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The Inventory Ate My Profits

When you stack inventory on your shelves, you might as well be stacking dollar bills. The key is to control your inventory – instead of letting it control you.

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To many body shop owners, inventory is simply
all that stuff you keep in boxes in the back to help complete
jobs on time. And, often, little effort is made to actually keep
track of it. About the only inventory-control methods employed
by some shop owners is to try to make sure they don’t run out
of a critical part or paint in the middle of a job.

The funny thing about this haphazard approach
is that these same owners usually are the ones who never seem
to have enough working capital. In other words, there’s always
just a little too much month left at the end of the money.

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"Help! The inventory ate my profits!"

When you stock inventory on your shelves for
any area of your shop, you might as well be stacking dollar bills.
And while you certainly need an ample level of inventory to get
jobs done on time, keeping too much is very costly.

Bob Anderson, owner of Anderson’s Automotive
Center in Sheffield, Ohio, says a good inventory-control system
is key to the success of any body shop. Not only does it help
the owner manage his working capital, but a good inventory-control
approach sets the right example for the shop’s technicians and
other employees.

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"If my people know they’re being watched
and they’ll be held accountable for what they use, it makes them
much more aware of waste," says Anderson. "That reduces
my cost and reduces my inventory."

A good inventory-control system includes several
key components. What follows are five of these components (switching
to automation, computing inventory turnovers, finding a balance
between too much and too little, organizing the ordering system,
and using accountability to keep your inventory down) and some
practical suggestions for implementing these methods in your shop.

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Accepting Automation

If you’re one of those shop owners who’s resisted
the computer age and hasn’t yet installed a management-information
system, quit it. There just aren’t any good reasons not to be
automated anymore.

Worried that it’ll cost too much? You can
purchase a PC-based system, including all the hardware and software
you’ll need, for as little as $10,000 or so.

Don’t have a spare $10,000-$20,000? Banks
and leasing companies offer a number of different options for
financing, possibly up to 100 percent of the cost.

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Don’t know the first thing about operating
a computer? The new Windows 95 and compatible Macintosh systems
are quite user friendly, with plenty of training offered to new
users.

Inventory control is only one of the benefits
of a good automated management-information system. Your shop will
also become much more efficient in the areas of estimating, job
scheduling, general administration, overall production and accounting.

"With today’s systems, you can do so
much more, quicker and more accurately," says Anderson, adding
that his computerized inventory-control system allows him to know
at all times where he stands on every single item in his shop.
And this information literally is available at the push of a button.

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"At any time, I can pull up a part number
or a product line and find out what we have and what we need,"
he says. "It’s easy to manage, and it’s easy to control."

A fully automated inventory-control system
also saves a considerable amount of time when placing re-orders.
Anderson says he doesn’t involve any of his technicians in the
re-ordering process because a computer report is generated weekly,
indicating what items are low and need re-ordered. When the salesperson
comes by, the report is given to him, and the items are ordered.
"My shop saves time because the information is right there,
and I don’t have to bother my technicians," says Anderson.
"And the salesmen love it because they’re in and out."

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You can automate your inventory for tracking
purposes several different ways. Items can be sorted by product
line, item type and item number – even for a large shop with thousands
of different items on hand. A smaller shop that has a less-sophisticated
computer system or that uses a manual inventory-tracking system
might opt for something less complicated, such as the ABC system
for coding inventory.

The ABC system follows the 80/20 rule: A few
items (about 20 percent) typically will constitute the majority
of dollars spent by a shop with a large number (about 80 percent)
used sparingly. The parts coded with an "A" will represent
the 1-20 percent of inventory items that use up 75-85 percent
of the shop’s inventory dollars. Because some of these items might
be expensive or hard to obtain, purchasing must be closely monitored.

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The "C" parts are either very easy
to obtain or used less frequently. The "C" parts might
make up more than 50 percent of the items kept on hand but only
10-20 percent of the cost. "C" parts often are inexpensive
and purchased in bulk.

A body shop’s "B" parts essentially
constitute everything in between "A" and "C"
parts. A numerical system is attached to the different letters
to complete the monitoring system, allowing identification of
thousands of parts.

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Whether you have a small shop or a multi-million-dollar
operation, it’s worth reiterating the importance of computer automation
in relation to inventory control.

Computing Inventory Turnovers

Many different financial computations can
be used to track the level of inventory on hand. The most meaningful
of these ratios is inventory turnover. If you don’t currently
use this ratio or track it on a monthly or daily basis, then yesterday
was not too soon to start!

Inventory turnover is easy to compute:

Cost of Goods Sold / Inventory = Inventory
Turnover

As a rule, a shop should turn its inventory
at least 12 times a year. If it’s turning any slower, the shop’s
probably keeping too much on hand.

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"Inventory turnover is part of our daily
plan to ensure we have what we need to get our jobs done,"
says Anderson. "I don’t want a technician spending a half-hour
looking through a junk box for a nickel part."

Like many shop owners, Anderson takes the
concept of inventory turnover a step further by computing turnovers
for each part in stock. Of course, this would be impossible without
the computer system used in his shop. "We use our computer
system to watch our turnovers," he says. "If we can’t
turn an item at least once a quarter, we don’t need to have it
on the shelf."

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Anderson uses the per-item turnover numbers
to assist him with re-ordering. This ensures parts aren’t ordered
prematurely, which results in wasted working capital and increased
borrowing cost if a line of credit is used.

Inventory turnover can also be stated in days,
which is done by dividing 360 by the turnover number. If the turnover
number is 12, then the inventory turn stated in days is 30 (360/12).
This means the inventory is on hand for about a month before it’s
used for a job.

One other somewhat obscure computation can
be made to gain a proper financial perspective on inventory control:
the dollars per day of inventory.

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Here’s how it’s computed:

$ in Inventory / Inventory Days = Dollars
per Day of Inventory

Let’s consider an example for a shop with
$100,000 in inventory on hand that turns every 45 days:

$100,000 / 45 = $2,222

Why is this important? Because it indicates
that inventory for this shop ties up $2,222 per day in working
capital. If this shop were to successfully lower its inventory
to the industry standard of 30 days, it would free up $33,330
in working capital; this would mean less money borrowed (and lower
cost of borrowing) and/or more money available for other areas
of the shop.

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Finding a Balance

So where’s the balance between too much and
too little inventory? We can see from the above example that too
much inventory ties up valuable working capital and leaves a shop
more vulnerable to damage, theft and obsolescence.

On the other hand, not keeping enough inventory
can result in the production process coming to a screeching halt.
Any shop owner who’s ever had to stop his technicians in their
tracks while somebody runs to the hardware store for eight bolts
has experienced more than a little frustration with an inventory-control
system that’s too lean.

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Anderson says that finding the balance is
a moving target – but one that he continually attempts to strike.
Some items that are easily obtained and in plentiful supply are
kept at low levels, while other items are maintained with excess
on hand to ensure the shop doesn’t run out.

"I stock more paint inventory than I
would like," says Anderson. "But I can’t afford to have
a painter standing there for an hour waiting to paint. We do use
a backup inventory system for paint. Once we hit the backup level,
we immediately re-order. That way, we almost never run out of
any paint."

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Another suggestion is to avoid stocking items
in too many different grades. "We stock everything in grade
eight or higher, even though many of our jobs call for grade-five
parts," says Anderson. "This accomplishes two objectives:
Not only does it help us keep inventory levels down, but it also
ensures that a substandard part is never used for a job."

There’s one other important factor to consider
when searching for the proper inventory level, says Anderson:
location of the shop.

"Inventory control is highly influenced
by distributors and suppliers," Anderson says. "If you’re
in a metropolitan area with salesmen who come by a couple times
per week, then you can stock less. But, if you don’t see your
salesman very often because you’re in a rural area, you might
have to stock more inventory."

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Establishing a Good Ordering System

A shop can have the most sophisticated computer
system offered for inventory control, but if the information generated
isn’t used to impact the inventory-ordering system, it’ll have
little effect on inventory control.

What follows are 10 components of a good inventory-ordering
system:

  1. Use your information – Many shop owners have installed
    automated accounting systems but haven’t yet started using all
    the "bells and whistles" attached. One of these "extras"
    should be an inventory-control system. Get this system up and
    running, and you’ll see a dramatic change in your ability to stay
    on top of your shop’s inventory.
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  • Make sure the right person is ordering – The wrong
    person might be easily swayed by an aggressive salesperson, which
    can result in significant overstocking. Make sure the person doing
    your ordering understands your inventory needs and is well-versed
    on any management reports utilized in the ordering process.

  • Pay attention to quantities ordered – Anderson says
    it doesn’t always pay to take volume discounts. You might save
    a few dollars ordering several dozen gallons of a certain paint,
    but if you wind up pouring some of it out because it goes bad
    before it gets used, your savings go down the drain with the paint.
    On the other hand, for items that you do order and use frequently,
    you might want to consider ordering larger quantities if it saves
    you money.
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  • Use Just-in-Time ordering whenever possible – Just-in-Time
    (JIT) purchasing means the shop literally waits until the last
    minute (or day, anyway) to buy inventory. JIT should be used only
    for those items that are easily obtained and plentiful at all
    times. Anderson says he uses JIT to order many hardware items
    such as nuts, bolts and fasteners.

  • Catch errors early and often – Inventory orders should
    be thoroughly checked over upon arrival at your shop before the
    items are shelved. Finding errors early will enable you to correct
    the problem. It will also help you to avoid future disputes with
    suppliers about defective materials that were ordered weeks, or
    even months, before. If you’re seeing a lot of returns due to
    errors or defective merchandise from a particular supplier, it
    might be time to change suppliers.
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  • Make sure you can restock – Most suppliers allow a
    certain time period during which an item purchased can be re-stocked.
    If you have certain inventory items that simply don’t move, retain
    the option of returning the items later. Most suppliers will charge
    a re-stocking fee for this, but it’s better to free up those discounted
    dollars for working capital than to leave the money tied up in
    stale inventory.

  • Shop suppliers – Although Anderson regularly shops
    around for suppliers, particularly on bulk items, he doesn’t often
    change over a few pennies. "I don’t want to fragment too
    much and go for price over service every time. It’s also important
    to have good relationships with your suppliers."
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  • Ask for discounts – You might be surprised what you
    can get out of your suppliers by just asking. If you buy a higher
    quantity of paint, bolts or anything else from a certain supplier
    than you did in the past, you’re in a position to ask for a lower
    price per item. All the supplier can do is say no. But he might
    just say yes.

  • Don’t re-order stale inventory – Anderson said earlier
    that he doesn’t re-order inventory that turns less frequently
    than once a quarter. If you have certain items that seem to sit
    around for months, don’t re-order them once they’re used if they’re
    readily available from your supplier.
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  • Pass along price increases – Of course, you’ll face
    price increases from year to year from your suppliers. Don’t forget
    to pass these along to your customers.

    Using Accountability to Keep Inventory Down

    Accountability in a shop is vital to keep inventory levels in
    check and to avoid waste. This keeps with the old adage that people
    don’t do what’s expected; they do what’s inspected.

    Anderson started a cabinet system a few years back for his technicians
    that cut waste substantially – overnight. The system is simple:
    Each technician has his own cabinet for supplies needed for that
    particular job. The supplies are "checked out" by the
    technician each day to re-stock the cabinet. The technicians also
    are required to keep a written record of all items used for each
    job.

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    "This system allows us to track the work flow of each technician,"
    says Anderson. "If a technician is working the same number
    of clock hours on the same job but is using twice as much sandpaper,
    then we have a problem. With this system, we can correct the problem
    by showing him what other technicians are doing to avoid waste.
    If there’s accountability, there’s reduction in waste."

    Another benefit of Anderson’s cabinet system is increased efficiency.
    "With the cabinets right there at their work stations, technicians
    have everything needed for a job," he says. "It saves
    them a lot of steps and keeps them from having to walk all over
    the shop looking for inventory."

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    The cabinet system has made Anderson’s technicians more aware
    of the cost of doing business. While completing the work orders,
    technicians see exactly what parts, paints, etc., are being used
    and how much they cost the shop. This system requires extra training,
    but Anderson says it’s worth the effort.

    Another common method used for accountability is physical counts.
    Most shops conduct a full physical count of inventory once a year.
    But it’s a good idea to periodically spot check inventory levels
    to ensure there’s no shrinkage.

    Anderson performs a complete physical count annually, but it’s
    the random spot checks that play a key role in maintaining good
    inventory control. "We don’t necessarily find a lot of discrepancies
    in our spot checks," Anderson says, "but spot checks
    help find weak links in the system. People pay more attention
    to making sure everything used gets put into the system when they
    know we’re going to check on a routine basis."

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    Good Dollars and Sense

    It’s important to take control of your inventory – rather than
    being controlled by your inventory. This strategy not only makes
    sense, but will save you more than a few cents in the long run.

    When you consider your inventory to be dollar bills stacked on
    your shelves, the importance of inventory control suddenly becomes
    clear: Money piled on your shelves is money not in your pocket.

    Writer J. Tol Broome Jr. is a contributing editor to BodyShop
    Business.

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