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.

Business Within A Business

by Vance Breese

Easy Inventory Tips

Buying and selling used motorcycles is different than selling new motorcycles

I love the motorcycle business. There’s always more to learn and more ways to make it work. Each time I think it’s going as well as it can, I find some way to do a better job. There’s always growth, and as I learn more, I find that money I’d left on the table now finds a way into my pocket. I love looking at the numbers because that’s how I learn about what works and what doesn’t.

Early on, I tended to do all business the same way when I was actually running many different businesses under one roof. I was more profitable when I learned to treat these businesses differently.

More Than Selling Bikes
Selling motorcycles seems simple enough: Have some motorcycles on the floor and people will come in and buy them. Put more motorcycles on the floor and more people will buy them. If you have too many, the flooring will eat up the profits. Discounting will eat up the profits. Commissions will eat up the profits.

When you only have 15 or 20 percent gross profit, the motorcycles had better turn over, and you need to be efficient. I was in a small town, and I had real limits on how many motorcycles I could sell, so I needed more businesses making money under my roof.

It’s easy to believe that you’re making money when you’re not because of the costs that go into getting a used motorcycle ready to sell. Because of this, I prefer to sell the motorcycle parts and labor at full retail.

Financing is another business. It doesn’t take up room and there’s no inventory. Fill out some paperwork, establish working relationships with some people, and you can make some money. It took me a long time to learn to ask “Would you like financing with that motorcycle?”

Insurance is a lovely business that many shops let slip away. In California, every motor vehicle must have liability insurance. If a motorcycle is financed, it needs to have collision and theft insurance to protect the lender. Getting an insurance license is relatively easy, and I still get checks from renewals even though I sold my shop in 2002. All I had to do was to ask “Would you like insurance with that motorcycle?” I had to let people know that I could help them with their insurance needs, fill out some paperwork, and make bank deposits. No inventory, no finance charges, and no warrantee hassles. I was using my shop in a more efficient way.

Selling Service And Stocking Parts
Service is a particularly challenging business. Most shops bill around 20 minutes of each hour available. There are 2,000 working hours in a man-year. Multiply your shop rate by 2,000 for each mechanic and that’s your potential. Compare that to what really comes in and it’ll help you understand how much money you’re leaving on the table. The car business is typically at 110 percent efficiency. Motorcycle shops are often around 33 to 50 percent of that potential. There are many reasons for this. In the motorcycle world, the biggest reason is we don’t do a good job of selling service, so we don’t charge enough. I was never able to get past 85 percent efficiency, and if I didn’t work at it all the time it was easy to slip to 65 percent.

The more varieties of parts and accessories we have, and the better they’re displayed, the more you’ll sell

Service parts is a business unto itself. There is less price shopping in service parts because it’s a smaller part of the bill. We can often plan when we’ll need parts so we don’t have to stock everything. We usually have a couple of days to get gears or pistons so we don’t have to stock them. Crash jobs are wonderful because you have the time to order all the parts so you can do a lot of business without a big inventory. Cables and electrical parts are something we stock to get people back on the road, so we have to invest some of our inventory dollars in these parts. It takes experience to properly stock items. We need to charge enough to provide a margin that’ll support the expense of having these things in stock. Seals and gadgets are critical items to complete a job, and we have to learn what ones to carry and how many. Taking a motorcycle off the lift for a lack of parts can take the profit out of a job. I’ve found that it usually takes at least 20 minutes, and on a two-hour job, that’s 16 percent. I’ve never been able to take home more than 12 percent of the gross sales, so you can see that this is going backward. Stocking too many service parts can use up capital that could be used for other profitable businesses operated under the same roof.

Oil and spark plugs fall into another category entirely. We know that they’ll sell, and our job is to keep from running out. We need to watch the freight costs for oil, and it’s a price-sensitive item because people buy it regularly enough to know how much it should cost. If you’re not price competitive on oil, it gives people the impression that everything in your store is overpriced.

Accessories And Apparel
Accessories are different than service parts. The more variety we have, and the better they’re displayed, the more we will sell. Hiding them on some shelf in the back won’t work. Knowing what you have and what it will do for the customer is important.

Salesmanship is also important. We can sell a lot by using the catalog. People love to have something that none of their friends have, so it would be difficult to stock everything that they might want. There’s no substitute for instant gratification, so it’s important to have a selection of accessories properly displayed.

Variety sells, so it’s better to have five different items than five of the same thing. At the same time, we don’t want to overlook the effect on the industry when someone important in the motorcycle community buys an accessory, and we need to be ready to respond to the demand that creates.

Having all clothing sizes at a few different price levels is important

Clothing is at least two businesses. We have the traditional biker jacket, and having all the sizes at a few different price levels is important. Having what the customer needs when he needs it is important. The customer should try on the next bigger and the next smaller size because apparel can be expensive, and he will probably have it for a long time. A little advice goes a long way, so we need to explain both quality and function. There’s a difference between a fashion jacket and a riding jacket.

T-shirts are about variety and size. Most of our customers aren’t small, so we need to have the sizes that sell. Customers like to leaf through the T-shirt racks to find their special treasure. Ordering T-shirts is a crystal-ball experience, and it’s easy to make a mistake. I did find out that cheap clothing hurt the shop’s reputation. Don’t be afraid to discount the ones that aren’t selling so you can invest in ones that do. When we got a new shipment of T-shirts, I’d mention it in our newsletter, and I was always amazed at how many people responded. Some clothing is more seasonal. Even in California, we didn’t sell a lot of tank tops in the winter. On the other hand, sweatshirts sell all year round. This is another place where experience pays off.

Although we didn’t concentrate much on selling jewelry, I learned that sometimes a man could get permission to buy something he wanted by buying jewelry for his lady. It also gave women visiting the shop something to look at and talk about so they wouldn’t be in such a rush to leave.

I love the complexity and variety of being in the motorcycle business, but it sometimes wears me out. Each business inside the business needs work and attention to make it profitable. Each day is an opportunity to make each part work a little better.

Motorcycle, Quad, ATV, Scooter Business Basics

by Vance Breese

At its core, the retail sales business isn’t that complicated.
Whenever something seems really complicated, I’ve usually found that it’s because I’m not seeing the truth. Understanding this helps me to be honest with myself and keep it simple. When I want to deceive myself, I make something even more complicated and imagine it as a unique situation.
Business, in spite of what I sometimes tell myself, is not that complicated or unique. Others have made it work, and we can learn from them if we are honest with ourselves.

The retail business consists of selling something for more than we paid for it, paying the overhead, and keeping a percentage for ourselves. To do this, we need to have something that people want to buy, let people know we have it for sale, and make the sale happen.

That means there are three ways we can increase our net income: by increasing sales, increasing margin, or decreasing overhead.

The Sales Factor
We can increase sales with better salespeople, better inventory control, or more effective advertising. Having a great location also helps, and having something that people want to buy is useful.

The conundrum here is to increase sales while controlling our expenses and living inside of our available capital. We know that if we could stock every part from every manufacturer, and we could find a way to tell every potential customer of this bounty, our sales would go up. We also know that we would need a large building and many people to manage the sales. We don’t have the capital to do this, so we have to strike a compromise. We need to determine the correct amount of inventory, the proper building size, and the correct number of employees for our market.

Maximizing Margin
We have control over our gross margin. If we charged too much, our sales would go down. If our margin were less than what it costs us to sell a product, no amount of sales would help our net profits.

To put this in perspective, most small retail businesses net around 4 percent of the gross. This means that if we gave all our customers a 5 percent discount, we would continue to go backward, no matter how much our sales increased.

It also means that if we cut our margins in half, we would have to sell four times as much stuff to make the same profit. Why? Because we would have to invest more in inventory, facilities, and people to make the sales.

Cutting margins also means we would always be competing against the people who discount. Our customers would be drawn to us mainly because of our low prices. There wouldn’t be much customer loyalty, because we wouldn’t have the profits to invest in customer service.

I would rather charge more, have fewer sales, and take care of my loyal customers.

Look Out for Overhead
Lowering our overhead is easy, but how does it impact sales and our ability to maintain our margins? If we move to a too-small, out-of-the-way location, or fire our employees, our sales will go down, and this will have a negative effect on our net profits.

If you could stock every product from every manufacturer, your sales would go up, but would your profits?

We have a product that few people need, so we must invest in teaching our customers how to enjoy their motorcycles, and that costs money. But if they don’t have a positive experience when they interact with us, we won’t be in the motorcycle business for long.

It’s important to see where the money goes. As uninteresting as the books are to most, they contain many important messages about how to get the business to be the correct size for our customer base.

Inventory is always a gamble; we are betting that we will have the part or accessory when the customer is ready to by it.

The Business Fundamentals
These business fundamentals add up to define our job description:

• We must increase our gross sales because that is what drives the rest of the business.
• We must teach our employees to help our customers enjoy their motorcycles. We need to be sure customers have a positive experience every time they interact with our establishment.
• We must process sales in an efficient way, so we don’t have to charge too much for our overhead.
• We must manage our capital outlays so we don’t outgrow our available resources.
• We must make sure that a percentage of the gross sales ends up in our pocket.
• Business is ever changing, so we must continue to learn and change with the times.

We have to work hard each day to make our business the best it can be based on these fundamentals.

In my experience, if something seems too complicated, it is probably a distortion of reality.

If we do all this well, our reward is that we get to participate in the American dream of doing what we love for a living.

Getting Back to Fundamentals

By Vance Breese

If Your Customers Aren’t Having Fun, They Won’t Spend Money

A friend called me the other day and told me how badly his shop was doing. He cried about how business had fallen off. Even though he was a friend, I felt better once the conversation was over.

When I went to visit him a couple of days later, his customers all knew of his troubles. It occurred to me that instead of dropping by because they knew they would feel better after spending time in the motorcycle dealership, they, too, were visiting because they felt an obligation.

It seems fundamental to me that the point of a motorcycle store is to make the customer feel better. My friend had lost sight of this because he was not having fun.

I’m not sure he heard me when I told him it was his responsibility to have fun and his job to make sure that his customers had fun.

Taking the Plunge
The condition of his shop reminded me of my early days in this wonderful industry. I had been around the industry for 40 years, but I had been clever enough never to depend on it for my income. Then I took the plunge.

Is there a motorcycle shop around here? Sometimes you have to face challenges that are beyond your control.

April Fools’ Day of 1987 was the day I made my commitment to the motorcycle industry. As I sat behind my desk in the shop I had just purchased, the dark reality of the situation closed in around me.

The person who had owned the store before me looked like a Harley dealer and was at the shop every morning at 8:30. He usually didn’t go home until after?7 p.m. His wife also worked there full time.

He had come to this small town with a lot more money than I had, and nine years later, he was leaving town with next to nothing. I did not want a rerun.
I knew a lot about motorcycles, but little about running a motorcycle store. It occurred to me that I had made an error.

From the outside, the shop looked like what it was: a dream gone bad. The paint wasn’t good, the place still had an AMF Harley-Davidson sign in front that you couldn’t see from the street because it had a tree in front of it. And since the shop was located on a state highway, city officials told me they couldn’t get rid of the tree or change the regulations that kept people from parking in front of the store.

First Impressions
The previous owner had been lulled into a sense of inaction by the success of his friends in the late ’60s, a good time to have a Harley-Davidson shop. But I had bet everything on this place, so I had to take action to turn the business around.

I rolled a motorcycle out front so that you could tell it was a bike shop. This was a farming community, so we had to wash the dirt off it often, but it worked better than any sign I have ever had.

I hired a painter to paint the building, and he used the money to make a down payment on a motorcycle. I hired a homeless guy to police the grounds. Together, we painted the inside and realized how dark the place was, so I bought used fixtures from several stores in town that were going out of business, and installed them. Each morning when I walked in, I would stop at the front door and imagine what a customer’s first impression would be. Then I would try to imagine how to improve it. You only get one chance to make a first impression.

I started asking my customers what they would like to see in their shop, and they not only gave me good suggestions, but helped me turn their ideas into reality. I quickly discovered that there was a lot of talent in my customer base, and I was careful to mention the names of all my volunteers in our monthly newsletter.?We started having weekly rides at night and a monthly shop ride. I found that customers who had better social skills than me were willing to help. It seemed they all wanted to be in the motorcycle business, but they were too accustomed to money to do it.

Business Expansion Plans
Business grew and the shop expanded. The customers felt a part of it.
I found that growth costs money, so I made friends with one of my customers who was a banker. He loaned me the money to buy a computer to manage the ever-changing inventory and keep track of my customers’ needs. I had a customer who was a bookkeeper, and he helped me understand business on a much higher level and provide reports that the banker needed to justify loans.
I hired a second mechanic, and every winter we taught a course on working on motorcycles. Once people found out all the work that was involved in a service, they were happy to pay our new, higher labor prices. But more than raising the hourly rate, we worked at making sure we were actually charging people for the time we spent on their motorcycles. There are approximately 2,000 working hours in a year, and it turned out that we were only charging for about 600 for each mechanic.? During the summer, I would hire a lot kid to wipe the fingerprints off the motorcycles and make sure that when a customer picked up his bike it always looked better than when he dropped it off.

Even mistakes can help attract customers, if you handle them right
We started taking bikes to car shows in the summer and placing them in malls at Christmas. Yes, the motorcycles got a little scratched up, but it was worth it.? We sponsored a bowling team and a girls’ softball team. We gave a free T-shirt to each graduate of the motorcycle safety course. We had donuts on the weekend and always had free coffee.

Personal Connections
We made it a matter of company policy that each customer was to be greeted as soon as he came in the front door, before turning left or right. And instead of saying, “Can I help you?” our employees asked, “What brings you in today?”
We tried to answer the phone before the third ring so that we made a good first impression. And we made sure that the fun we were having came through on the phone.

We created a bulletin board where we would post pictures of our customers. We offered a free 21-point safety check to identify the things the customer needed to buy to be safe.

If one of our customers was considering buying a used motorcycle, we would perform a thorough inspection and provide him with a detailed quote on what it would cost to bring the motorcycle up to snuff.

We changed the look of the store every few months so that it made a new first impression of our customers. We set aside one area for new products, with information on all kinds of seasonally appropriate accessories. And we set up a bargain table to get rid of our mistakes. It is amazing what people will buy if it is really cheap.

All of these ideas didn’t happen at once. Some, I came up with on my own, and many others I got from customers or from looking at successful stores. All of them contributed to creating a different outcome from the one experienced by the shop owner who preceded me. And together, these ideas meant I was able to make a living out of a store where he’d been losing money.

I’m sure you can think of a lot more ideas. But good ideas aren’t worth much if you don’t make them happen.

Remember, your shop can always be better.