Inventory Management at Reichard Buick GMCDayton, Ohio

Team 7:Paige Reichard

Katharine PezzattaAndrew Parker

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I. Introduction

Team 7 has chosen to look at the total inventory management, more specifically the

service lane parts (SLP) inventory, at Reichard Buick GMC. SLP parts are any of the parts

needed to service a customer’s car, including parts needed for oil changes, engine repair, over the

counter sales, etc. On April 1st, 2013, Reichard Buick GMC adopted the SLP ordering system

provided by General Motors Company. The voluntary loyalty program rewards GM dealerships

for ordering SLP parts strictly from GM’s manufacturing plants and penalizes them for buying

parts elsewhere. If the buying habits of the dealership are effectively monitored, the program can

result in monetary savings while improving customer turnaround in Reichard’s service drive.

Reichard is required to maintain purchasing levels of 90% for SLP parts in order to receive the

bonus.

II. Problem Statement

Reichard Buick GMC has the potential to save hundreds of thousands of dollars by

effectively utilizing the SLP ordering payout system through General Motors. In this report we

will conduct analyses to evaluate the advantages and disadvantages of utilizing the system,

suggest recommendations for improvement, and consider the overall impact of the SLP ordering

payout system on the dealership.

III. Company Facts

Reichard Buick GMC is currently the third largest parts dealer in Ohio. They service all

Buick, Saturn, Cadillac, Hummer, GMC, and Pontiac vehicles. Reichard Buick GMC moves

inventory through four different ways: wholesale, over-the-counter, service department, and

body shop. The wholesale customers are from body shops, other dealerships, and some

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independent service facilities. Reichard Buick GMC offers free delivery within a 100 mile

radius and delivers goods three times a day around Ohio. Presently, the inventory level being

held is $1.35 million. The primary inventory being held is sheet metal, which is not a part of the

service lane parts inventory. Other types of inventory include power train, truck beds, hoods,

bumpers, grills, bumper covers, and mechanical parts. By far the most popular body part

inventory item is bumper covers. The inventory is held in four warehouses. The total warehouse

area is approximately 100,000 square feet. The space is not entirely filled to max capacity with

inventory to leave room for potential growth or erratic spikes of inventory levels. Orders are

placed daily before 5pm and usually contain more than a hundred lines of items. A total invoice

price could cost anywhere between $20,000 and $200,000 in inventory parts. The procurement

department often finds problems with orders not going through before 5pm, which can alter the

delivery times of shipments. The inventory is usually delivered by the truckload or semi-

truckload to ensure maximum quantity discounts. The parts are delivered through overnight

delivery from GM’s Cincinnati location. Reichard Buick GMC uses DSC ordering; an online

format used to submit orders. The current system used to track inventory is rapid inventory

management (RIM). Since the implementation of the SLP loyalty program, Reichard Buick

GMC gets fined for ordering SLP items from other dealerships or wholesalers, which limits their

aftermarket and used parts purchase options.

IV. Analysis

Inventory Flow of SLP Parts

An inventory flow chart can be seen in Appendix A. The SLP parts are manufactured at

GM plants and shipped to distribution centers located across the United States. Reichard Buick

GMC requests parts from GM’s Cincinnati location, and they are transported via semi-truckloads.

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If the Cincinnati distribution center does not have a part ordered by Reichard, GM will ship the

items through overnight flight, therefore guaranteeing next-day arrival. The parts are stored in

Reichard’s four warehouses and used on-site when needed in over-the-counter sales and by the

service department. Other dealerships, wholesalers, and body shops can order inventory through

Reichard; if so, Reichard ships the items using company trucks. The inventory turnover rate is 65

days, resulting in approximately $7,790,000 annual turnover.

The inventory flow is streamlined to provide a simple, direct flow of SLP parts so that

items can be delivered quickly, ensuring high customer service levels. Reichard can and does

order items outside of this flow, such as through aftermarket wholesale, but this method is less

convenient and does not provide the monetary safeguards GM does. For example, if an item does

not sell for 15 months, Reichard can “return” it to GM for the full monetary value. This is called

return reserve, and it provides many benefits for GM dealerships. The dealerships face no risk in

holding the parts since the obsolescence imposes no cost to the individual dealers. The economic

impact only includes holding costs, however these are also reduced since the item can be

removed from their inventory after 15 months. Conceptually, return reserve benefits the

dealerships by encouraging constant inventory movement and accepting GM’s suggested

inventory levels, resulting in more cash flow. It also provides a safety net for the dealerships

because they can take on a broader product line in hopes to push demand, but if it does not work,

there are no negative consequences for taking the risk.

Advantages of Utilizing the GM SLP Ordering Program

General Motor’s new ordering program provides a number of benefits for Reichard Buick

GMC. The most economically significant aspect is the annual bonus earned by Reichard if the

purchasing levels are met. Reichard estimated their potential savings for 2012 as if they had

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implemented the SLP loyalty program earlier (figures removed from this version of the report).

Based on last year’s figures, Reichard would have saved $156,710 if a 90% SLP compliance rate

had been met. It is likely that Reichard will receive a similar bonus at the end of the year. Since it

is only the first year Reichard has implemented the program, these savings should increase as

opportunities to cut outside purchasing arise. Recommendations for how Reichard can

consistently achieve high compliance levels to guarantee the dealership receives the estimated

bonus amounts will be discussed in later sections.

Below are two payout grids that explain the opportunities and bonuses GM’s dealerships

can achieve (in reward percentage and dollar amount). A favorable aspect of the SLP program is

that not only is it optional, but it also contains more than one level of payback opportunities.

Dealerships do not have to choose to comply 100% vs. 0%; there are three levels to gain three

different percentages of payback, for a total of nine different opportunities. Any one of these is a

reasonable incentive to comply, but striving to get the highest payback is worth, in Reichard’s

case, $156,710. If Reichard did not use the loyalty program, their cost of the penalty for would

total $238,640, as estimated with last year’s figures. Based on these calculations, it is clear that

Reichard would greatly benefit from utilizing the program from an economic standpoint.

90% 1.25% 2.75% 4.25%80% 0.75% 2.25% 3.75%70% 0.25% 1.75% 3.25%

70% 80% 90%

Loyalty Performance Grid Payout Opportunity %

Sales Loyalty

RIM Service Lane Purchase Loyalty

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*Note: actual numerical amounts have been removed from this version of the report.

Beyond monetary benefits, Reichard is subject to many conceptual advantages if they

effectively utilize the SLP ordering process. Ordering parts will be a one-and-done process due

to the fact that all required parts will come from one location. Searching for aftermarket sales

will decline, as the cost difference is now insignificant from the dealership’s point of view. This

will save time and money and allow Reichard to allocate resources to value-adding activities,

such as servicing customers. Repair speeds will be expedited due to on-hand availability of SLP

parts, leading to a higher customer service turnover rate at no price or quality difference to the

customer.

Disadvantages of Utilizing the GM SLP Ordering Program

There are a few costs that go hand in hand with this new program. In order to be

compliant with GM, dealerships cannot buy parts anywhere but GM, with a 10% leniency. This

means that Reichard cannot purchase more than 10% of its products outside of GM without

being fined or losing higher levels of loyalty bonuses. Before this system, if Reichard had a

customer who needed a part they did not have, they could go to a dealer just a few miles away,

with whom relations are amiable, and buy the part from them; a local purchase would be quick,

easy, and cheap for both Reichard and the customer. Since Reichard must now maintain 90%

compliance with GM, they must be more conservative in what jobs they accept that do not fall

under order compliance. Another downside when buying straight from GM is that everything

comes new, making it harder to meet needs of customers. For example, in the past Reichard had

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a customer bring in a Grand Prix that was worth a total of $3,000. This car needed a new engine,

which if bought from GM (under total SLP loyalty compliance), would cost the customer $4,500

-- more than the value of the car itself! Reichard went to an automotive store close by that had a

used engine, bought it, and installed it in the Grand Prix, costing the customer only $2,000. In

this case, Reichard did not comply with the SLP loyalty program, but did not lose the Rank 1

bonus payout since this deal was less than the 10% leniency they receive. Even though they still

received the bonus, this would be one of the few times they could make a deal outside GM, so

they must carefully weigh each and every transaction to decide which ones are worth losing

percent compliance for.

Through compliance with the SLP ordering program, Reichard is forced into a single

sourcing strategy. Having only one source for parts increases the risk of stockouts if GM cannot

deliver on-time. Reichard’s high dependency on GM’s delivery reliability jeopardizes Reichard’s

customer service levels. A final disadvantage of SLP compliance is the high inventory levels. If

GM dealerships do not stock and sell a certain percentage of SLP parts, they will not receive the

payout bonuses. This program is not mandatory, but there are significant advantages when

complying with it, as seen in the previous section.

ABC Analysis of SLP Items

AN ABC analysis was conducted on all 2,760 SLP items that Reichard is gauged on for

the SLP program. Each item line’s dollar usage was calculated (price multiplied by its annual

demand) and these values were ranked in descending order. Once each part’s usage is ranked,

they can be categorized into “A”, “B”, “C”, and “D” items. The items with the highest dollar

usage, which cumulated 80% of the total dollar usage, were categorized as “A” items. Any

additional parts that went up to 92% were “B”, the additional items that added up to 100% were

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categorized as “C”. Any part that wasn’t sold during the year we categorized as “D”. The

percentage of the total parts for each category are as follows: “A” items made up 29.38% of all

SLP items, “B” 18.12%, “C” 44.13%, and “D” 8.37%, respectively. Looking at the items

purchased for each item does cause some concern, especially in the “D” category. Reichard is

still ordering these parts (sometimes multiple times) even though they did not sell at all

throughout the year. (Note: this ABC analysis is not included in this version of the report.)

LPG Payout Opportunity

Reichard would want to order parts from a source other than GM when a used part is

required to service the customer. This is either because the customer wants to save money by

getting a used part or the insurance company requires a used part so they don’t have to pay as

much money. GM only sells new parts because they manufacture all the products and do not

resell old products. From what we have learned, GM has a system implemented to keep track of

purchases but Reichard has no control over this system. Reichard does not have a system

implemented to tell them their current status of compliance 90% RIM Service lane purchase

loyalty. An Excel file calculating current compliance figures can be seen in Appendix B.

Reichard’s purchasing manager can use this information to determine what their current

compliance percentage is, how closely they are meeting their goals, and how purchasing an item

that is not under GM’s compliance would alter the compliance and leniency levels. It would then

be easy to decide if it’s worth ordering the part from another distributor. Continuing to order

noncompliance SLP items without using this tool can lead to lost sales, extra time spent keeping

track of purchases, and will also run the risk of ordering fewer than 90% of their total purchases

from GM. This will all lead to lost money in sales and the bonus.

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V. Recommendations

Since the SLP ordering program is new to Reichard’s process, there will be room for

ordering improvement. Reichard Buick GMC must be sure to order all SLP items from General

Motors every time in order to keep a 90% purchasing level. Unless it is a special incident that

economically benefits Reichard, they should not take on jobs that do not comply with the SLP

ordering program. Depending how much Reichard’s success with the program increases over the

years, they may have an opportunity to negotiate with General Motors to increase their minimum

compliance level in return for a higher annual bonus. This should only be done if Reichard is

confident their purchasing levels will be maintained.

After conducting the ABC analysis on the SLP protected inventory, Reichard Buick

GMC should make sure the main focus is on “A” items. Less time and money should be put

forth to “C” items. It should be stressed that all “A” and “B” items are always ordered through

SLP; this is an easy way to ensure the company meets their 90% purchase loyalty. Reichard can

take this attached analysis to GM and show how “C” items are not significant in cost and should

then negotiate a new deal so that Reichard does not have to stock these items all the time. If

Reichard is successful in negotiations, they can then buy these few items only when needed at a

potentially lower cost from another source. “D” items are items that have not had any demand all

year; these items should not be stocked at Reichard. An additional supplement to the negotiation

must be added in order to receive allowance to remove these items from Reichard’s regular

inventory. If they are currently holding these items, they should be returned via the return reserve

process.

Implementing a system that keeps better track of Reichard’s success of maintaining

required SLP ordering levels will help them save time and money in the long run. The SLP

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inventory Excel file (Appendix B) contains cells to enter purchases from GM and purchases

from elsewhere. These purchases are added together to get the total purchase amounts. When

these values are changed, Excel simultaneously changes the purchase percentage orders from

GM and the bonus percentage that Reichard will receive from GM. Using this spreadsheet and

the numerical values it creates will help Reichard’s purchasing manager in making a quick, clear

decision when considering ordering product from another source or not. Regular review of

performance levels will increase purchasing efficiency and awareness because of the motivation

to maintain and surpass the current SLP ordering percentage. Reichard can further benefit from

this tool by expanding the system to take into consideration the profit margin of each job to more

accurately determine its opportunity cost. Using this system would enable Reichard to compare

the benefits of taking on individual projects that are not covered under the SLP loyalty program

to the opportunity cost of foregoing the loyalty bonus simply by entering the price and cost of the

product.

It is important that all of Reichard’s employees are trained for the new ordering process

and know the benefits of keeping the SLP compliance levels. If the parts department has a

comprehensive understanding of the program, they will be more likely to proactively support the

program. If Reichard management conveys the message of “the business’ success is the

employee’s success”, then overall morale and SLP ordering compliance will increase.

VI. Impact of the SLP Ordering Program on Reichard Buick GMC

Short-term Effects (within a year):

Reichard may experience somewhat negative effects in the short term, but will achieve

significant positive effects in the upcoming years. Purchasing costs and inventory levels will be

higher because the SLP loyalty program requires a specified level of inventory, which must be

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maintained in order to receive the annual discounts and bonuses. There will be less flexibility in

Reichard’s ordering options, which may be a convenience for Reichard by reducing time and

resources spent on ordering tasks, but limits their ability to service customers. A challenge may

be faced by Reichard when specific parts are needed that are not SLP compliant; they will have

to evaluate if the job is worth a part of their 10% leniency.

However, Reichard will see a faster turnover with their service customers. SLP expedites

the repair process by having everything needed on hand all the time. This also means there is not

a risk of having a stock out. This faster turnover will make customers happy and increase overall

satisfaction.

Long-Term Effects (longer than a year):

Long term benefits will prove to outweigh the short term downfalls. Reichard will

experience significant cost savings with the annual bonuses and discounts seen in the payout

grids (above, IV. Advantages). The higher customer turnover rates will also lead to higher

profits, which increases the already immense economic savings gained through the SLP program.

As customer satisfaction increases, so will Reichard Buick GMC’s company image, which will

make customer service a core competency for the dealership. Another benefit will be the

streamlined ordering process. As stated above, SLP required a specified level of inventory,

which will always be replenished quickly, and items not used can be removed in a relatively

short time span. Increased inventory flow reduces holding costs and ensures parts availability.

VII. Implementation Plan

Short-term: 1. Reichard should take our ABC analysis results and use them as a basis

for SLP ordering.

2. Use a system to keep track of purchases to take advantage of the LPG

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payout opportunity in the service department

3. Train parts department personnel on the ordering process and explain

the benefits of ordering through SLP.

Long Term: 1. ABC results can be used as a negotiation tool with GM to get rid of the

unnecessary “D” items.

2. Conduct annual ABC analyses to provide up to date data for continual

negotiations.

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Appendix A

Inventory Flow Chart forGM Inventory

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Appendix B

Interactive Excel File forDetermining SLP Leniency Allowance

** These numbers are examples, not actual Reichard GM records.

Note: as different purchasing totals are entered, the loyalty compliance will change, allowing one

to determine the indifference points of the payout system. The “yes” answer will change if the

“other” purchases exceed the allowed amount in order to receive the bonuses through GM.

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Parts Purchased 6,000,000.00$ 90% 1.25% 2.75% 4.25%Parts Purchased from GM 5,400,000.00$ Sales Loyalty 80% 0.75% 2.25% 3.75%Parts Purchased Elsewhere 600,000.00$ 70% 0.25% 1.75% 3.25%

70% 80% 90%

Sales Loyalty 90.00%RIM Service Lane Purchase Loyalty 90.00%Purchase PriceProfit Margin on used part

Percentage of Purchased returned 4.25%

Should we service outside of GM Part? yes

Total Purchases GM OtherJanuary 450,000.00$ 50,000.00$ February 450,000.00$ 50,000.00$ March 450,000.00$ 50,000.00$ April 450,000.00$ 50,000.00$ May 450,000.00$ 50,000.00$ June 450,000.00$ 50,000.00$ July 450,000.00$ 50,000.00$ August 450,000.00$ 50,000.00$ September 450,000.00$ 50,000.00$ October 450,000.00$ 50,000.00$ November 450,000.00$ 50,000.00$ December 450,000.00$ 50,000.00$

LPG Payout Opportunity %

RIM Service Lane Purchase Loyalty