To stock or not to stock Part 2
Now I know I’m going to pick a fight on this subject. Van inventory is a subject of much controversy and discussion in our industry. Many if not most dealers that I encounter, want their service vans stocked with very lean inventories that consist mostly of consumables, some ignition parts, belts, switches and radiator caps. The reason is simple enough. Inventory costs money, and when you have a dozen or more vans on the road, it’s a sizeable investment. So, we tend to limit van stock to only the fastest moving parts. Conventional wisdom informs us that a dealer must turn the value of his entire inventory 4 times a year in order for the department to meet their overall net profit objective. There are variables that affect this ratio. Interest rates, changes in OEM equipment lines, dead stock, and annual returns all add a measure of complexity to the daunting task of inventory management.
I will generally agree that a forklift dealer should have a minimum of four inventory turns per year on his entire inventory value. Individual piece turn ratios however can be wide and varied, and the criteria for shelf stock in the warehouse may be driven by outside factors. For instance, if we know that a transmission housing has a 6-month lead time, and we normally sell two a year, we may feel constrained to abandon the simplistic 4x model, because we simply can’t afford for our customer to be out of service for an extended period. So, we depend on the faster moving inventory in the warehouse to “balance the scales” and get us to the 4x value benchmark. This “balancing” includes paring down the stock on the vans, so that they ONLY carry fast moving items, which helps us meet our overall 4x turn ratio goal.
If we are married to the 4x model, it will be difficult to achieve this goal any other way.
The 4X model however has some weaknesses I would like to address.
The 4x model assumes that the only costs to be accounted for in inventory value are the prices we pay for the parts, and the interest carrying costs we pay to purchase the inventory. I would agree that these truly are the only costs when we are talking about over the counter warehouse inventory. When we sell parts out of the service van however, there are other costs that should be considered.
Some of these costs are as follows:
- The cost of labor to return to the shop to pick up a part we don’t carry on the van
- The cost of fuel for the same trip
- The cost of wear and tear on the service van
- The loss of reputation we suffer for NOT being able to perform a “first time fix”
- The loss of repair business that COULD have been approved, completed and billed on the spot, because we didn’t carry the right parts onboard.
The absence of non-consumable, “component” parts on a service van does one very important, and very destructive thing. It forces your road technician to say NO when he should be able to say YES. I think it’s important to understand the risk we run when we force our people to tell customers “no” (including “No, I can’t quote you”, or “No, I don’t have that part on my van”).
- If a technician is working on a customer owned unit, not having parts on board puts you at risk of losing the customer, or your profitability, because of excessive travel time needed to acquire the parts.
- If a technician is working on a rental truck, not having parts on board puts you at risk of losing profitability due to increased labor expenses. Either way, the tech has to be paid, not to mention the additional mileage and fuel costs involved.
So, how do we know how MUCH to stock, and WHAT MODELS to stock parts for?
My observations of most dealerships are that in respect to van inventory, the dealer is in one of 2 camps.
Camp 1. Their van inventories generally are not very well controlled, and they routinely depend on individual technicians to “request” the parts that they think they will need. This practice leads to “hit and miss” van inventories that are based on estimations and assumptions by the technician that may or may not be correct.
Camp 2. Their van inventories are TIGHTLY controlled, and follow the 4x model (at minimum), perhaps even setting the bar at 6x or 8x due to the fact that only fast-moving parts are allowed on the van.
I am of the opinion that BOTH camps are equally inefficient in cutting the costs that I listed earlier. In order to eliminate the costs of not having the right parts on the van, we have to invest time anticipating what parts will actually be needed. This process begins with assigning ALL of the (retail) equipment the dealer regularly services to individual technicians (or vans). We cannot reasonably assess our needs if we don’t start with these assignments. Assigning retail forklifts to a van (or a tech) helps to build an “equipment profile” that when analyzed will provide us with the makes and models that a particular tech will be MOST LIKELY TO HAVE HIS BOOTS UNDER during the course of normal day to day activities.
Once this analysis is complete, we can draw a conclusion as to what the OPPORTUNITIES will be to sell parts on the makes and models discovered in the analysis. The level at which we will stock the van with parts for an individual make and model, will be directly proportional to the ANNUAL service opportunities (ASO’s) that tech will have to work on those units.
We then should devise multiple levels of van parts inventory consistent with these ASO’s.
Level 1 – (a few parts) For makes and models where the tech has between 15 and 35 ASO’s
Level 2 – (moderate inventory) For makes and models where the tech has between 35 and 80 ASO’s
Level 3 – (comprehensive inventory) For makes and models where the tech has more than 80 ASO’s
This fundamentally changes the model for planning and stocking van inventories. Instead of using a “historical sales” criteria, we can now use an “opportunity” criteria. When done right, restocking the van should also be paired with a program that provides a “menu” of repairs that the technician can quote “on the spot”, utilizing the parts he now knows he carries for the equipment he is likely to encounter. This inventory modeling will have a much greater impact on the other cost factors we mentioned earlier.
I have provided this type of service for several dealers across the country, including the needed analysis, inventory planning, menu development, and even incentive programs. At the end of the day, you are either going to have an inventory plan that costs you money or gives you the maximum opportunities to drive new business. I like the latter. See more about this at: ww.resonantdealer.com/programs/service-menu-program/
Dave Baiocchi is the president of Resonant Dealer Services LLC. He has spent 35 years in the equipment business as a sales manager, aftermarket director and dealer principal. Dave now consults with dealerships nationwide to establish and enhance best practices, especially in the area of aftermarket development and performance. E-mail email@example.com to contact Dave.