Parts inventory can be one of your dealership’s greatest strengths or greatest weaknesses. It’s one of your highest-margin areas, but it’s also one of your most fluid assets. You can affect its performance much faster than you can sell a building or land, or sometimes even move a piece of equipment.

I have been at this for a while. I grew up in a dealership, left to work for an OEM and later worked for several other manufacturers. For the past 11 years, I have worked directly with dealers through Parts Academy. What I am sharing here did not come from a textbook. It is the “street smarts” I gained by making mistakes, studying many pages of data and continuing to work alongside dealers.

Over the years, I have learned that parts departments rarely lose ground because of one dramatic mistake. More often, performance declines gradually while everyone is focused on something else. That is why managing parts inventory begins with situational awareness. 

Watch Your Altitude

First, a story to set the stage.

In 1972, Eastern Air Lines Flight 401 was approaching Miami with 163 passengers and 13 crew members aboard. As the crew prepared to land, an indicator light for the nose landing gear failed to light up. The pilots manually verified that the landing gear was down, but their attention remained fixed on the burned-out light and finding a replacement below the cockpit.

While the crew focused on that small problem, the aircraft began descending so gradually that no one recognized what was happening. Flight 401 flew right into the Everglades, killing 101 people. 75 survived.

Shortly after midnight, Eastern Air Lines COO Frank Borman received the call. The airline knew the plane had come close to Miami and believed it was somewhere over the Everglades, but no one knew whether it was still in the air, on the ground or whether anyone was safe.

Borman, a licensed pilot, gained access to a helicopter and began searching. He found the wreckage, alerted rescue crews and landed on a dry patch about 100 yards away. Still dressed in the pajamas he had been wearing when the call came, he entered the chest-deep water and helped pull survivors from the wreckage.

It is an incredible story, but the lesson for me is what investigators determined about the crash: The crew lost situational awareness. The plane was on course, but while everyone focused on one malfunctioning light, it quietly ran out of altitude.

The same kind of gradual decline can happen in a parts department. Your altitude is your profit margin, fill rate, inventory turns and accuracy. Your distractions are all the things that pull your attention away from those numbers.

Margin slips a point. The fill rate drops a little. Turns slow down. You explain it as a difficult year or an unusual circumstance. But before long, that lower performance becomes your new altitude.

I believe there are six areas where even a good parts department can lose situational awareness. These course corrections can help you maintain your altitude. 

#1 Trust Demand, Not Instinct

There are really only two good reasons to put a part on the shelf. You have prior, repeating demand for it, or you have a reliable reason to predict demand.

The word “repeating” matters. Most dealerships look back 12-18 months when evaluating demand. If you sell a part twice, it might happen again. If you sell it three times, it probably will happen again. If you sell it four times, you need to stock it.

Selling a part once does not tell you much. I recently worked with a dealership that provided 4 years of data to analyze. We found about 18,000 part numbers that had sold exactly once during that period. Imagine what would have happened if the dealership had stocked every one.

Predicted demand can be appropriate for maintenance parts and initial stocking lists. The thing that worries me, however, is gut instinct, partly because I have made that mistake myself.

One dealer called me because his business was flat while his parts inventory was skyrocketing. He was preparing to pour concrete for a third addition to the stockroom.

The next day, I was talking with the parts manager when the owner walked by. Before leaving the counter, he picked up what I remember as a voltage regulator and said, “Get a bunch of those.”

After he left, I asked the parts manager whether they sold many of them.

“I think that’s the first one we’ve ever sold,” he said.

He checked the system. The part fit only one model, and the dealership had not sold many of those machines. Still, he was going to order more.

“You heard the man,” he said. “His name’s on the front door. He’s my boss.”

I walked into the owner’s office and told him, “I think we’ve found the problem. I think it’s you. You’re doing it to yourself.”

He was a great dealer who had grown up twisting wrenches and knew the equipment inside and out. However, his instincts were filling the stockroom faster than customer demand. Experience is valuable, but I advise clients to not let it override the data. Data will help drive healthy, sustainable decisions. 

#2 Maintain Demand History

Dealers often tell me they cannot trust their dealership management system or OEM replenishment program because it recommends “crazy stuff.” When you examine individual part numbers, the problem often comes back to demand history.

I call it digital dirt: the information in the system that needs to be cleaned up.

Two types of demand require particular attention: demand you missed because a part was unavailable and abnormal demand created by an unusual, one-time event. 

If a customer asks for a part, you do not have it and the customer leaves without ordering it, you still experience demand. Maybe the customer buys it somewhere else. Maybe he goes home, and patches it together in a DIY fix. 

Either way, it was a lost sale. If you do not record it, the system never receives the demand hit, and you may continue failing to stock a part customers are requesting.

Abnormal demand creates the opposite problem. A tornado may damage several machines and create parts sales unrelated to normal wear. If you leave that demand in the system, it may interpret the one-time event as evidence that you should stock those parts.

Your system can only provide trustworthy recommendations when you maintain the information feeding it.

#3 Match Supply to Lead Time

Once you decide to stock a part, you have to determine how much to carry. Time supply should have a logical relationship to replenishment lead time.

I regularly find dealerships that can replenish a part in a week or 10 days but have 6 months of it on the shelf. The explanation is usually, “I’m never going to run out.”

That extra supply may feel safe, but it hurts your ROI by tying up cash and consuming shelf space. Eventually, you’re convinced the dealership needs more racks, shelving or another location. 

Supply does not have to match lead time exactly, either. Seasonal needs, supplier problems and appropriate safety stock all must be considered. I know a strong dealer operating with just under 6 weeks of inventory on average. 6 weeks may not be a universal target, but the point is to decide intentionally. You do not need 6 months of a part you can replace in 2 weeks.

#4 Act on Dead Inventory

Parts have a lifecycle, and at some point every dealership has to decide when a part is dead.

You remember when the part used to sell, and know there are still machines in the area that could need it. You look at it and think, “That’s a perfectly good part. I can’t throw that away.”

Meanwhile, dead inventory takes up space, reduces turns and creates work.

My guideline is to consider a part active if it has sold within the past 12 months, dormant if it has gone 12–35 months without a sale and dead once it reaches 36 months.

Your timeline may be different. I know aggressive dealers acting after 18 months and others holding parts for 36 or 48 months because of the installed base they support.

The number is your call. But make the call.

Once a part meets your definition of dead, take action. Anything eligible for return should be sent back. Other recovery options may be available. If none of them work, “get a Dumpster.”

Dead inventory is not harmless because it sits quietly on a shelf. Employees walk past it to reach active parts, move it, organize it and count it every year. Chances are that you are spending too much time on parts that are no longer serving the business.

#5 Count What Moves

I have spent too many nights counting parts until 11 o’clock, eating cold pizza and drinking warm Mountain Dew. At the end, everyone is exhausted and wants to go home.

A physical inventory may make your records accurate for one day. It usually does not tell you why the errors happened.

That is why I prefer cycle counting. The more frequently a part sells and gets touched, the more often it should be counted. Count active parts daily or weekly, then give someone time to investigate discrepancies and identify the root cause. 

I would rather count 15 parts a day than attempt to count 40,000 part numbers in 2 days. Correcting a quantity without correcting the behavior that caused the error means you will count the same problem again next year.

#6 Measure What Matters

The final mistake brings us directly back to situational awareness.

You could measure many stats in a parts department. Measuring all of them, however, will not necessarily help you make decisions. Instead, focus on the few metrics that tell you how the business is performing, and compare them with meaningful benchmarks.

Breadth, which some manufacturers call compliance, measures whether you have the parts you decided to stock. Manufacturers generally expect at least 85%. Most good dealers should be closer to 95%, and getting above 90% is achievable.

Fill rate is different. Dealers in our performance groups average approximately 80% total fill, with some approaching 90%. The right expectation depends on the dealership’s installed-base profile. A dealership supporting everything from push lawnmowers to combines cannot be judged exactly like one with a narrower product profile.

Inventory turns also must be considered in the context of an equipment dealership. Automotive operations may turn inventory 6, 8 or 10 times, and manufacturers may expect 12. Those expectations do not transfer directly to this business. 2 to 4 turns is a reasonable range for an equipment dealership.

There is also no reason a dealership cannot work toward 95% inventory accuracy. If you conduct only an annual physical inventory, however, you can measure accuracy only once a year. Cycle counting, as shared earlier, lets you monitor it much more frequently.

These benchmarks come from real dealers working to improve. They challenge one another, discuss what is not going well and learn from each other’s mistakes.

Many dealer peer groups say they discuss parts and service, but those topics often receive less than 5% of the meeting time, even though they can drive more than 50% of dealership gross margin. If your group is not digging into parts performance, find one that will.

Make the Two-Degree Changes

Flight 401 did not suddenly nosedive into the Everglades. It lost altitude so gradually that no one recognized what was happening.

Dealership performance can decline the same way. Margin slips a point. Fill rate drops. Inventory turns slow down. Eventually, diminished performance becomes normal.

Dealerships also lose awareness when their best people are pulled away from their primary responsibilities. If the parts manager is the person watching the department’s altitude, be careful how many other duties you assign.

Borman later told me about a two-degree course correction made during Apollo 8. Without that small adjustment, the spacecraft would have missed the moon by 9,000 miles. Waiting would have made the correction much more difficult.

The same is true in your parts department. Maintain demand history. Match supply to lead time. Act on dead inventory. Cycle count, investigate discrepancies and measure the results that matter.

Small corrections made now can prevent much larger problems later. Pay attention to your altitude and act before declining performance becomes your new normal.