations with those people.
In RV parts departments, these areas are generally the end caps to the gondola display shelves. This is an excellent place to spotlight parts that have not created the sales that had been expected. Placing parts on end caps, at a greatly reduced price, can stimulate interest from consumers that had previously not existed. Every shopper is looking for a deal, especially during this economy, and they might look at something they would otherwise overlook if it is “on sale.”
Not all parts can be sold using a sales price, but it will reduce the amount of items that need to be marked down. The sooner these parts are place in a more prominent location in the store, the better the opportunity for a retail purchase. Identifying parts that have had no retail sales for the previous six months and placing them on an end cap with a special deal attached will help keep your parts inventory fresh and turning for profits.
Establish a “Clearance” Area
The proliferation of discount and “one dollar” stores is proof that the consuming public loves a good deal. Unfortunately for the consumers, there is not a chain of discount stores for slow-moving RV parts.
Fortunately for RV parts dealers, they have an opportunity to create such an area within their parts departments that will bring in new and different customers as well as keep existing relationship alive. If a parts department establishes a designated area in which to place parts that have not sold up to expectations and place these parts at a substantial discount, customers will visit the parts department just to see what is “on sale.” This is where parts can be disposed of that are being marked down before they are completely written off. This area creates customer interest in the parts department and helps lower inventory values; it is a win-win situation.
Normally, items in the parts department should be carrying close to a 50 to 65 percent markup from cost. This allows for a comfortable and profitable margin for the RV store.
Once a part has been determined to be a slow mover (i.e., no sales for the previous 12 months), it should begin to be marked down 10 percent per month. During this time, the part should be placed in the clearance area and be sold at substantial discount off of previous retail.
The clearance area could be divided into several areas, with each area carrying a different discount off of retail. The first area should be for parts that have just begun to be marked down and should have discounts of 40 to 50 percent off retail.
Parts that have been marked down for four to six months and not sold should then be moved into the next area where they carry a 60 to 70 percent discount. Parts that have been marked down for more than six months should then be moved to the final clearance area and be marked at 80 percent off of original retail price. This clearance area should do an excellent job of recouping as much cash from dead inventory as is available.
Clearance areas are a great traffic builder for RV parts stores. If these areas are constantly being updated with new parts and new discounts, previous customers will make special trips to your store just to see what is on sale. They will come in to watch certain parts, hoping they don’t sell before they are moved to the larger discount areas. These customers will sometimes even make an “offer” for the part, which will create even more sales.
In order for this type of area to be successful, they must be maintained properly and they must contain substantial discounts off of original retail prices. These discounts will not have a negative effect on your department’s bottom line, if the marked down are being taken on the aged inventory. The only hope for creating a market for these parts is to get the price low enough to entice someone who might not otherwise be interested. Big discounts are hard to pass up for some customers. Use consumers’ desire for a bargain to clean up your inventory.
A Final Discontinued Area
No matter how attractive a clearance area is to customers, there will still be parts that will not find a home. Certain parts just do not have a large enough demand, or may be too specialized for someone to consider, even at a large discount. These are the parts that will, after 10 months of being marked down, reach a cost factor of zero. These parts have been completely written off and can be disposed of in any way deemed appropriate.
But before you deposit these items in the large dumpster behind your parts department, why not take one more shot at salvaging some value from them. It is amazing how many people will buy a part they have absolutely no need for if it was originally $200 and they can now purchase it for $4.99. Now, I realize this is a pittance compared to the original value, but getting $5 for something that is completely written off is better than paying your disposal company for hauling it away.
This discontinued area should be an attachment to the clearance area. It will also increase customer interest in the discount area and get more people wandering through your parts store. I recommend breaking this discontinued area up into several areas like the clearance area. These do not have to be large areas, as most of the parts will be sold in the clearance area.
If your store is finding too many parts in the discontinued area, you should evaluate your discount policies in the clearance areas. Generally, there should be less than 10 parts in each of the discontinued areas. One area should have all parts, customer’s choice, for around $7.99. A second area should be for $4.99, a third for $2.99 and one final area with customer’s choice of any part for just 99 cents. A dollar is, once again, not a great amount, but is better than nothing on a part that has now been in your store for close to two years. Take what you can get and be happy with it.