A Simple Tool to Maximize Your Bottom Line

Bottom-line management is more important than just measuring top-line activity.

The reason is very simple: margins have been dropping across the entire industry. If jobber management does not start focusing attention on the bottom line, then the obvious will happen: the doors of the store will close, for good.

The one single asset that jobber management must continuously pay attention to, as everyone knows, is inventory levels and turnover frequency. It still amazes me, however, how many jobbers still justify keeping items in their store for years because they bought the material at a very low cost and feel that they will sell it at a premium price. It also amazes me how some jobbers are consumed with building the total dollar value of their inventory without regard to how the inventory is moving within the business. In these competitive times, with declining margins and with cash seemingly always at a premium, how can jobbers still justify such old school thinking?

Most jobbers will agree that inventory turnover can be a key measurement that determines the benchmark for a jobber store’s success or failure. Stocking the right inventory based on the shop customers that the store sells to has become critical for maximizing the use of cash within the business. Technology exists today to provide management with real-time, key measuring data, that management can then analyze in order to maximize the store’s inventory investment, building a strong bottom line.

To support the above points, jobber management should consider constant measurement of the “Inventory Turn-Earn Index.” The Turn-Earn Index is a measurement that combines gross margin with turnover.

If a jobber enjoys high profit margins, then he can be very successful with a low inventory turnover value. Consider, on the other hand, if a jobber has very low profit margins it is critical that he have a very high rate of inventory turnover. This much would seem obvious, but keeping a handle on the right balance gets complicated in the real world.

Jobbers carry many lines of products that have a wide range of margins. All products call for the consumption of cash in order for the products to be put on the store’s shelves. It is, therefore, critical that products be measured properly to prove that they are providing a reasonable return on investment to the store. It is also important to have a method of measurement that can prove the jobber is carrying the right products for the customer base he is selling to. The Inventory Turn-Earn Index (TEI) accomplishes this.

The TEI is calculated by multiplying the inventory turnover by the gross margin percentage:

TEI = Turnover X Gross Margin

The most successful jobbers strive for an overall turn-earn index of at least 140, but preferably closer to 150.

With that in mind, consider the following three examples:

If a jobber has an average gross margin of 30% on a particular line and succeeds with five inventory turns of that line, then the store has accomplished a turn-earn index of 150.

5 Turns X 30% Gross Margin = 150 TEI

If a jobber has an average gross margin on a particular line of 15% and achieves an inventory turn with that line of 10 times, then they have also achieved a turn-earn index of 150.

10 Turns X 15% Gross Margin = 150 TEI

But if the jobber had a high margin of 50%, then the store would only require three inventory turns to achieve the same turn-earn index.

3 Turns X 50% Gross Margin = 150 TEI

Consider that by using such a benchmark measurement as a standard, management can now determine what lines of products should be continuously carried in order to maximize shop purchase satisfaction. If the jobber doesn’t have it, the shop buys it somewhere else. The measurement standard also ensures that the jobber is not tying up important cash on items that do not contribute to the store’s bottom line.

Stocking levels for the jobber store can now be clearly defined. For example, if a jobber was only achieving a TEI of 90 with a product line earning a margin of 30%, the math proves to the jobber that the line is only turning three times.

That sub-par popularity of the specific product line or item can send management a message that could mean one of the following:

–the line item may not be the type preferred by shop management for the vehicles they service;

–the shops are not properly informed about fit, form and function of the product line, as the jobber has not educated or marketed the product line properly to the customer base;

–there is too much of the product line in the jobber inventory, consuming jobber cash.

This is not to say that everything is black and white with inventory management or with this measuring method. There are other issues. However, the odds are very good that by using this measurement tool, combined with common-sense jobber management, the store can achieve a consistent 20% Return on Investment (ROI) year over year from the business. Consider ROI as the “true measurement” of an owner/manager’s business ability.

As the jobber’s business continues its metamorphosis, simple measurement tools can be a great time saver as well as a great business bottom line builder.

Take the time to measure your store’s Turn-Earn Index. I believe it will become a tool that you will enjoy using, as it tells you so much about the activity that is being generated by the business, and where your resources are being put to the best use.

Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has 28 years of industry-specific business management experience. He has developed shop business management courses for independent service providers recognized as being the most comprehensive courses of their kind available in Canada. Bob is the first Canadian Business Management Consultant and Trainer to be recognized for his industry contributions when he received the prestigious Northwood University Automotive Aftermarket Management Education Award in November 2003. E. K. Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive aftermarket industry preparing analytical operating statements for management purposes, personal and corporate tax returns and business management consultation. Visit them at www.ekw.ca and sign up for their free monthly management e-newsletter. Automotive Aftermarket E-Learning Centre Ltd. is a leading edge company devoted to developing comprehensive shop management skills through the E-Learning environment. Visit AAEC at www.aaec.ca . Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 and by E-Mail: greenwood@ekw.ca or greenwood@aaec.ca.