Ken Staubitz
Many business owners overlook the cash that is sitting idle within the business. Too many of us have cash tied up in excess parts inventory. Properly managing your parts inventory can have a dramatic effect on cash flow, rescheduled call rates, and ultimately affect the level of service provided by your organization. There is a delicate balance between avoiding tying up excessive cash in inventory and ensuring that a technician is caring the right parts in his car stock to effectively serve your clients. Having an inordinate amount of unused parts sitting on a shelf in the warehouse or in a technician’s car, can greatly reduce the available cash a company can spend on other things—payroll, training, vendors, etc.
The key to proper inventory effectiveness is ensuring you have the right parts in the right place at the right time while maintaining acceptable inventory turns. Piece of cake, right? If a technician is putting a service call on hold for a part that he is not carrying more than 8 percent of the time your organization is incurring additional expense for the technician’s ineffectiveness. This technician ineffectiveness can also impact your customer service levels if your client’s feel your team is unable to resolve their issues one the first call.
In addition to managing each technician’s rescheduled (incomplete ) call rate, one must also focus on managing inventory turns to ensure the organization is ordering and stocking the parts required to support its needs (actual usage). According to the Wikipedia inventory turns by definition is “a measure of the number of times inventory is sold or used in a time period”.
If your turns are too low you may be over stocking which could lead to obsolescence and potential inventory write-off. Conversely, if your turns are too high you may not be carrying enough inventory to meet the current demand which can lead to excessive lead times, shortages, and ultimately diminish your customer service. The formula for calculating your inventory turns is as follows: inventory turns = annualized cost of goods sold (COGS)/average inventory. The inventory turn target in our industry for a technician’s car stock inventory is 5.5+ and is 3.5+ for overall parts turns.
As an example, let’s assume your annualized COGS for your overall parts inventory is $120,000 ($10,000 month X 12) and your average overall parts inventory on hand is $50,000. By using the formula above, your average overall parts turns in this case would be 2.4 ($120,000/$50,000). Quantifying the cash impact of an improvement in inventory turns can be eye opening. Using our prior example, if you were able to improve your turns from 2.4 to 3.5 you would reduce your average inventory to $34,286 ($120,000 annualized COGS/3.5) providing a cash improvement of almost $16,000 ($50,000 – $34,287). Improving your inventory turns to reduce your inventory value will cut your overall cash invested in inventory further improving your net income and profitability.
Below are a few of the many best practices relative to managing car stock inventories in order to improve cash flow and minimize your rescheduled call rates.
Focus on car stock turns vs. inventory value – Remember you want your techs to have the right part at the right time and ensure they are using the inventory in their possession. It is not uncommon to find organizations that mandate technicians carry a car stock inventory below a particular dollar threshold. However, car stocks can fluctuate dramatically from tech to tech depending on the equipment supported in their territory. A production color technician for example, is more likely to carry a higher value inventory then a technician working on Segment 2 or 3 mono devices. It is important to confirm the technicians are carrying the right parts based on the appropriate usage for the machines they support. Generally speaking if a technician has an average monthly usage of >.5 for a given part, they should carry this part in their car stock.
Purge slow moving, obsolete car stock regularly – Have you ever counted and reconciled a technician’s inventory and noticed that he hasn’t used the majority of the parts in their inventory all year? If so, keep in mind these parts are tying up precious cash and could lead to potential inventory write-off. When conducting your physical trunk inventories pull the slow moving and obsolete parts so that you can redistribute these items to folks who are using them. Doing so will also reduce the likelihood of buying items you may already have in your stock.
Inventory car stocks quarterly – Much can be learned from taking a physical inventory of your car stocks. Investigating discrepancies can allow you to fix ineffective processes that are contributing to excessive write-off. Think of it this way, if you gave someone $100 and asked that they hold onto it for you, later to find that they lost it, would you be upset? If so, imagine how a business owner feels when a member of his team presents a $10,000 inventory write-off for unaccounted parts. If it was your money wouldn’t you want accountability and safeguard from repeating such a loss? Besides, an accurate car stock helps optimize car stock effectiveness further reducing rescheduled call rates.
All of us would agree that we would love to have more cash in our pockets so we could do, or buy, more “stuff”. That extra cash would allow you to pay off bills, provide schooling for your kids or allow you to get away from it all on a nice vacation. Better managing expenses and investments can provide you extra money to spend in many of these areas. The impact extra cash can have on a business is no different. Extra cash allows organizations to reduce debt, give raises and provide resources to improve. Managing your inventory turns to free up cash will provide extra money for your organization to spend in these areas and will contribute to the financial health of the organization.
About the Author: Ken Staubitz is a service consultant with Strategy Development, with 15+ years experience in all levels of service operations and MPS service structure. Formerly with Modern Office Methods (MOM) in various service and operational roles, Staubitz was MOM’s Director of Client Services where he oversaw all service operations & managed a staff of 60+ field service personnel. Ken served on the Lanier Dealer Advisory Council & was an E-Automate Service Committee member. He can be reached at Staubitz@strategydevelopment.com. Vistit www.Strategydevelopment.com.
