RPM: Supply Chain Management On the Cheap

Supply Chain Management can be implemented with a level of investment accessible by most jobbers, but it may require a different way of thinking about your inventory.

Supply Chain Management (SCM) provides many benefits to merchandising businesses, including:

1) Enhanced relationship with trading partners

2) Greater sales

3) Improved order forecast accuracy

4) Inventory reduction

5) Reduced operating expenses

6) Increased customer satisfaction

7) Increased ROI

The biggest drawback to SCM for the automotive jobber is the high cost to implement. Only the largest multi-store chains can afford the multi-thousands of dollars it costs to buy the new SCM software and the hardware to run it.

One of the larger chains in the U.S. (well over 500 stores) made the investment and planned for a one-year installation period. Two years passed and it still wasn’t done. Imagine putting your customers and employees through that kind of learning curve. The good news is after a couple of years it is working; they freed up over $60 million, increased inventory turns by 44%, and built two additional distribution centres that they staffed with existing employees.

But what if you’re not part of a large chain? What if you don’t have an extra $250,000 to invest? What if you can’t wait two years for your customers and employees to get acclimated to a new system?

The answer might be to use Proactive GMROI to adjust the procedures and strategies on the computer system you already own, using the Proactive GMROI calculations and the Velocity Products Index (VPI). (See www.autoserviceworld.com. Click on Education and scroll to RPM section.)

The VPI calculates Proactive GMROI at each intersection point of an Inventory Turn line and a Gross Profit % column. (Example: 3.0 TURN @ 25%GP = Proactive GMROI 1.0)

The VPI can be any size that fits the page. The idea is to pick a range of margins and turns that covers all your purchasing and selling parameters.

The VPI shows at a glance the trade-off between turns and margin. As you become familiar with the VPI you will find that inventory turn has a powerful advantage over gross profit margin when it comes to increasing GMROI.

Inventory turns can be dramatically increased by simple changes in purchasing strategies. Stocking one instead of two and ordering more often can double inventory turns. As you can see on the VPI, doubling inventory turns doubles GMROI. Similar improvements to gross profit margin are almost impossible, especially in the current market conditions. You would have to buy for a lot less and sell for a lot more to substantially increase margin. You would have to overcome resistance from both suppliers and customers to succeed.

The path to more profit is the path of least resistance. You can plan your profits with Weeks Supply and Street Price.

Weeks Supply is installed by the Stock Level Report and totally controls your Inventory Turns.

Shop your competitors and set your pricing in the same ballpark. The Gross Profit Margin is controlled by competition and not very moveable.

Inventory Turn is where the least resistance to optimizing GMROI is, and “Weeks Supply” is the first place to start. Next comes order frequency, freight schedules, rebates, and special promotions. I found my suppliers much easier to deal with on purchasing issues than they were if I was negotiating lower prices.

Product Line Ranking Reports by part number can be downloaded into spreadsheets that rank part numbers by GMROI. When I started talking about part numbers ranked by GMROI, it made people nervous. I got comments like “I’ve got over 100,000 part numbers in my store. Where am I going to find the time to manage all that data? I’ll have to hire more people.”

However, part numbers ranked by GMROI tell an interesting story. When it comes to Proactive GMROI, there are only two classes of part numbers, Upper Class and Everything Else. There are relatively few part numbers at the top of the Sales Ranking Report. Less than 5% of the part numbers drive well over 50% of the sales volume. These few “Upper Class” part numbers have the high GMROI and with fine-tuning can go even higher.

The first product line I ranked by GMROI was filters. We were stocking about 1,000 part numbers. The “Upper Class” was limited to the top 33 part numbers. The Sales Ranking Report assigned a code and we purchased those 33 numbers in case quantity from the factory at a 10% extra discount and 30-60-90 day dating.

My strategy for purchasing “Upper Class” filters was totally automated. The Sales Ranking Report ran automatically every month. The percentage break-point parameter defined and assigned the right code, and a purchase order launched every time we hit a qualified order. The automatic Stock Level report ran weekly. It maintained our inventory at a two weeks’ supply. A two weeks’ supply of fast moving inventory yields 26 turns. Our after-rebate GP% on filters was 35%. VPI shows 26 Turns @ GP35% = GMROI 15.17.

Automating the process not only addresses the time concern; it provides a self-correcting strategy for purchasing. As new part numbers start to move they are automatically included in factory orders. As old numbers quit selling they automatically drop out of the “Upper Class” and the stock level sells down.

The Everything Else class is made up of slow-moving inventory. These make up the breadth of coverage and you have to stock them. The service these parts provide to your customer is why they do business with you. The money to buy these parts can come from the overstock in Upper Class inventory if you are keeping too many days’ supply.

I once worked with a jobber who carried an extra 120 of one filter number. We reduced the stock level by 120 and put in one each of 120 part numbers he wasn’t stocking.

This brings up an interesting point: What is the GMROI of overstock that doesn’t sell? Zero sales drive Zero GP$. Zero GP$ = Zero GMROI. At least slow-moving inventory has some GMROI. Like they say, something is better than nothing.

The GMROI of Everything Else ranges from less than 1.0 up to 2 or 3 and there is nothing you can do to improve it! If you raise the selling price above the street price, you’ll send the wrong message and lose customers.

The Survey of Profitability from the Automotive Aftermarket Industry Association shows that over the years, the store GMROI of the average jobber is around 1.50 ($1.50 of gross profit for each $1.00 of inventory investment). The store GMROI of the high profit jobber is between 1.80 and 2.0. (If the difference between 1.50 and 1.80 doesn’t sound like much, which would you rather have as your batting average?–ed)

Achieving high profit status, maximizing your store GMROI, is best achieved by improving all the Upper Class part number GMROI you can. And yes, it is easier said than done, but not much.

Next month we will continue working with procedures that develop higher GMROI.

Jerry Loney is a professional consultant regularly hired by jobbers and retailers

Any jobbers or distributors who may wish to contact him with specific questions may do so, in confidence, through Jobber News Magazine by fax at (416) 442-2221.