By Jeff Sheets
Most dealers that I have worked with do not enjoy inventory management discussions. They really enjoy talking about sales, employees, signage or about 1,000 other things, but their eyes start glazing over when inventory management conversations begin. You need a reasonable amount of inventory, so that you can deliver whatever you are selling to the customer immediately and close the sale. The art of this process is in making sure you don’t have too much or too little. If you have too much inventory, then interest costs can drag down your profits. However, if you have too little inventory, you miss sales that could have generated more profit for the dealership. I call this “The Goldilocks Problem.” Just like Goldilocks in The Story of the Three Bears, you need your inventories to be “just right.” Following are three tips to make sure you have the best inventory management possible.
Tip #1: Limit the number of lines of equipment
Some owners think more lines of equipment mean more sales, but they tend to forget that there are minimum whole goods and parts inventories that come along with each line. When you start combining all these inventories together, it can effectively choke off the cash flow of a business. My suggestion is to have two complementary equipment lines and one handheld line. By “complementary,” I mean that there would be different price points and possibly different types of equipment in each line. They should not be in direct competition with each other as much as possible. This one tip will make your life so much easier, and you will be thankful for it. Having additional lines of equipment can really slow down the sales process and confuse your customers as to what they should buy.
Tip #2: Know your sales history
Good inventory management in both parts and whole goods is reliant on knowing what happened in the past, so that you can have a good idea of what you need and what you don’t need. One of the big advantages in the parts department you have today is that you can have parts delivered in 48 hours or less. My suggestion is that you make sure that you have the top 100-150 parts in numbers sold on hand with some depth based on history, but the rest of your parts you can stock in limited quantities (a maximum of two items) since you know you can get them from the manufacturers quickly and easily. I would also be very careful in stocking very expensive parts. Parts with a value of more than $100 should be limited to only those you have a very deep history of selling. The less dollars you tie up in inventory, the better cash flow for the dealership all year-round. Your goal is to turn your parts over multiple times in a year. If I were giving you a goal for your parts inventory turnover, I would want you to shoot for three-plus turns.
In whole goods, you rely on the inventory numbers to help you not just know how many units to order but to know that your growth depends on selling the right equipment as well. You should research your sales history to see where growth has been happening, especially in specific price points and types of equipment. Make sure you are growing where you can but reducing where sell-through has been less than stellar. An example might be garden tractors. In most dealerships, these numbers have been decreasing while zero-turn mower numbers have been increasing. Make sure you also analyze what promotions or extra marketing efforts you are going to take in a given product area to make sure your numbers are correct for your efforts. Obviously, your manufacturer can help you if you need more equipment or maybe need to get rid of some whole goods inventory, but you can’t rely on that too much, which is why your history of selling is so important. If I were giving you a reasonable yet challenging whole goods inventory turnover goal, I would suggest two-plus turns per year.
Tip #3: Take advantage of return and restocking programs for parts
If a manufacturer gives you a chance to return parts, I have one thing to say to you: DO IT! You need to analyze your parts department, and anything you have purchased within the past nine months and have yet to sell, needs to be identified for return, starting with the oldest parts possible. If you have parts that have been sitting on your shelves for at least 12 months and can’t be returned, take the markdown and get them out of inventory. These parts are great to be listed on eBay or on your website, so that anyone, who might have a need for those parts, can find them. I would definitely keep these parts in a separate area away from your current parts, so they are not counted in inventory. Every year, you should be looking to get rid of old parts out of inventory. If you do sell a written-off part, it becomes all income because of no cost associated with it because of the write-off.
Buying your top 100-150 parts in large quantities when the manufacturer gives you discounts is not a bad idea. Normally, you may make 35-percent margin on your manufacturer parts, but with the extra discounts, this might move it up to 40 percent or more. If you have great confidence that you are going to sell these parts (I include oil in this too), then getting the extra margin makes sense and usually you get great terms from the manufacturer on this as well with delayed payment.
In both of these instances, the manufacturer is helping you with your inventory — not taking advantage of it causes you to miss great opportunities for your business to be the best it can be.
I know invoking a fairytale story to get your attention seems a bit far-fetched, but if you get your inventory “just right,” you will sleep better — just like the character Goldilocks. What you don’t want to end up with is excess inventory with no hope to really reduce it effectively. Many dealers discount prices to get rid of inventory and make little or no money on it, but that is not the reputation you want to establish for your business. Customers will figure this out and delay their purchases. Again, that will affect your profitability and cash flow, which can cause you problems. My ultimate advice is to “know your inventory.” If you don’t have a handle on it, you can get yourself into trouble very fast. Owners who keep track of this, by looking at their reports on at least a monthly basis, will manage their inventories better than those who don’t. If you have parts managers or sales managers, then they should be held accountable for the inventories on both equipment and parts with goals regarding excess items. I like the following quote from James Sinegal, founder and former CEO of Costco, with regard to inventory: “We want to turn our inventory faster than our people.” I think all of us would like to meet that goal. Keep working hard at your inventory management, and your business will be better for it.
Jeff Sheets is the founder and owner of OPE Consulting Services. Whether a business is thriving or struggling to survive, Sheets’ rich experience in both the corporate and not-for-profit sectors allows him to partner with business owners to customize unique strategies for their needs. For the past nine years, he has worked extensively with hundreds of outdoor power equipment dealers to create best practices in business structure, personnel management and financial profitability. For more information, he may be contacted at firstname.lastname@example.org or (816) 260-5430. You can also follow him on Twitter @opeconsult, connect with him on LinkedIn, and visit his website at www.opeconsultingservices.com.