Build A Better PowerSports Business

The Dust and Clothes Pins Method Of Inventory Control

Inventory Control – What Is It? Do I Need It?
By Vance Breese

Years ago, I bought my motorcycle shop on April Fools Day. It is a birthday that is easy to remember. The shop came with $22,000 worth of obsolete inventory and a 10-year history of not making a profit.

I remember sitting at my desk watching a fight that had spilled from the bar next door. I felt very out of control. I knew that I needed to change some things in this new endeavor or I was bound to repeat history.

My customers had made it clear that they wanted to be able to buy parts without special ordering them. I also saw that I could not afford to stock everything. This was my first conundrum.

In the first nine months I doubled the gross of the previous owner’s final year, so it seemed like sales and growth were the easy part. But, why was my bank account was shrinking? My accountant said that I was making money and my banker said that I was doing great as he loaned me $30,000. But, I felt even more out of control.

I was using what I call the dust/clothespin method of inventory control. When I would sell something I would put a red clothes pin on the inventory box. That night I would look in the box and if it was clean I would re-order it, if it was generally dusty but the part was not outlined in the dust I would look up the part and find out what bikes the part fit. I would try to imagine how many of my customers bikes it would fit and how likely they were to need one. This of course was modified by the needs of the service department. If the outline of the part was clear in the dust I would turn the box upside down. When I ordered things I would put a green clothes pin on the bin and a white one if it was back ordered.

I had to do my ordering at night due to the level of concentration required and the emotional investment which went into my reorder process. If I tried to do it during business hours and a customer interrupted me in the middle of a part investigation I would treat them badly, which I quickly found out was not a good way to continue the growth. My wife was threatening to leave me for spousal abandonment and having a bad attitude at home.

I was out of control!
I then hired someone to help with the counter and that only exacerbated the problem. They would try to help put things away, but I couldn’t find the parts they put away. They couldn’t begin to understand my overly complex, multi clipboard special order system and the customers were not happy. I was no longer connected with who bought what for which motorcycle so my ordering decision process suffered. My emotional state suffered even more as sales continued to grow. I needed to find out how to take the emotion out of ordering and, at the same time, not run out of money. I needed to find time for my personal life.

Now I really was out of control!
Lets see, if you double the sales, that should only mean you should double the inventory? My gross margin was between 35% and 40%. At the time I sold about $59,000 per year in parts and had about $17,000 worth of good inventory and about $20,000 in bad inventory which I acquired along with the shop. My gross profit was $22,000. How was I going to add $37,000 in inventory with $22,000 in gross profit and bills to pay? This amounted to about 1 inventory turn per year.

My service department was not making much money because, even though I had hired a second mechanic, they were only achieving 37% efficiency. There were 55,000 people in the town with half of them being field workers and half of what were left were retired so my motorcycle sales didn’t make up the difference. For you new guys, the boom hadn’t really started yet.

These are the questions and answers that worked for me in a small town in a small shop. Your answers will be different but the questions are the same.

At what point do I stock or not stock an Item? For me if I sold one in five months or had 3 different people ask for it in three months I would stock it. This ration had to be modified for our service parts, We knew that if we couldn’t finish a job due to the lack of a part, the job lost money and the customer was unhappy.

How much inventory do I carry?
This can be expressed in days, weeks, months or average monthly sales. I found that the more often I ordered, the less I had to carry. I was gambling that my investment in time would pay off when I had what the customer needed when they needed it. I had to consider how likely the vendor was to back order the item. I began to order every day so I stocked about a one-month supply. I could see that if I ordered every day and that parts took about a week to arrive I wouldn’t run out of the part. There has to be some kind of a curve though. If I sold one per month I would stock one, but if I sold one hundred per month I would stock around 35. In the middle there is a curve.

When do I decide to do more than just call my inventory “BAD INVENTORY”?
If a part has been on my shelf for more than 9 months I would move it to the bargain bin. It amazes me what things people will buy if you discount it. I have had people buy discounted items so they can sell it at our shop swap meet. When I first started doing this there was a lot of stuff that fit this definition of bad inventory, but as I worked on it, my inventory got better. I would have to remind myself that if I could sell old inventory for even half, I could reinvest that money in good inventory and make more than 100% return on investment (three turns at 37% is 111%). This was much better than celebrating the parts’ birthday in my store.

In practice this got me close to three inventory turns per year and reduced my dead inventory. If we apply this to the original problem I could support $176,000 in sales with my $37,000 in inventory for a gross profit of $65,000. Even I could see that this was better than $22,000.

I needed a way to keep track of all this and if I had understood the value of better control of the inventory I wouldn’t have balked at the investment in a computer.

I didn’t really have trouble with the cost of a computer system, my problem was more thinking about the extra work I would have to do to keep track of things with a computer and the ongoing costs of support and price book updates. I can’t type, can’t spell and I am dyslexic. These are not good traits for a computer operator so I began to design a program for people like me. I eventually decided to share my programmer’s bills with my friends and started Counterman. You can see even at the sales of 1988 I could afford a fulltime person to do this and still be money ahead but I have found over and over that I do a better job of worrying about how my money is spent than people with a less personal interest. I guess that makes me a hands on kind of guy.

Having an ordering system dramatically reduced my emotional investment and stress. It allowed me to grow to over $1,000,000 in parts sales per year, which once again made me feel out of control. Inventory control is clearly a relative term.

Learn From Other Businesses

by Vance Breese

Looking Outside The Motorcycle Industry??
Fortunately most customers aren’t like me. I’m cheap, I know what I want, and what I want is weird. The shops I liked the best were the ones who had all the parts that nobody wanted except me. I didn’t need knowledgeable sales people, and I didn’t care if the place was clean or well-organized. I liked the shops that would let me look through the parts books and wander around in their parts departments. I was always looking for the racer discount.

Supermarkets know how to face the shelves so that it looks like they have more inventory, and why the milk is always at the back of the store

Suddenly, without proper training or a true evaluation of what I was letting myself in for, I found myself the owner of a Harley-Davidson agency in a small town where I didn’t understand the culture of the locals. I knew that to make a living I needed to increase sales by at least 20 percent. Harley-Davidson spent a couple of days trying to teach me how to run a store, but this was 1987, and its approach seemed aimed at spending all of my money on parts. I didn’t have the money to make that work.

I didn’t have time to go to school to learn to be a motorcycle dealer because I needed to know what to do now.

Whom To Ask?
The first people I asked were my customers. They did a lot of different things for a living, and they had to be good or they couldn’t afford such expensive toys. They also understood the local culture in a way that I still don’t.

The first person to help me was the manager of a grocery store. You think we have short margins? You should see what they’re working with. They have elevated self-serve to an amazing level. The grocer taught me how to face the shelves so that it looks like you have more inventory, and he explained why the milk is always at the back of the store.

Then there was the auto-parts store owner across the street. He had to service so many different types of automobiles that his inventory had to work. His parts people had to know their stuff and push a lot of parts across the counter. My own experience with foreign auto parts helped me understand what he was trying to tell me about inventory control.

In my opinion, women know more about shopping than men. It’s an avocation for them, and they know what they like and don’t like. They helped me with the apparel ordering and the merchandising of the store. At first I was afraid to ask because I thought I would be imposing. I discovered that many women have a desire to create the ultimate shopping experience. Each woman is a wealth of knowledge and seems to know how it should be done. They took me to Nordstrom’s where I learned the meaning of true customer service.

Auto parts have to service so many different types of automobiles that their inventory has to work. The parts people have to know their stuff and push a lot of parts across the counter (Photo courtesy of Reinertsen Motors Inc.)

Service is something that continued to puzzle me throughout my retail motorcycle experience. Why do we have mechanics trying to sell service? How much do I charge an hour for my shop rate? What do I charge for? How much help do I have in the service department? I found the answers and more at the local automobile dealers. They seemed willing to share what they had learned. A word of caution here: I feel that doing things the automobile dealer way won’t work in many areas of our business. We have to build a relationship with the customer and teach him how to enjoy his toy. Nobody needs a motorcycle, so it’s our job to keep him interested. This is a concept that is lost on most automobile dealers. On the other hand, the people at some of the enthusiast automobile dealerships can teach us a lot about customer follow-up.
Then there are the other motorcycle shops. This is a tough business and to stay in it they have to be good at something. When I would go on cross-country trips, I’d stop in at every motorcycle shop I could find and try to learn from each one. When I returned, I’d try to evaluate my shop in the same way.

Sometimes I would learn what not to do. For instance, I learned to keep angry service customers from the new bike customers by watching what happened at a shop in Nevada during a big rally. A new bike sale was well on its way to closing and several angry service customers were talking loudly in the showroom about all the trouble they were having with an aftermarket chopper — but they were calling it a Harley. The potential customer got into his BMW and drove off into the sunset. Then two other people in the showroom asked about the reliability of the new Harleys. It was an awkward moment that could have been avoided by having the service customers in the service department instead of the showroom.

Anytime there’s a rally, there are problems with batteries and charging systems because there are people there who only ride their motorcycles at rallies and don’t ride them often enough to keep the ?battery charged.

Marketing, Promotions, And Advertising
Everywhere I look there are signs. Which signs work, and which ones do I forget and why? This was all a new world for me, and another new learning experience.

?Advertising brought up the same questions. I could never tell if advertising worked. I could see that the people who advertised had more business. In my heart, I felt that they advertised because they could afford it, and it didn’t really help. In my head I knew I needed to advertise. I always wanted to quantify how it worked. This is silly. I know that if I didn’t advertise that the business wouldn’t work as well. A local radio station had classes on advertising. They were aimed at selling radio time. There was still a lot to be learned there.

The local dirt track gave me a lot of ideas about how to promote events. The track management has an active e-mail list that they must keep pared down to work. This is computer stuff, but it has made me a lot of money. They understood what it cost to fill a seat.

And then there are the trade publications. I learned a lot from this source, and I still try to read them all. Knowledge is power and no knowledge ?is wasted.
We are all challenged by the same things, and I learned that solutions that work for others are likely to work for me.

I don’t have the money to have every part anyone could want, and I don’t have money to throw away on advertising that doesn’t work. I don’t have a desire to build a monument store. I just want to be in the motorcycle business and have fun. Learning from others is one way I have found to do that.

Learning From a Young Shop Owner

by Vance Breese

I had an interesting discussion with a young, successful motorcycle shop owner the other day. I asked him what made his shop make money. He said the main thing was helping his customers get the most out of their motorcycle purchases. They must be taught how to enjoy their motorcycles. They need to be involved in the motorcycle sport.

He said he tries to have at least one event a month. He keeps a close connection with motorcycle rider training. He makes sure that his customers’ bikes are down for the minimum amount of time for service, and he makes sure that his customers know the value they receive from every purchase.
I asked him about profit, and he was quick to respond that maintaining a margin on everything he sells is important. He also said it’s critical to avoid tying up money in inventory that is not working. He is careful to make all the parts of his shop work. He likes bike sales, because a large amount of money comes in without too much effort. He finds finance and insurance to be worthwhile moneymakers, and extended warranties provide a profit center without a lot of work.

Service is a moneymaker if he can keep his mechanics working and keep their efficiency up. Accessories and clothing are profit centers, but inventory control is critical, as is keeping up with trends. He has found that when his parts man is left unsupervised, he will sometimes buy the things he wants instead of what the customers want.

I asked him about advertising, and he was not exactly sure how it worked. He knew if he didn’t advertise, his competitors that did would surpass him. He figured events and promotions into his advertising budget.

I asked him about employees and he said, “You can’t live with them, and you can’t live without them.” He finds turnover and training to be major expenses, and he knows some of the thefts he sustains come from his employees. But he said his employees are what give his shop its personality. He felt that the shop’s personality is a big part of his success.

Over in the corner, I saw a forlorn Sportster, so I asked him how his business was different from a Harley shop.

He said that Harley customers have more money and already know how to enjoy the motorcycle experience. The Harley customer is free with his money and not always looking for the cheapest price. The Harley customer already knows how to ride and has no need for training.

He felt Harley events just happen by themselves and there is little need to advertise them. He believed Harley customers will wait six weeks to get their bikes serviced. And when they get charged $225 for an oil change, they’re happy to pay it. He told me Harley mechanics are more mature and less full of themselves, and that Harley customers are apparently willing to put up with bad service and bad treatment.

He said it’s easy to make money working on Harleys.

Metric Motorcycle Dealer

He believed Harley shops don’t have to look for all the little ways to make a profit because they’re working with better margins and more cash flow. It appeared to him that Harley shops sell everything they can get. Inventory control is not a problem, because there are so few models and nothing ever changes. He felt Harley customers are hungry for accessories, and there is no selling involved. They wear the same clothes they did 20 years ago, so there’s no need to stay on top of trends.

Harley Motorcycle Dealership

His observation was that Harley shops don’t need to advertise, because everyone already knows about them. He believed Harley shop employees are older and more stable, meaning there is less drama and no theft.

I did my best to keep a straight face. This young man was successful, and I felt his perspective had value. I felt he was accurate in what it took to make his own business work. He was just a little off with his fantasy of what the Harley business was like. He may have been pulling my leg.

It seems to me that we all have a lot to learn about the motorcycle business. Most of us are enthusiasts first and businessmen second. All business is driven by sales. All customers are cheap and difficult. All shops are cash-poor. All employees have different agendas from their bosses. It’s always about margins and cash flow.

I learned a lot from this young man. He reminded me of all the things I need to do to stay profitable.

Motorcycles are still about passion, and the motorcycle business is still about business. No matter what we sell, we can learn from each other, and we can be good for each other. Our customers have the same desires and needs, and our businesses require the same essentials for success.