Dealers, distributors and repair garages that take core management seriously do well, and those who don’t take it seriously don’t do as well. It is as simple as that, according to Dave Clark, manager of consulting at Karmak.
“Everybody needs to treat cores with the same focus they give to the rest of their parts inventory, because it is not uncommon to have 10% to 15% of your total parts inventory invested in cores,” he says. “The amount of cash that is tied up can be pretty significant, so you have to treat it very seriously.”
Doug Wolma, general manager – worldwide operations, Meritor Aftermarket, agrees. “There are both poor and good core managers out there. Dealers and distributors who cannot manage cores effectively find the margins too slim to continue."
A Defined Process
For the core management process to be successful, you must begin with the accurate tracking of inherent cores. The inherent core often is called the clean core, but according to Clark, the inherent core is the value that has been assigned to the core in order to entice the buyer of the part to return the core.
“This tracking must be placed on your perpetual inventory as well as your general ledger,” he says. “At any time you should be able to report the value of your parts inventory, your inherent core inventory and your dirty core inventory.”
In addition, core should be included in physical inventories, cycle counts, and should be a line item on regular inventory reconciliations.
“Your processes should include correct identification of dirty cores. Sometimes cores look very similar, but have different values,” Clark says. "Be sure that you are correctly identifying all core being returned by your customers.” You can do this by using reference materials available from suppliers.
Wolma suggests that cores be inspected as soon as they are removed from a truck so that they can be valued properly and any deductions taken for cores that are in less than perfect condition.
Once cores are removed and inspected, they should be organized in their own separate storage area.
“Many companies have established separate bins specifically for dirty cores,” Clark says. “This allows them to place the cores in a well-organized manner and allows the company to easily control them.”
The company’s business system also should track all transaction in which a core is involved and should be able to show exactly how many of a particular core a customer owes the business.
“The dealership or distributorship should have a specified amount of time in which the customer can return the core. “Their right to return timeline should be defined in part by the suppliers’ core right to return program with the dealer or distributor,” Clark explains.
Remove Obstacles & Assign Responsibility
The core tracking process offers many opportunities for errors to occur.
“If you look at a core, through its life in a parts operation, it has a minimum of five transactions,” Clark says. You buy it as the part, you receive it into inventory along with the part, you sell the core, you credit the core, and then you return the core to the supplier for credit. “There are a lot of transactions and a lot of room for errors if processes are not tightly defined."[PAGEBREAK]
Wolma says one of the biggest obstacles to profitable core management is that no one is accountable for managing the cores. “They are treated as an afterthought,” he says. “Often cores are stored in a place where they are out of sight and therefore out of mind,” he adds.
Clark says that since cores that are returned are often dirty and greasy, they are not viewed as having high value – when in fact many times the cores have a higher value than the actual remanufactured part.
Personnel with responsibility for cores need to be educated about their value and the processes that should be used to keep track of them. Wolma believes lack of education is one of the big obstacles to core profitability.
The responsibility for cores lies with the parts department, according to Wolma. Since cores are part of the parts transaction, it makes sense that the parts department be given the responsibility for them.
“They have to control not only inventorying the inherent core, charging the customer for the core, they also have to manage all the dirty cores that are coming back,” Clark says.
It also is important that cores be priced properly. “We always encourage that cores be marked up and sold at a profit,” he says. “Typically those profit margins are different than what is executed on the parts themselves.”
The Business Owner’s Role
The business owner needs to understand the investment he has in cores. Clark encourages owners to go out into the parts department and look for cores and determine if they are being handled properly. The business owner needs to instill in his staff the fact that cores have significant value.
“Cores are not just worn-out parts,” Clark says. “They represent big dollars to the business. There has to be high visibility for cores.”
The owner needs to set policies in place so that every customer is charged for a core unless that customer has a dirty core that he is exchanging directly at the point of sale. “They also need to adopt the discipline that their dirty core inventory should be accurate at all times,” he adds.
Working With Suppliers
Dealers, distributors and repair garages also need to carefully monitor the returnability of cores to their suppliers. “They need to makes sure all cores are returned on a timely basis so they can get their total credits due,” Clark says.
Wolma suggests returning cores as soon as the minimum ship quantity is reached rather than waiting for the core return deadline.
Suppliers will inspect all cores that are returned to them, so dealers, distributors and repair garages must make sure they are not returning damaged cores. Damaged cores are worth less than cores in good condition and manufacturers will make deductions for damages and only issue partial core credit.
If a dealer, distributor or repair garage has already issued full core credit to a customer, it will be hard to get that back if the manufacturer only issues a partial credit. This is why it is important to make sure that employees who have responsibility for cores are not only trained in the core management process, but also have a thorough understanding of what to look for when inspecting a returned core.