Why You Need to Get Serious About Managing Your Inventory
As a business owner, you probably have a lot on your plate. Between managing employees, caring for your customers, and keeping your cash flow consistent, it’s easy to become lax about certain things. One common area where shop owners often become complacent is in the management of their repair shop or parts store inventory.
Over time, it’s easy to forget that each item in your inventory has a real cash value. Look often enough at those shelves full of random fan belts, radiator hoses, and starters, and you begin to see just that: a random collection of parts. Your employees also likely just see a collection of random parts, as they aren’t personally invested in the cash value of those items.
Failing to understand the real cash value attached to your inventory can lead to mismanagement, opening your company up to theft, financial loss, and unsatisfied customers.
The Real Value of Your Inventory
Now, imagine for a moment that instead of random parts lining your inventory shelves, you have crisp stacks of $100 bills, totaling tens (or hundreds!) of thousands of dollars. Each one of those bills came right out of your pocket, and now sits out in the open, un-guarded and un-managed. Would you feel comfortable storing your money this way? Of course not!
The parts in your inventory represent a cash value which came right out of your pocket, and should be managed as carefully as you would manage stacks of cash. Would you allow your employees or customers to freely access your inventory if the shelves were lined with Benjamins? Would you have a casual attitude about stacks of cash being removed without being immediately recorded? Would you do regular counts to ensure that no money had come up missing? Might you consider installing some security cameras and a proper tracking system to watch over your financial stockpile? If you want to keep your money, you will. It should be no different for your parts inventory. Each item in your inventory was purchased with your hard-earned dollars, after all.
If you approach your inventory in this way, as a stockpile of real cash value rather than a group of abstract parts, you will be in the right mindset to properly manage it. Once you’ve made this shift in your thinking, it’s time to take steps toward securing your inventory and managing it efficiently.
Just like cash in a locked vault, a proper inventory management system will ensure that your parts don’t get lost or walk out the door in someone’s pocket. To achieve this, you need to have a few basic systems in place to track, secure, and manage your repair shop or parts store inventory.
Choosing the Right System for Your Business
While your grandfather may have used a sheet of paper to track an inventory, your business is growing and thriving in the technological age. Your technicians regularly use computers for diagnostics, your receptionist uses appointment booking software, and your bookkeeper expects to see reports from your financial software. Your inventory, similarly, needs a computerized system to be secure and managed effectively.
The right inventory management system will always pay for itself, often within the first few months of use. Not only will it efficiently track everything that goes into and comes out of your inventory, it will also give you an incredibly valuable high-level view of your business. You will know immediately what’s selling and what’s not. You will know what the correct pricing needs to be for each item, and how to run a discount that doesn’t put you in the red. It will help you identify how and when parts are being used most often, and alert you if there’s a problem with theft or misuse in your company.
Because the right inventory management system will tie directly to your invoicing system, you won’t need to manually track sales from your inventory. As soon as you sell an item, the system will automatically deduct it from your inventory. And because it will also be tied to your purchasing system, the cost of each item will be stored in the system and the pricing will update automatically to reflect the return you need from the sale. Allowing an inventory management system to handle these tasks for you will free up a lot of your time, and the time of your employees, saving you money and reducing staffing requirements.
What the Perfect Inventory Management System Should Do for Your Shop
The heart of any great inventory management system is the ability to fine-tune your inventory control process. For optimal inventory control, your management system should be flexible and agile in its approach to tracking your inventory. In a truck repair or parts shop, this is especially important. For this reason, the perfect inventory management system will achieve a number of things for you, beyond just tracking the most basic processes. It should also:
- Control and monitor access to your inventory, ensuring that only well-trained and trusted employees are able to access the items and records.
- Record when an item is removed from the inventory, by whom, and for what purpose. This will help you identify and eliminate problems of misuse, giveaways, and theft within your company.
- Track every individual item, and provide flexibility in the tracking process. Because inventory involves a wide variety of items, a great inventory management system will allow you to customize how items are tracked. Sometimes you buy an item and sell it exactly as you bought it. Sometimes you buy a case, and resell piecemeal. Sometimes, you buy a 50 gallon drum of oil and sell or use it by the quart, and sometimes you buy supplies by the roll and sell by the foot. For this reason, an inventory management system should be highly flexible to fit your specific needs.
- Monitor the age of each item in the inventory, ensuring an optimum rate of inventory turnover to eliminate the potential for outdated and obsolete holdings.
- Provide a foolproof matrixed pricing index for key customers, allowing you to set customized discount levels for certain accounts.
- Alert you to an inventory shortage and automatically reorder a preset amount of parts when they fall below your minimum stocking requirements.
- Track and allocate an individual item, to determine the status of any part. This enables you to not only see what parts are available in your inventory, but also which parts are already allocated to work orders to prevent double-counting and allow for accurate re-ordering.
- Automatically update pricing, depending on a number of variables including original purchase cost, price changes from vendors, in-shop customization factors, and whether the item is being sold at retail, reseller, or distributor prices. An ideal setup should allow you adjust your pricing as First In, First Out (FIFO), First In, Last Out (FILO), or a simple inventory cost averaging. This is critical in managing profit, especially when reselling items that experience meaningful pricing changes over time.
- Accurately track alternator, starter, brake, and battery cores, including current core inventory, late returns, account credits, and return purchase orders for your vendors.
- Utilize barcode technology for streamlined tracking and processing. The ideal inventory management system allows you to use barcodes to identify every part, its location, and other important information. Barcoding allows you to receive or pull parts faster, and more accurately. It also allows rapid cycle counting, making it much easier for employees to properly stock or pull parts, or complete an accurate inventory count.
These useful automations, allowing you to track items from inventory to invoice to work order and beyond, can help save you time and money while eliminating costly mistakes and human error.
More Keys to Successful Inventory Management
Having a great inventory management system is the first, and most important, step toward getting control of your costs and profits. But, your work doesn’t stop there. In order to be effective, you need to build a habit of discipline around managing your inventory. This means keeping good records, completing orders and sales the right way, training your staff to follow through with these principles, and using your system to its greatest potential.
Don’t Neglect Your Purchase Orders
Purchase orders are sometimes neglected in a parts or repair shop, but they should be an important part of your inventory management routine. A purchase order serves the same purpose as a work order or invoice. It’s a record of activity between your business and a vendor, acting as a contract between the two companies. Just as your customer should always expect an invoice or work order, your vendor probably expects a purchase order from you. A well-executed purchase order is a formal offer to purchase parts from a vendor, for a set price. If the vendor accepts your purchase order and ships the inventory to you, they must honor the price agreement. In the event that a vendor changes the price of an item after accepting a purchase order, you have recourse to hold your vendor to the previously agreed upon price for the purchase.
Tip: Track and review purchase order reports to understand a vendor’s performance over the course of a working relationship. These reports will also tell you who you buy from the most, and who offers the best pricing over time. This information empowers you to negotiate with vendors more effectively, and ask for better prices on orders.
The Receiving Process – A Vital Step in Inventory Management
Just like purchase orders, the receiving process is an essential, but sometimes neglected, part of managing your inventory. In this important process, you officially receive the parts and by doing so, validate the completion of the original purchase order. During receiving, you adjust pricing changes, verify which parts and quantities were received, and make note if anything is missing from your order.
Tip: Choose an inventory management system that will automatically update your inventory records as items are received, as well as updating any purchase orders and work orders directly linked with the incoming items.
Leverage Reports to Your Benefit
Because managing your inventory and keeping it fresh is essential, it is important to routinely run inventory movement reports to determine what is aging and what is hot. An inventory management system should create reports to measure your inventory carrying costs, determine inventory turns, enable accurate cycle counting, identify lost sales, and manage core statements.
Limit access to your high dollar inventory
Many shops allow their technicians to have access to their inventory. When done well, it can improve efficiency on the work floor and create better workflow. However, it can also lead to a great deal of lost inventory.
An ideal solution is to hire a dedicated parts manager. A good parts manager will significantly reduce your risk of lost, stolen, and mismanaged inventory by providing a single point of accountability.
If a dedicated parts manager is not in your shop’s budget, a second option is to separate high dollar, low volume inventory items (such as alternators, starters, etc.) from low dollar, high volume inventory (such as hoses, oil, and filters). This system allows your technicians to access those items which they need, while limiting your company’s risk of high dollar inventory loss. For more expensive items, train your shop or service manager on proper pulling and tracking procedures. This, too, gives you a single point of contact and accountability for expensive items.
Tip: Make sure all of your employees are well trained and have a well-defined tracking process to use, to ensure parts or accessories are managed accurately.
Regular Cycle Counts Are Vital
Again, if your inventory was cash sitting on the shelf, the labor of counting it would not be such a burden. It would be fun to see how much you have on hand, and would make you feel confident that your investment is safe and sound. It is just as important to count your inventory as it would be to count those $100 bills on the shelf. It is a necessary step to make sure that what your computer system says you have, is really what you have.
There are several reasons this is important. The first is to make sure you actually have what you think you have. You don’t want to find out last minute that you don’t have an important part to do a job. The second and most important, is to make sure inventory isn’t walking out the door. If you don’t do regular cycle counts you will never know this.
Tip: What is cycle counting? Cycle counting is where a small subset of inventory, in a specific location, is counted on a specified day. This is done continuously throughout the year, moving from one location to the next, counting each location multiple times per year.
Implement Bar Coding
It takes a fair amount of time to set it up the first time but, barcoding will save you an enormous amount of time in the years to come. Barcoding significantly streamlines many processes throughout a parts or repair shop, making life easier and faster for you and your employees. Cycle counting will run faster, receiving will be faster and more accurate, and the general operation will run much more efficiently.
Tip: Assign each of your technicians a barcode number that they use when entering parts on a work order or pulling parts from the inventory. This makes the process fast and easy for your technicians, and also provides instant accountability for each employee, each part, and each work order.
Run and review key reports regularly
It is extremely important to know which inventory items are selling and which ones are not. Inventory items that are not moving should be returned to the vendor, or simply not ordered in the future. It is a good idea to review your inventory movement reports every month, to make sure you aren’t losing money on non-sellers.
Tip: Along with reviewing movement reports, you should make sure to review purchase requests on a daily basis, to make sure you have the right parts ordered and are not spending money on useless items.
Review pricing strategies
Pricing is one of the key aspects for getting the most out of your inventory. Knowing how to price appropriately to create higher frequency purchases, to get maximum profits, and to cover your inventory carrying costs are vital to your company’s ongoing profitability.
Develop Strong Relationships with Your Vendors
Your vendors are the lifeline of your company. If you are serious about inventory, you need to build and maintain great relationships with your vendors.
Too often, shops just try to find the best price on inventory rather than the best relationships. There are many things you need from your vendors other than price. You need them to be willing to stock some slower moving inventory so delivery can be made quickly in the event you need it, and to take back inventory that isn’t moving. You want a vendor that supplies you with the broadest selection of part numbers possible, and stands by those parts when you buy them.
Tip: Reducing the number of vendors you deal with increases the dollar volume with each one and increases your discount leverage. Try to work with vendors that offer the widest possible variety of parts to reduce the number of vendors your company relies on.
As Always, Good Business Practices Are Your Foundation
Ultimately, a good business system can only do so much on its own. You (and your employees) truly are the key to building an excellent and effective inventory management process within your company. For this reason, it is very important that you be as disciplined as possible regarding your inventory. This means training and monitoring your employees, making a habit of closely tracking all of your variables, and keeping excellent records. This can be difficult if your shop is busy and has a lot of activity, but it should be a high priority, nonetheless.
Getting serious about managing your inventory by putting an excellent system in place and leveraging it effectively, will make the difference between high returns or big losses for your business.