If you are not receiving payments for parts scrap, who is?
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By Marilou Vroman, CPA, CFE
In recent months we’ve had a lot of activity surrounding the topic of parts obsolescence and scrapping. Perhaps It’s a result of year end parts inventory physicals, where obsolete parts are more likely a topic of conversation among dealership management with the interest to free up some frozen capital and use the cash for fresh parts inventory.
Interestingly, we find highly inconsistent practices from one dealership to the next when it comes to how obsolescence and scrapping of cores and “worthless” stock is handled. What is quite steady however, is the practice of writing off inventory. Interestingly, we find a disconnect between writing off inventory and the ultimate disposition of these items.
Consider a $500 part that has not been receipted or sold for 12 months. By some standards, this part would be deemed obsolete. This part still has some value to someone and there is a good chance of selling this item on eBay or to a vendor in the business of purchasing scrap parts. Either way, if the dealership is simply writing off or reserving for these parts and management is not asking what happens next, there is a good chance the dealership will not recover any portion of this $500. Often there is simply a payment of cash or check for these items from a third party with little more to support indicating what parts have been exchanged and these items are simply removed from inventory without detection.
In a recent conversation with a parts manager, he shared a true story with me. He became aware of a potential manufacturer return opportunity for certain cores and began stockpiling them. After a year passed, the OEM did not come through with the program, so he had to arrange to get rid of these items. He contacted a scrap vendor who agreed to purchase these items from the dealership. When the vendor asked who to make the check payable to, the parts manager said, I’ll create an invoice and you can make the check payable to the dealership. The vendor replied, “No, really, WHO do I make the check payable to?” In other words, the vendor was accustomed to paying dealership parts managers personally instead of the dealership. In another store, a parts manager was terminated and a week or two later a parts counterperson came to the accounting department with cash that he did not know what to do with. Accounting had not seen a transaction like this before and the parts counterperson said, “I don’t know what to do with this money; it was always given to the parts manager.”
If your dealership is not receiving payments for scrap or obsolete items, someone else could be.
There is no one sure fire way to know exactly what happens to every part in your inventory however, we find the dealers with most frequent communication with parts management and regular monitoring of departmental activities fare best. Here are some suggestions on what you can do:
- Controllers and operational managers should encourage parts employees to record the sale of scrap or obsolete parts on an invoice to relieve inventory and set up a receivable.
- Record parts write offs by part number on an invoice, instead of using a lump sum or just an accounting journal entry. Accounting should request a detail of any items written off.
- Obsolete items can be added to the DMS inventory with a cost of a penny so when they are sold, they can be invoiced, and any recovered losses can be recognized as pure profit at that time.
- An employee from outside of the parts department should routinely inspect the parts department for old cores/damaged/obsolete items and inquire about the planned disposition of these items.
- Communicate about the scrap and obsolescence process with your parts manager and review the status of these items regularly, especially if parts have already been written off.
- Management should regularly monitor inventory adjustment reports to help identify items removed but not invoiced.
There are no guarantees every parts payment will be captured, but as we always say: “trust but verify”.