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Inventory turns: how much is enough?

BY NAPOLEON TETRAULT

In any sport in which you are trying to improve, be it running, biking, cross country riding or even doing a work out video in your own living room the old saying rings true—“no pain, no gain.” Unless you push yourself to the point of discomfort will you get the reward. So is the same true for our professional lives? How about the way in which we operate our store? Our departments? Must we be miserable in order to gain anything? The answer depends on your state of mind. Let’s dive a little further in order to see what I am talking about.

The subject of inventory turns comes up often and has been for a long time. As long as I can remember the goal and standard turn on inventory is four times per year. Has business changed in the past 15 years? You bet. We are making different profit on different items and selling them in different ways. In most cases our margins and profits are down in order to compete with widespread discounting. How about our operating costs? Although we may have a good handle on our costs they continue to rise because we have to do more these days to engage customers, reward customers and provide customers with purchasing platforms and the tools in which to sell to them. So I ask, is 4 inventory turns sufficient to sustain a business with less profit margin and higher expenses than when that rule was accepted? I’m gonna go out on a limb here and say no.

4x inventory turns is a comfortable number for us because that’s the way it’s been for so long. But in most cases it’s just doesn’t work anymore. So what does? One of my top customers who is a multi-line OEM with just a landing page for a web presence in the parts department turns his inventory 10x a year. 10x! Here is how he does it:

Dynamic inventory control—His inventory goes up in the busy times, and starts to go down before it slows down. I’m not just talking ordering, his staff takes an active role in being ahead of the curve and scales down just to cover demand for that period. He’s not afraid to special order slower moving items during this period. Others give bonuses for hitting an inventory goal at the end of the year. I must note that he does not, however I will always encourage a pay for performance approach.

Lower margin—I know I know, the goal is to do all this and keep our margin, I get it. But I have to be truthful with you. This customer is operating on a lower margin because he will not let his staff lose a sale….period. Be it matching an online price or offsetting the inconvenience of returning to pick up a special order or drop shipping fee this staff wants it all.

Decentralized command—Sound like a military term? It is. But it’s very applicable in today’s business climate and especially at our points of sale. Our staff must be trained in the methods of growing business, rewarded for doing so and most importantly allowed some freedom in which to make the deal happen without being buried in policies or micromanagement that inhibit the desire to sell more.

Rewards—Employees are paid for performance, not presence. They are paid when they sell and paid more when they sell more profitably. In addition to monetary rewards, there is a culture of positive reinforcement, mutual support and teamwork that act as intrinsic rewards.  

There is no one size fits all solution here. What works for some may not work for others and that is why we have YOU—the influencer! Your job is to take a hard look at your inventory turns, determine an aggressive new goal and come up with a tailored solution in which to get there. Like a runner training for and running a marathon, you will be uncomfortable most of the way. But if you can get comfortable with being uncomfortable the spoils of victory await! Act decisively, act now.

Napoleon Tetreault is a sales representative with Tucker Rocky, an aftermarket PG&A distributor in the powersports industry. He works with powersports retailers on merchandising, profitability and management of the parts department as well as the education of dealership personnel. His experience includes being the GM of the largest indoor motocross facility in the U.S., owner/operator of a regional distribution company and current role with Tucker Rocky. He can be reached at:

Email: ntetreault@tuckerrocky.com  

Website: www.trdealer.com  (Consumer: www.powersportrider.com)

One comment

  1. High volume and low margins work well at grocery stores and places like Wal Mart. I've yet to see any real longevity at a Powersports dealership who operate with that strategy. In fact, during the 17 years i was involved with inventory finance, one of the common denominators of the dealers I had to repossess or shut down, was weak margins. Profit is not a dirty word.

    I'll assume the turns and margins you are talking about pertains to the parts dept only because I rarely if ever saw dealerships with an overall turn of 4. It isn't realistic in this seasonal business. I think the bigger issue with parts margins is that most dealers don't charge enough. You can give me financials from 10 different dealers and I'll show you that the majority have a 29% margin because they think marking up P&A 40% means 40% profit. Don't worry about competing with online discounters. That's a race to the bottom. Price is important only in the absence of value. Give your customers a reason to buy from you. Personally, I don't mind paying a little more if I'm well taken care of.

    I agree with you that inventory management is very important. Dealers need to utilize their DMS and focus on quick moving parts and be more pragmatic when it comes to P&A bookings which will help improve turns.

    Thanks,
    Bruce Marcia
    bruce@bm-associates.com

    • First Name: Bruce
    • Last Name: Marcia
    • Email Address: bruce@bm-associates.com

    [Reply]

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