As the change of seasons approaches, no doubt you will be faced with some important decisions about what to buy and how much. In the wake of two consecutive seasons of mild weather–the winter that wasn’t and the summer that wasn’t either–many jobbers will be preparing for the worst, but hoping for the best.
Nevertheless, fall booking programs are the norm for the industry, and many jobbers are anxious to take full advantage of mass purchases, even keeping truck trailers to handle the overflow from their existing stock rooms. Still, with such weather-dependent lines as batteries, belts and hoses, and to a lesser extent lighting, massive inventory investments do carry a risk.
Balancing that financial risk with the potential benefits of a lower unit purchase price is not something that should be viewed in too simplified a manner. While the need to purchase competitively cannot be denied, without considering the effect of having financial resources tied up in product the true financial picture cannot be obtained.
The fact is that with fall and winter booking programs you have to guess now what the demand will be later. That’s risk number one. The second is that you’ll need to decide whether you’ll be able to maintain a price level that will give you the added margin you will need to balance the up-front risk. One of the best tools that I have come across to do this comes from Jerry Loney, who wrote regular columns for Jobber News until a heart attack forced him to cut back on his strenuous schedule a few years ago.
You are likely familiar with Gross Margin Return on Inventory measurement (GMROI)–GMROI = Annual Gross Profit $ Average Inventory $–and your computer may be able to provide you with that calculation.
However, what Loney called Proactive GMROI took the concept’s ability to predict the effect of inventory changes a step further. It’s a concept that is particularly useful when considering the effect of large stock purchases on your overall financial picture.
The Proactive GMROI can be calculated as follows:
When faced with the opportunity to shave a few points from your purchase price, and either add them to your selling price or take the discount directly to your customer base, you have to be mindful of the added cost of that extra stock. In the extreme, if you have to purchase the entire winter season’s stock of batteries to get the discount you want, you can’t just take that same discount and pass it along to your customers without having an even greater impact on your own bottom line. The cost of carrying that extra inventory must always be considered when offering your customers the benefits of your volume purchasing. If you’ve got terms for 30, 60 or 90 days, that may change things, but you should still be thinking about when you have to pay for the order in terms of when you’ll have it all sold.
Considering the unpredictability of the weather–having just been through the winter that wasn’t and the summer that wasn’t either–it is probably advisable to be conservative in this calculation. You may find yourself a bit short in mid-season if business is strong, but that’s still preferable to finding yourself sitting on a truckload of stock when the season has passed. If that were to happen with a big battery inventory, for example, you may find yourself in a position where you’re concerned with the aging of the batteries–a six month shelf life is pretty standard–or find you’re tempted to discount the product just to move it, which is counterproductive in so many ways.
Looked at one way, shifting your focus from just margin and service level allows you to maximize your profitability. Looked at another way, in a world where margins are shrinking, it gives you a way to reliably maintain as much profitability as possible, while at the same time retaining your ability to service your customer. If, for example, you lose 5% on your gross margin to price pressures, but can increase your turns from three to four, you’re ahead of the game in terms of pure profit. However, it doesn’t take much to tip the scales in the other direction, so working with the numbers to discover a price point that gives you the most dollars may in fact put you at odds with some price-shopping customers.
A key element of GMROI is inventory turns. When purchasing in large quantities, your number of turns will decrease of course. Your hope, no doubt, is that your margin increases. In some cases, it may also be a hedge against running out of supply. For some products, the ability to actually obtain stock in mid-season cannot be guaranteed. You call this element your service level or fill rate.
In the interplay of purchasing and inventory turns, the service level must always be considered. A high GMROI may look great on paper in one way, but if your fill rate drops, you may be running with too lean an inventory.
It would seem prudent to err on the side of efficiency, rather than overstock. You may find that so-called “safety-stock” levels can be reduced without adversely effecting your fill rate. Put another way, if you have a SKU that is ordered only four times a year, that’s only one every three months. Do you really need a case? Without considering purchasing price, you could theoretically reduce this to quantity to two or three for the SKU, increasing your turns on the SKU, and reducing your investment without reducing your fill rate. And, if you took that investment and redeployed it, you could actually increase your overall fill rate.
Going back to the archives for some more Jerry Loney info, he suggested that looking at stock in terms of days of supply, rather than just turns, is useful for both profiling your inventory and minimizing your financial risk.
The Additional Days Supply table shows at the intersection of Existing Days Supply and Existing Gross Profit % how many Extra Days Supply to purchase for each 1% of extra discount on the special offer. If the Extra Discount is 10%, multiply the intersection number by 10.
For each Existing Days Supply (Inventory Turn) and Existing Gross Profit % there is an Existing Return on Inventory Investment (GMROI). When you buy extra product at an extra discount it reduces inventory turns and increases gross profit percentage. By considering the additional days of supply to determine how much extra product to buy, you can maintain the same GMROI.
It gets particularly important to pay attention to how many days’ supply you have on hand when faced with additional terms for your order. If you are allowed an extra 30 days as part of the deal, you could consider adding another 30 days’ worth to your order. You could, but if you guess wrong, you’ll drive down your GMROI. If you guess very wrong, you may be stuck with more stock than you know what to do with.
If you’re conservative–adding 15 extra days’ supply for each extra 30 days’ terms–you can be reasonably sure that you will have sold the product before you have to pay for it. In practice, this turns it into consignment inventory (temporarily anyway) which does wonders for your investment. To get the total QOH you require, don’t forget to subtract the current stock level.
Here’s an example:
Existing Days Supply14
Days to add for 10% Extra Discount5
Days to add for Extra 60 Days Dating30
Total Days Supply 49
Since your computer might already be keeping your on-hand supply at 14 days, you would already have that much, which means you would buy an additional 35 days’ worth more. The final decision on inventory levels must reflect your own experience, of course, and will be shaped by the demographics and climate of your area, not to mention your proximity to a source of supply.
Predicting what the exact number of days’ supply a specific quantity will constitute may be difficult in this erratic market. If you look at your key seasonal items’ activity over the past few years, and err on the side of caution, you’ll probably be safest.
Without the benefit of a crystal ball–or an almanac that I would trust–I would hazard a guess that a stocking level of seasonal i
tems just equal to last winter’s sales would probably leave you short. After all, how many winters like last one can we have? Eventually it’s got to get cold.
Looking at it another way, the mild weather of the past two seasons, and more than that long for some regions, has meant that borderline vehicles have continued to run reliably. This can’t go on forever. It’s called pent-up demand.
The right inventory will leave you prepared when it hits, but will also leave you in good shape if it doesn’t.
Special thanks to the following for their contributions: Mitch Williams, president, Hella Inc., Mark Odorico, automotive channel manager, GE Lighting Canada, Stuart Novak, director automotive sales, Osram Sylvania, Bob Dugan, Exide Canada, Frank Fanciulli, product manager for batteries and electric, ACDelco Canada, Jim McIntosh, field sales manager, Ont./Atl., Gates Canada Inc.
BATTERY SEASON TIPS
With an installer’s commitment being as few as half a dozen sizes and types, with perhaps a few CCA rating options to boot, the installer’s battery commitment can be easily handled.
For you the jobber, however, the slow seasons of recent past may have left you with some aging stock that you’re not even aware of. Batteries are perishable goods, even if they do have a long shelf life. After about six months their level of charge may not be as good as it once was.
This isn’t a problem if you’ve been diligent about First In First Out. But if you haven’t, you may find some dust collectors at the back of the shelf.
Before ordering a winter inventory, check current stock for level and condition. Move all existing stock to the front of the shelf, being sure to move the oldest items to the very front. Have an employee check all batteries more than a few months old for state of charge.
Consider carefully which CCA batteries you need to carry. Check your activity reports. If you don’t have the detail there, check your shelf. If the lower CCA batteries are lingering longer than the higher rated ones, ask yourself if they need to be on the shelf.
Eight-year-old and older vehicles make up the majority of what the aftermarket sees for battery replacement. While consumers may be inclined to go cheap on batteries for an aging car, it is just those aging vehicles that require the most help starting. Talk to your installers about weighting the inventory to the high-end product and see what happens. It’s not strictly an inventory issue as it involves sales too, but if you can sell more premium batteries, and enabling you to stock fewer of the mid-quality ones, it can help your GMROI.
If you don’t do this already, consider checking and charging every battery that leaves the building. This should certainly be the case for any DIY sales. About one in every seven batteries sold in Canada is to a DIYer.
Remind your installer customers to check their customers’ batteries as part of fall inspection. It doesn’t take much time and can help prevent a recent repair customer from being stranded and consequently unhappy. A battery’s performance is halved for every 10-degree drop in temperature. A battery that’s just barely okay in September is not going to perform come October or November. Car owners should be reminded of this.
Inventory Turns = Sales Units Per Year/Average Units Quantity on Hand (QOH)
Example: 10 turns = 100 Sales Units Per Year/10 Units Average QOH
Hint: the Average QOH tends to be the Stock Level your computer tries to maintain.