How much and when

Only one way controls inventory properly

What is the biggest asset your business has? Most likely it is inventory. Only if you own your building do we find a business where inventory is the second largest dollar investment. And just the old saying of, “it is not how big is the dog in the fight; it is how big is the fight in the dog” can be true, a variation of this is very true of your business.

It is not how much inventory you have; it is instead what you do with the inventory you have. Translating, it means the amount of profit your business makes is not determined as much by how much inventory you have, but by how well you handle the turnover of your inventory.

This claim bears a closer examination and explanation. There is not any parts house having any single item, much less a category of inventory, that sells at the same rate throughout the year. Doing so would mean this item or category produces 8.33% of its annual sales each and every month. So we agree that everything has at least one if not more sales cycles during the year.

The dealer making a point to find those cycles and utilize it to his advantage is the one who best knows what to do with his inventory. Let’s look at a couple of examples, the traditional parts jobber would look at items such as batteries and starters. The sales peak for these items in most parts of the country should come during the two extremities of weather each year – the hottest and coldest days of weather as that is when we expect these parts to fail for the customer.

With racing, the sales of items are going to be more closely tied to the racing season for the tracks in your area. Within the season you could also see peaks occur with the races that have the biggest payouts during the year. Add to this, you may also find during each season times where cars experience a breakdown of parts due to the stress and length of the season.

Knowing this information, you would expect an increase in sales at each of these points in time. The challenge is that not all parts, tools and accessories have the same peaks and valleys within the season.
Your point of sales system should have the capability of telling you where these peaks occur. Now we can use this information to make a big difference in how much profit your inventory can make for you.

Without naming a specific product, we have “item A” that has an initial peak before the season begins, followed by a smaller peak in July and another small peak before the biggest races of the year held Labor Day weekend.

The jobber maximizing his inventory is going to look at the options of where he can buy item A. He will look at his sources for buying, along with information telling him about the price breaks for different quantities and based on previous years of experience, how well his wholesaler keeps inventory on hand for stock replacement.

Our jobber experiences a lull in sales of item A after the initial peak which allows him to diminish the depth of his inventory until the time of the smaller peak in July. The same can be done in the time between the July small peak and the Labor day races.

Diminishing the inventory during the lulls allows the jobber to take dollars that would otherwise be sitting on the shelf in the form of item A, and use those dollars to bolster the inventory of any number of items having their peaks at times that are different from item A.

This shifting of inventory into dollars into inventory of another item; back into dollars and into inventory of another item are what is necessary for the business not having an unlimited amount of dollars and shelf space. (Isn’t that just about everyone?)

All of that movement of inventory and dollars affect two measurements of a business that any lender or business advisor is going to closely monitor. The first is the “inventory turn rate”. This is a measurement of how many times over the course of a year, your inventory is bought, sold, bought and sold again.

The higher this number goes indicates how your business is doing a better job of managing the inventory you have using the amount of money you have available.

The second measurement that improving your inventory turn affects is the ROI or “return on investment”. Imagine our selling all of your business, paying all of your bills, and then handing to you what is left. This is called the equity in your business.

You would take the money and consider where you now want to invest. You could visit a banker, stock broker, financial advisory or any number of businesses and individuals where you will ask, “What is the rate of return my money is going to earn?”

A valid and important question. Shouldn’t you also be asking that question of the money you have invested in your business? That is your ROI. The better you turn your inventory, the higher your ROI.
This is not to suggest this exercise is going to be one you are going to complete in just a few minutes. It will take time and effort to constantly monitor the changes that are happening in your business and in your trade area. However, the results are of the size that will pay you tremendous rewards, financially, for your effort.

The alternative is simply using a stock replenishment method. Which means when you sell five of something, you buy five of the same item to replace what you have sold. While easier, think about your business when you got to the end of the season last year. As sales decrease, there are may expenses that do not decrease. You need dollars (the dollars that are sitting on your shelf in the stock replenishment concept) to pay the bills that do not seasonally decrease.

Whether you call this “inventory control” or “open to buy”, we call it extra profit in your pocket and a better return on your investment. We think that is what you are looking for.

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