Your inventory is cash on the shelves, but it shouldn’t be your savings account.
Huh, can that fit onto a T-shirt?
Even if we can’t turn it into a catchy slogan, there’s a lot to be said for maintaining the right amount of inventory. Like a Jedi bringing balance to the Force, a proper amount of inventory is immensely helpful for your business and helps you stay in the black—but an unbalanced inventory is like inviting a Sith Lord to rampage through your savings account.
This is a topic that’s near and dear to the heart of Chris O’Brien, Fullbay’s COO and a former fleet manager for Shamrock. So we sat down to get his thoughts on all things inventory and how to protect your parts margin—as well as why you shouldn’t treat your inventory like your savings account.
HOW TO LOOK AT INVENTORY
“Inventory is the bank,” Chris says. “It’s your savings account.”
Plenty of shop owners see their inventory as an asset—something to be reported on during tax time. But that often bypasses the bigger questions: What is your inventory doing on the shelf, and how did it get there? And don’t say the Inventory Fairy brought it, because she’s not real.
If you don’t ask yourself these questions, odds are you aren’t handling your inventory properly—and you may even be losing money (your savings) on it.
Let’s address the second question first. Maybe you bought all your current inventory yourself. Maybe you took over a business that already had stuff in the stock room. “The problem is, you start accumulating parts, and adding parts … but your parts house isn’t doing that for free,” Chris says.
Which brings us back to the first part of the question. Is your inventory as a whole moving? Do you sell the parts you bring in? You are paying for the parts room, after all, and if you aren’t moving parts quickly, they’re just going to…sit.
(And in some cases degrade, but more on that later.)
Let’s make a couple of assumptions, if we may. Since you’re browsing our blog looking for advice on shop management, we’re going to assume you aren’t made of money. We’re also going to assume you have at least glanced at your shelves and thought, “Ah man, those 10-packs of vintage glow plugs really aren’t moving.”
The only times you should really be “stocking up” on inventory in the classical sense are the following:
- You’re in the middle of nowhere and it may take two days to get a part;
- You’re in the middle of nowhere but the guy down the street carries these parts, and you need to have them or you can’t complete;
- The parts actually move quickly
“Your reasons should never supercede cash flow,” Chris warns. “If you don’t have the operating cash to pay yourself, your employees, and so on, then you shouldn’t be stuffing cash onto the shelves.”
Once that money is on the shelf, it’s at risk—at risk of not being sold, at risk of losing value, at risk of degrading.
You can avoid—or at least interrupt—this cycle of drained savings by understanding what’s in your inventory.
THE ART OF RECONCILIATION
So, how do you find out how fast your parts are moving? Reconciliation.
Fullbay has a reporting feature for this, and most good repair shop software should, as well—if you’re not using either, you’re likely depending on spreadsheets or your own reporting system.
Here’s what you’re looking for:
- Beginning balance
- Ending balance
- Whatever’s going on in the middle
Let’s build out an example.
Your starting balance on March 1 is $100,000. On March 31, the last thing you want to see is a balance of $300,000. Why? Because it means you took $200,000 and moved it into inventory. In short, you bought a bunch of parts, and they’re now sitting on the shelf, possibly collecting dust.
“It’s on the owner or parts manager—or whoever is wearing the parts manager hat—to measure what’s coming in and out of the building,” Chris says.
In an ideal world, March 1 arrives and you’ve got $100,000 as a starting balance. At the end of the month, you have $110,000, or maybe even $100,000. In the middle you see some number—transactions, coming and going—essentially you buying parts and turning them around quickly because they’re in demand.
This is why a reconciliation report—and, if you have one, a receiving report—is so critical. If you aren’t keeping an eye on what’s going on in your parts room, how can you catch problems and errors before they snowball into serious financial difficulties?
WHAT SHOULD I STOCK?
Okay, Fullbay, you may be saying, then what SHOULD I keep in the parts room?
We’ve got you.
To determine what you should stock, you need to take a close look at what you sell.
- Was any of your inventory special ordered?
- Did you keep up with demand?
- Are you just way overstocked?
“Inventory that doesn’t move should just get sent back to the vendor,” Chris says. Now, we can hear you already: FULLBAY, THEY’RE GONNA CHARGE ME A RESTOCKING FEE. Yes, we know. But the restocking hit is cheaper to get that money back in the bank so you can make payroll. Even a 20% restocking fee means 80% goes back into your pocket. And hey, you can negotiate the restocking fee. “Maybe get it down to 5%, maybe they waive half of it,” Chris says. “Just get it out of your building.”
The best way to avoid restocking fees is to avoid falling into this problem in the first place. We’ll say it again: review your inventory. See what moves and what doesn’t. And don’t forget to look into things you don’t routinely carry that you might be bringing in special.
Chris refers to this as emotional buying. No, you probably aren’t weeping as you make the purchase. But it does tend to be driven more by feelings than logic. Say you notice you’re moving a lot of turbos. You decide to bring more turbos in. On the surface, this is a logical decision. But if you looked closer at what you were selling, you might notice that yes, you sold a lot of turbos…but not one of them was the same make and model.
If you’re not selling one particular turbo in a month, you probably don’t want to keep that model in stock. You definitely don’t want to bring in multiples of that same turbo because you’re getting into thousands of dollars just sitting on the shelf, taking up space.
With that said, if you have demand, do it. But don’t go on a buying spree on a hunch. Make informed decisions.
DON’T FORGET CYCLE COUNTING
You should always be reconciling your inventory.
If you reconcile it once and then never look at it again, you’re probably losing thousands upon thousands of dollars. We’ve got a whole blog post on cycle counting (and a deeper dive from our 2022 report data), so we won’t get too much into it here. But just know that it is necessary to monitor what’s going on in your parts room.
In the worst-case scenario, you’re in the negative because you’re selling items that are (or were) in the building, but somehow aren’t. In this case, Chris says, it’s usually because someone received something wrong. “We had somebody sell a brand-new starter at a rebuilt price,” he tells us. “How do you catch that if you aren’t looking?”
Some of the things that can lead to a negative are:
- Receiver error
- Put-away issue
- Pulling a more expensive part for a cheaper part
- Selling a cheaper part instead of a more expensive one
If you have a negative pick and your inventory goes negative, you have to get that fixed the next morning. Don’t even give things the opportunity to spiral out of hand.
Count your fast-moving parts monthly. Count your medium-moving parts quarterly. Count your slow-moving parts at least yearly.
Those are absolute baselines. If Chris had his way, you’d be counting them way more frequently. But these are starting points for those who haven’t thought much about their inventory and may not know where to start.
Eh, Fullbay, you may be saying, I don’t mind losing a couple grand here and there.
Maybe you’re okay with losing some money on inventory. There may be some operations that can accept loss through inventory as part of the cost of doing business. But for most businesses that route will eventually lead to ruin (or at least some severely tangled finances).
PERILS OF THE GREAT DEAL
You’ve probably done this at least once: a vendor offers you an amazing deal on a bunch of parts. Sure, I’ll take it, you think. I should be able to move those!
Like Anakin Skywalker, you have been seduced by the Dark Side of the Parts.
Unless they’re a popular part, or you have new business coming in that will for sure help them move along, odds are those parts may just…sit.
“The parts on your shelf are deteriorating,” he says. Bearings and gears made of steel will hold up okay, but gaskets and hoses—and other rubber parts—don’t last forever. Even if you install them eventually, they may not make it through their warranty. Suddenly your parts hoarding is leading to chargebacks and other problems for you, the truck driver, and the fleet manager.
That is bad for business. Very bad. Now you’re getting into reputational damage.
Your reputation is everything.
Again, YOUR REPUTATION IS EVERYTHING! It’s going to determine whether you stay in business profitably or not.
Chris gave us permission to share this personal story. A few years ago, he bought a roll of vacuum hose (for cars he worked on). At the time, 25 feet of vacuum hose, paired with a discount he had, was a screaming deal. “I had no reason to have the roll,” he admits. “I maybe used three feet over ten years.”
When he recently pulled it out to assess it for a new project, something kept going wrong. “I did some testing and there were microfractures inside the hose that you couldn’t see. I did some research, called the manufacturer. The first thing they said was, ‘How old is the hose?’”
Chris was silent for a moment.
“There’s your problem,” the manufacturer said.
“I was [working on someone else’s car] and I looked like I didn’t know what I was doing,” he concludes.
Parts degrade, guys.
MAKING INFORMED STOCKING DECISIONS (WITH & WITHOUT FULLBAY)
Have you been waiting for a Fullbay plug? Congratulations! Here it is. We have all kinds of reports that can help you make the most of your inventory, but two in particular will be very useful:
- Our reconciliation report helps you do all the stuff we mentioned above without having to, you know, do math or think all that hard about it. It helps you ensure that the number of parts you have on the books matches the number of parts actually in your inventory.
- Our velocity report lets you see exactly what parts are moving and how fast they’re going. You can isolate the velocity report to a particular type of part and see how many of them you’re really moving over at least a three-month period. Then look at a six-month period. Think about what’s going on in your business right now: Did you get a new customer? Is it just that time of year?
Then you start purchasing (or not).
Now, if you’re handling your inventory without any software help…umm, this may get more complicated, but basically you need to go through your records and see what’s moving and what’s not. And you need to do it frequently to make sure you’re on top of things.
Whether you use Fullbay or not, think about what you stock and why you stock it. When you’re ready to order parts or review your inventory, ask yourself:
- Why’d you buy it?
- Is it moving?
- If it’s been on your shelf for six months, should you return it to the vendor?
As long as you’re being honest with yourself and acting on the information you discover, you’ll be treating your inventory more like a savings account. Chris put it best: He generally expects to earn money in his savings account instead of lose it. That’s good for everyone.
If you don’t use Fullbay but are absolutely salivating over the idea of our parts reports, hey, give us a try! We’re here to make your life easier, whether that’s through better inventory management or greater tech efficiency.