Keys to cores

CORES ARE A CHORE for many dealers and distributors. They view them as a necessary evil that negatively impacts the bottom line, often costing the business a lot of money.

But J Richard Schien, president of Karmak, Inc, believes the proper handling, tracking, and accounting of cores can lead to higher profits, and that both manual and business systems should be designed to closely account for core sales and return activity. He says if cores are properly managed, they can make money.

Schien says each repair/exchange item in the inventory is actually two components: the repair/exchange cost and the core.

“Each time a sale takes place for a repair/exchange item, either the dealers' business system should automatically charge for the core, or repair/exchange items should be changed to include the core charge amount,” he says. “Otherwise, counter people will need to remember to make a core charge for each repair/exchange item they sell. If your business system does not handle automatic core billing for repair/exchange items, we suggest adding “EX” or “RX” to the part number and adding the core charge amount to both the cost and the selling price. In addition, we suggest creating a second part number for tracking the dirty core back into inventory. We suggest a suffix of “CX” for the dirty core part numbers.

“Repair/exchange items are then sold ‘outright’, including the core charge and repair/exchange charge. Dirty cores are posted back into inventory and credited to the customer using the part number with a “CX” suffix. Repair/exchange part numbers and dirty core part numbers should be clearly identified in their respective descriptions.”

He says most dealerships/distributors do not really know if they lose cores or if they give credit for cores they never received. They have no system for tracking cores in, out, and back into inventory.

“Although some systems check cores in automatically, cores are often not posted into inventory as cores when they are received from the supplier,” he says. “And yet, every repair/exchange item has an accompanying core. For every repair/exchange item in stock at a dealership/distributor there is a core — and a core value. This core value is an increase to inventory and should be posted into physical inventory and to an appropriate inventory account in the general ledger. Many dealerships/distributors do not want to deal with both a repair/exchange cost and a core cost; in the process, they lose track of the core cost.”

Each time a repair/exchange item is sold, Schien says inventory should be reduced by both repair/exchange cost and the core cost. He believes the charge for a core should take place every time a repair/exchange item is sold. It is important to show the customer that cores have a value, and it is even more important to show the customer consistent invoicing.

He says this is the important step: Each time an “old” or dirty core is received from a customer, it is important to update the proper inventory records for that dirty core.

Many core tracking problems for a dealership or distributor can be eliminated by implementing a policy of three-line repair/exchange transactions.

“Every repair/exchange sale is in fact three transactions. Each time a repair/exchange item is sold, we have two transactions: the repair/exchange portion of the sale and the core portion of the sale. The third line is required when the dirty core is returned by the customer. Many repair/exchange sales are simply listed as exchange. This is meant to indicate that the customer had a core ready to exchange, and therefore, there is no need to charge for the core. However, these seemingly simple exchange sales cause a number of costly problems.”

He says this method typically skips the step of posting the dirty core into inventory; does not allow for dirty cores with varying values, such as cores with damaged or missing parts; and, most critically, teaches customers that cores are sometimes not billed when repair/exchange items are sold.

He says that when repair/exchange items are always billed as a three-line transaction, customers see a consistent billing pattern. They always see a core charge, and every sale of a repair/exchange item is the same — three lines. It doesn't matter whether the core is returned immediately and credited on the same invoice or returned many days later.

Making money with cores is not magic, Schien says, but it does require good core control methodology and firm discipline. He says these seven rules will “all but ensure your business a profit” on cores:

  • Price cores to make a profit.

    “Industry figures indicate that somewhere between 16% and 25% of all cores sold will never be returned. By marking up cores to the same profit level as the other items in a product line, dealers/distributors can realize a substantial profit on cores which are never returned. As an example, a dealership which does $2.5 million per year in parts sales probably does about $500,000 per year in core sales. If we assume that 20% of those cores are never returned, the dealership can realize a $25,000 profit each year by marking up cores at a 25% margin.

    “If your business system does not allow a markup on cores, consider creating a second part number simply for the core portion of each repair/exchange item.”

  • Never issue core credit until you actually receive the core.

    “Do you issue credit for returned merchandise that has not yet been returned? Cores are money. Run your core business like the rest of your business. Cores should be charged when the repair/exchange item is billed and credited only when the core is actually returned.”

  • Never allow customers to over-return cores to you.

    “Core credits should only be issued if you sold the core in the first place. If you allow customers to return cores that were not purchased from your dealership/distributor, you probably cannot return the cores to your supplier. Cores are then out of control and you lose money. Core credits should not be allowed without verification that the customer bought the core from you originally. If your business system does not automatically track core status by customer and type of core, then you must establish your own tracking system. Several manual systems work, but they all require discipline.”

  • Track inventory of “dirty” (returned) cores.

    “Cores are money and deserve the same treatment as other inventory items. Do you have too many cores? Did you actually receive a core for every core credit you issued? Both of these questions requires tracking dirty core inventory. Without tracking dirty cores, you really do not know when you have problems. Tracking dirty cores will tell you when you need to buy cores, and when you need to sell cores. It stresses to everyone in your company that cores are worth money. Dirty cores should also belong somewhere. They should be assigned a specific location just like other parts. Some dealers tag each dirty core as it is returned and attach a copy of the core credit issued.”

  • Track cores to customers using the same rules as your suppliers.

    “Every supplier has their own core rules. Some suppliers track cores by part number, some by product model and some by core class. Some suppliers allow return of broken and damaged cores and some accept only good cores. Whatever the rules of your supplier, these same rules should be applied to your customers. If your supplier tracks core charges to you based on core class, you need to charge your customers based on core class. If your supplier accepts only the same part number, then you should accept only the same part number. If your business system does not handle tracking cores by core class, we recommend that you establish a part number which represents a core class.”

  • Never over-return cores to your suppliers.

    “With rare exceptions, suppliers will not give credit for over-returned cores. Therefore, if you send cores back to any supplier over and above the cores owed to that supplier, you will almost always not receive credit. Keeping excess cores in your inventory allows you the option of selling them to a core broker or returning them to another supplier. Since most suppliers will not issue credit for ‘over-returned’ cores, returning more than you owe is really a core donation. If your business system does not handle core tracking to your suppliers, you will need to establish a separate system — either on paper or using a personal computer.”

  • Establish “cores only” accounts payable accounts.

    “For suppliers that allow you several days to pay for cores, it is often a good idea to establish a ‘cores-only’ account payable account. This will allow you to monitor the dollars of unreturned cores for which you will be required to pay if cores are not returned. Quite often there is a cash payoff in buying cores from customers at market price (typically lower than your supplier's charge) and then using these low cost cores to reduce or eliminate your supplier's core charge. A second option is to urge your customers to return cores in a more timely manner.”

He says some dealers and distributors set a value of zero on their cores. He believes that while this method of valuation keeps inventory values low, it invites several other problems that may be much worse: a zero valuation of cores is such an obvious understatement of value that it will be challenged by even inexperienced auditors; and valuing cores at zero tells everyone in your company that cores are worthless — an incorrect and potentially costly message.

“Cores do not have to be bad news. A painful situation becomes a profitable one when good core control methods are established and enforced. To ignore cores is to deny increased profits for your business. Ignoring cores only makes your profit go way. The cores will still be there — demanding your attention.”

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