BUSI 474 Week 4 Fixed Revenue Stream Assessment 2 Example

Fixed Revenue Stream Assessment 2: The Service Parts Department at Summit Motors

The Parts Department's Role

Summit Motors' parts department employs a parts manager, four counter staff who serve technicians and retail customers, and two wholesale representatives who sell to independent repair shops and body shops in the area. It supplies the service department's repair orders, the collision center's repairs and walk-in retail customers. Because nearly every repair order needs parts, the department's performance directly affects how many hours technicians can produce and how quickly customers get their cars back.

Sales and Gross Profit

The department's monthly sales and gross profit by channel are as follows.

Inventory Measures

Strengths

The department earns healthy margins on its most important channel. A 42 percent margin on repair-order parts reflects disciplined pricing to the service and collision departments, and the retail counter performs similarly. The wholesale business, though lower in margin, adds $33,000 of monthly gross profit from sales to shops that would otherwise buy aftermarket parts, and it uses the department's existing inventory and delivery trucks. Wholesale accounts also spread the cost of carrying a broad inventory across more sales.

Weaknesses

The first weakness is aging stock. Inventory turns of 4.5 a year are respectable on their own, but the average hides a split: fast-moving maintenance and collision parts turn many times a year, while a long tail of slow parts barely moves. Fifteen percent of inventory, $118,000 at cost, has not sold in a year. Kennedy et al. (2002), reviewing research on spare parts inventories, emphasize that such inventories differ from ordinary stock: demand for many parts is intermittent and hard to forecast, service requirements are high and the risk of obsolescence is constant as models change. Parts that are ordered for a single repair and then returned late, or bought in quantity for a promotion, easily become dead stock. Every dollar of obsolete inventory ties up cash, occupies space and will eventually be sold at a loss or written off.

The second weakness is availability. A 78 percent first-time fill rate means that more than one request in five cannot be filled from the shelf. Each miss delays a repair, idles a technician paid on flat rate or forces the customer to return another day. The two weaknesses are related: money tied up in parts that do not sell is money not available for the parts that do. Summit is holding too much of the wrong inventory and too little of the right inventory at the same time.

Saccani et al. (2007) studied after-sales service supply chains across several companies and found that their configuration, including how stocking decisions are shared among manufacturer, distribution centers and dealers, needs to fit the products and markets they serve. For a dealer, that means relying on the manufacturer's regional distribution center for slow-moving parts, which can usually be delivered overnight, while stocking locally the parts its own repair orders call for most often. Cohen et al. (1997), in a benchmark study of service parts logistics, documented wide differences in practices and performance across firms, suggesting that disciplined stocking policies are a real source of advantage.

Recommendations

• Return or sell obsolete stock: use the manufacturer's parts return allowance for eligible parts each month and offer the remainder to wholesale accounts at a discount. Target obsolete stock below 8 percent within a year.
• Stock to demand: set stocking levels from the past 12 months of repair-order history, so that parts are stocked locally only after they have sold a set number of times, and rely on overnight distribution-center deliveries for the rest.
• Track lost sales: record every request not filled from stock and review the list weekly, so that parts with recurring demand are added to stock. Target a first-time fill rate of 88 percent.
• Coordinate with service: have counter staff preview the next day's appointments and pull or order parts in advance, so that scheduled repairs never wait on parts.
• Grow wholesale carefully: add accounts with independent shops only where delivery routes already run, so the lower margin does not come with higher delivery costs.

The Link to Service

The parts department's weaknesses show up in the service department's numbers, and the reverse is true as well: when advisors write vague repair orders or technicians order parts at the last minute, the counter cannot plan. Each repair delayed by a missing part reduces the hours technicians can sell and makes customers wait, which hurts the retention problem identified in the first assessment. Improving the fill rate is therefore a service department improvement as much as a parts improvement. A monthly review shared by the parts and service managers, looking at fill rate, parts-related delays and technician idle time together, would make the shared problem visible and give both managers a stake in solving it. The collision center, assessed next week, depends even more heavily on parts, because a single missing panel or sensor can hold a car for days.

A Biblical Perspective

Proverbs 21:20 contrasts the wise, whose house holds stores of value, with the foolish, who use up whatever they have (English Standard Version Bible, 2001/2016). A parts department is a storehouse entrusted to its manager. Wise stewardship means holding what customers will need, turning it into value and refusing to let capital sit idle on shelves where it serves no one.

References

Cohen, M. A., Zheng, Y.-S., & Agrawal, V. (1997). Service parts logistics: A benchmark analysis. IIE Transactions, 29(8), 627-639. https://doi.org/10.1080/07408179708966373

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Kennedy, W. J., Patterson, J. W., & Fredendall, L. D. (2002). An overview of recent literature on spare parts inventories. International Journal of Production Economics, 76(2), 201-215. https://doi.org/10.1016/S0925-5273(01)00174-8

Saccani, N., Johansson, P., & Perona, M. (2007). Configuring the after-sales service supply chain: A multiple case study. International Journal of Production Economics, 110(1-2), 52-69. https://doi.org/10.1016/j.ijpe.2007.02.009