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.

I Just Lost A Mechanic. Why?

Facing Wage Reality
By Vance Breese

At the PowerSports Dealer show in Indianapolis, while solving the problems of the world with old friends and veterans of the motorcycle industry, I was reminded once again of an old wound. That reoccurring pain I felt was the difficulty of finding and keeping good service people.

The cry from the veterans is that they can’t compete with the wages that are paid in other industries. Some believe that unless a mechanic is truly passionately dedicated to motorcycles, they move on when the allure from other industries, of better wages begins to creep in. Many of my old friends are so dedicated that they will live in poverty just so they can operate in the most pleasant world of the motorcycle shop. This causes many of them to not understand when the size of a paycheck becomes a factor in the stability and retention of their service personnel.

Is this true? Must we pay our service personnel less than they could make in other industries? How did we get here and how do we change?

Lets run a few numbers first. Bob’s (not his real name) shop rate is $50 per hour and there are 2,000 working hours in a year so his two mechanics should generate $100,000 per year each for a total labor income of $200,000. Bob’s service department should also sell about the same or a little more in parts. The profit on service parts should be a little higher than normal but we will use a gross margin of 35%. So 35% times $200,000 is a gross profit of $70,000 on service parts. This means that each mechanic is generating $135,000 in gross profit or a total service department profit of $270,000. Clearly we would have the money to pay the mechanics a living wage! So where did Bob go wrong?

Bob’s real numbers look like this. Bob’s “A” mechanic generated $47,384 in labor sales and $56,784 in parts sales. The profit on parts was about $21,000. One way to see this is a gross profit of $68,394. His “B” mechanic billed $29,286 and parts of $24,682. The profit on parts was about $8,391. This could be seen as a gross profit of $37,677. The total service department gross profit was $106,071.

Clearly Bob is short $163,929 of gross profit. Where did it go? How can he get some of it back? Can we learn from some of these industries that are stealing our technicians? Are other people in our industry doing better than this and why?

Out of this, Bob has to pay $26,000 rent on the service department portion of the shop. Most of his $3,500 per year liability insurance is because of the service department. This leaves about $77,000 to pay the two mechanics a living wage and of coarse Bob should get something for his trouble. This would support Bob’s contention that he can’t pay a living wage to his mechanics.

I am not living in a dream world and you shouldn’t find something else to do with you time. In our industry, no one I know achieves 100% efficiency. I do know shops that are running over 87%, which in our example noted above, would be $87,000 for each mechanic just for labor and another $87,000 in parts. I have run between 65% and 78% in my own shop, which would mean $65,000 to $78,000 for our example. Bob’s number of 38% efficiency is typical, with the range for most shops being between 30% and 50%. To get your efficiency you divide what you actually get by what is possible. In this case 2,000 hours times the shop rate of $50 per hour is $100,000 per mechanic times two is possible and $77,670 is what we get for an efficiency of 38.8%.

Here are a few things that I believe to be true.
General Motors does a lot of research to find out how much they can charge for labor. In Bob’s town the GM dealer is charging $62 per hour for labor. I can’t guess why Bob should charge less. The income of people who can afford an expensive toy like a motorcycle is generally well above the income of people who can only afford a Chevrolet. Bob tends to make the assumption that everyone is as poor and cheep as he is. $62 per hour would be a 25% increase in his labor rate.

I was in a friends’ shop and asked one of the customers why he paid a higher labor rate than the local Harley-Davidson dealer. I am familiar with the local dealer and I was certain that his service department was at least equal to my friends shop. The customer answered, “because my motorcycle is important to me and I will get a better job here.” When I asked him how he knew, he said, “You get what you pay for!” This customer was in my friends shop because my friend was not afraid to charge a fair price. Before you say that you don’t have any customers like that, think about your own buying habits. A number that hasn’t changed much over the years is that only 16% of buying decisions are made on price alone. This friend did not have all the answers as his efficiency is well below 40% but at least it is 40% of a 25% higher shop rate. This means $24.80 per hour instead of $20 per hour or $19,200 more per year income for the two mechanics.

When I get my Ford worked on at the local dealer I don’t talk to the mechanics. I speak to a service writer. The service writer sells me as much as he can because he works on commission. He is responsible for ordering any parts that might be needed for the job. He makes sure that the parts are pulled for the job, and it is his job to see that the schedule for the mechanic is full. He is responsible for keeping track of the mechanics efficiency and if it falls below 110% someone is at risk of loosing their job.

I think we can learn something from this trip to the Ford dealer!
First, why would we want our mechanics talking to the customers when it could be that he has a far better mechanic skill set than his sales skill set and when the mechanics are not working they cost us our shop rate? In our example, it is $50 per hour.

Second, what does it cost when our mechanic has to take a job off his lift because he doesn’t have a part? He has to put the job away, making sure that all the parts are kept with the job. Generally this takes about 15 minuets. Then when the part comes in he has to put the bike back on his lift and track down all the parts. This generally takes most mechanics about 20 minutes. If this was supposed to be a two-hour job we just lost 29% efficiency or $29.16.

Third, I have seen good, hardworking mechanics not start on the next job because it was only 45 minuets to quitting time. He would rather cleans up and gets ready for the next day. There went $37.50 times two, times 5 days times 50 weeks, or $18,750 for the year. If we paid a shop kid $10 per hour to clean up and pull parts and saved a mechanic from doing the same job at $50 per hour wouldn’t that be good business?

Fourth, the service writer is responsible for keeping the flat rates on track. They do not rely on flat rate books that are written to save the factory money on warrantee. At one service school I was taught to up the flat rate charge 10% for each year old the bike was because of all the damaged parts, missing parts and parts that don’t fit. Who is watching the flat rates in your shop?

Lets see what would happen if we applied some of this to Bob’s Shop. We have added a shop kid to our payroll for $10 per hour or $20,000 per year and we have a service writer that probably needs to make as much as a good mechanic. We are now charging $62 per hour and have achieved 85% efficiency. $62 times 2000 hours equals $124,000 times 85% is $105,400. Two mechanics makes this $210,800. We are selling as many service parts in spite of our 85% efficiency because our service writer is a better salesman and has more time. $200,000 times our 35% margin is $70,000 gross profit. We now have $280,800 Gross profit. We subtract the $20,000 for the shop kid, $24,000 for rent and $3,000 for insurance and we have we have $213,800 to split up between Bob, the service writer, and the two mechanics. This sounds more like a living wage to me.

So, in my opinion, the reason we don’t make as much money and can’t pay as much money as a car dealer is because he is doing a better job.

I think we should catch up.

Living By The Numbers

Recognizing where my numbers need to be
By Vance Breese

I don’t have the same taste as my customers. Clearly I am more committed to all things motorcycle than most of my customers. As an example, for years I carried electric vests because I liked them, but my market was so small and the weather was so nice I was never able to make a profit.

When I would take my annual inventory I would spend too much time on all the things I liked and too much time hurting over the big mistakes I had made. A well run inventory should turn 3 times per year so even at a 33% margin makes it a 100% return on investment. That means if something that cost me $100, then has a birthday in my store, it now just cost me $200. It was very hard for me to admit I had made a mistake and blow it out for less than cost, but if it were to have second birthday in my store, now I have $300 invested in the item. The concept is called lost opportunity. Inventory is a tool to make money, but I found that I been making a personal and emotional investment in items. If I don’t have the money to buy inventory then I have lost the opportunity to make money. The really sad part is I have spent the money to create the opportunity and the mechanism to process the sale.

What I needed was a divorce from my inventory and I didn’t want to continue to make support payments. I started by doing it by the numbers for 80% of the parts. If I sold one in five months I stocked it. I stocked a one months supply, Simple and it helped. If something spent a year in the store I sold it for half of cost. Red tag sales worked well for me because people had to look thru the rest of my inventory to find the deals. It is amazing what people will buy if it is a deal.

Clothing is even more critical because, in my opinion you need to have all the sizes even though most of my customers were extra large. This means if you find out that a particular leather jacket style doesn’t sell you have to discount them sooner.

Service parts don’t necessarily go by the same numbers because if you have to pull a bike off the rack for the lack of a part, you have lost money on the job.

As I got more sophisticated I began to study the history of parts and the margin and soon realized that I would rather sell something with good turns or a good margin than something that is really cool.

I had to be careful about counting discounted items as a sale. It didn’t take me very many mistakes coming back into inventory to raise my pain to the level where I learned something new.

Playing by the numbers lowered my level of stress and helped my bottom line.

About the time things seemed to be going well emotionally, I hired a person to work the counter and they didn’t share my pain and returned my inventory to emotional chaos. I needed to do the purchasing because his bad taste made mine look discriminate.

Here is the rub, I may have been the better salesman than the new counterman, but I learned that I needed to spend more of my time away from the counter in order to keep my head around the inventory.

Trying Something Different

Things to do to make business happen
By Vance Breese

I sold a business to a friend of mine and he still owed me some money. Being a polite person, I didn’t just ask him when he was going to send me the money. I asked him how was business going. He said he was so busy he had everyone working overtime. I asked him what he was doing for future business? Again, he replied that he was so busy; he didn’t have time for that.

Three months later I called him about the money and asked him how business was going and he said that business was terrible and he had to lay some people off. I asked him what he was doing to for future business, and he said he didn’t have the money for marketing or advertising. I eventually received my money.

I love it when there is an expensive business lesson for which I don’t have to pay to learn it. When I owned an engineering job shop, I always tried to spend 30% of my time working on new business. When my friend bought the business he stopped marketing and about six months latter he paid the price. When business fell off he tried to keep everyone on payroll and ran out of money. He felt that without money he couldn’t find more business.

My next business was a small Harley-Davidson dealership in a small agricultural town. Looking back, I went into the business a little cash short and started growing so fast I ran out of money. I had to find ways to promote the business that didn’t cost a lot of money. These are some of the things that worked for me.

We would have a Wednesday night ride to no where in particular. It was billed as a mystery ride. It was never particularly well attended, but everyone talked about it.

We started a newsletter and tried to become the source of information for what was going on in the local motorcycle community. I bought one of my customers a word processing program and he would write about the local happenings and our mystery ride and who went on it. I have found that people love to read their names. We would let the customers know when a new shipment of T-shirts came in and who was doing what in racing out of the shop. We advertised service specials and sale items. There was not a lot of room for literary content. We also talked about the last Sunday of the month shop ride build excitement for the next one.

We started a once a month shop ride. We would try to ride around 150 miles and stop for brunch. Customers really liked it when people pointed at all the Harley-Davidson riders that would show up in some little town. Restaurants loved the business and would treat us special. Participating customers liked to see their name in the newsletter and stories about someone they knew and an experience that they had shared. The ride was typically around 250 miles total and if we had 20 riders that was two 2,500 mile services. I would often have 40 or 50 motorcycles show up. It gave the riders a chance to see what accessories their friends had and check out the latest high performance modification and feel motivated to escalate the horsepower wars. We felt compelled to write about these contests in the newsletter.

An interesting thing would happen at the start of these rides. Men would buy their ladies some accessory and their riding buddies would try to match the gift for their own ladies. At first I wouldn’t believe that people were really so completive, I learned encourage this. The really big items would show up in the newsletter.

We started three annual charity rides. An Muscular Dystrophy Association run, an Elisa Anne Rice Burn camp ride and a Toy Run.

I realize that the MDA run is not available to everyone, but that doesn’t mean you can’t support it and join in promoting it. It is a nice thing to do and if you work at it you can get a lot of free advertising for the ride and your shop.

The customer that wrote the newsletter was a retired fireman. The burn camp was his idea. Young people who get horribly burned often feel very alone with their disfigurement. The burn camp allows them to get together with other people that have had to overcome many of the same challenges. It is a great charity and gave people a lot to talk about. The local news media loved the idea of big-hearted bikers helping little kids. It was particularly well attended.

We also started a toy run. There was already a local toy run in a nearby town. Small town people are proud of their town and we began both supporting and competing with the other toy run. Some of the riders would dress up like Santa Claus and it would always make the front page of the local newspaper and be on the three local TV stations.

We started an annual birthday ride that wasn’t on our birthday because I bought the shop on April fools day. We would try to fit the birthday ride in between the other local events. We would give anyone who showed up on a bike a terrific BBQ lunch and have lots of raffles where people would win things that I had trouble selling. We would get better than 25% of my customer base show up and it typically cost less than three dollars a head. We would take over a local park and everyone would have a great time and we would be the talk of the town for more than a month.

We didn’t want to compete with the other well known local events as we supported these and made a point of promoting and participating in them. We helped facilitate the Victor McLaughlin stunt team coming to town. They would be in the middle of the local Elks Rodeo Parade and everyone in town would be talking about them. They all ride Harleys. We went out of our way to promote all of the Rodeo Queen contestants. The Festival of Lights was part of a Christmas celebration where everything with lights would run up the main street. We would get as many customers to run up the middle of town with their shiny, noisy bikes and we would help a couple of riders put patriotic flags on their bikes. People would cheer as they went by and the participants loved the attention.

We started a motorcycle mechanics class and taught the customers how to do a 2,500-mile service. Our mechanics were concerned that we would lose this profitable business, but just the opposite happened. When people found out how much work went into what they termed an “oil change” they were happy to pay to have it done. We started a separate class for women and would pass around engine parts so that they could learn something about engines. Holding a part in their hands was a lot more interesting than hearing about it or reading about it.

We started an annual swap meet so people could sell their junk and it gave us a great opportunity to sell our junk. People seemed to love to have a reason to hang out with their friends at the shop.

We always had free coffee and on Saturday and on Sunday we would add doughnuts to the fare.

We sponsored a Bowling team and a Girls softball team. We gave a t-shirt to the people who completed the motorcycle safety course. From time to time we would have a Harley-Davidson only motorcycle safety coarse. The customers would pay for it and all we had to do was make sure that enough people showed up.

We helped with the local police D.A.R.E. program.

We sponsored an Esso speedway bike in local speedway races. We sponsored a Harley Sportster in the XL road race class. Many of the customers would ask about how it was going. The sponsorship itself was very inexpensive, but the end result went a long way.

I would bring my Bonneville racing bike to car shows and sell t-shirts. Always there would be people who “didn’t know that there was a Harley shop in town.”

I would like to say a brief word about Yellow page ads. The advertisement should answer the questions, where are you (with a map)? When are you open? What do you sell? People that are passing through need to know these things. Many ads have too much copy and it is not money well spent.

In short we kept the name of the shop out in front of the town and gave our customers something to do with their bikes and a way to see their name and what they were doing in the media. All this was done with less than 1.5% of our gross income.

In short, I have always found a better return on marketing dollars than advertising dollars.

Surviving Or Thriving

How You Approach Your Business Can Make a Big Difference
By Vance Breese

We find ourselves in an interesting situation. Some say that Harley-Davidson sales are off 20 percent or more. Yet a friend of min who is a Harley-Davidson dealer in one the of the states hit hardest by the recession has said his sales are up 5 percent over last year.

One of the Japanese manufacturers, anticipating the downturn, cut shipments early last year. their sales are way off. The other Japanese companies are down statistically, but doing a good business, much better than the manufacturer who cut back. The dealers for that brand seem to have slipped a little.

Credit is tightening, and that making it hard to finance new units. But previous owned units continue to sell well.

The economy seems to be the topic of conversation almost everywhere. Just this morning, my barber told me that people are getting haircuts less often. I don’t feel that sharing this money-saving tip is good for his business.

In my little corner of the market, some of the shops that have Counterman are paying a little slowly, but many are expanding. This would seem to be counterintuitive.

Why do some shops struggle while others are struggling to keep up with increased sales? I called some of my friends in the business to see what I could find out.

First, here’s what I learned from the dealers who are doing well:
I found that they are universally focused on taking care of the customer. It is a mission in those stores to make sure the customer leaves happier than when he came in.
They work at teaching their customers how to enjoy their motorcycles, and they encourage customers to join store activities. I talked to some of their customers, and they all spoke excitedly about their involvement in the motorcycling community.

Successful dealers remember that all sales began with a question, so they ask their customers what they like, rather than assuming that they customer enjoys motorcycling in the same way they do.

They work at keeping morale up in the shop. People just don’t want to come in and hang out where everybody is unhappy.

They have not cut back on advertising and promotions in anticipation of poor sales.

They all seem to understand that the first job is to get the customer to hang around; spending money will follow. They work at finding reasons for people to stop by and hang out.

The successful ones are all careful about their inventory investment, taking advantage of the excellent service they get from warehouse distributors. They order more often and have smaller orders. They don’t let shipments of parts sit on the floor. These dealers get them out on the sales floor the same day and call the special-order customers immediately. They special-order a lot of stuff. They discount the things that aren’t moving, and create excitement with the special pricing.

They are careful to plan their service work and special-order many of the parts so they don’t have a lot of inventory dollars tied up in service parts they can get in a couple of days.

Successful dealers remember to spend time with the customer to show him that the work done was money well spent. They are not afraid to ask the customer about worn tires or brakes. They are not afraid to charge enough to do a proper job. They send out service reminders, and have service specials and packages.

They are organizing more rides, which are well-attended. They are staying involved in the community. They are displaying their motorcycles in more places than their showrooms. They involve radio personalities in their activities. They work at public relations. They work with other businesses to piggyback on each other’s promotions.

Now let me tell you about one of the dealers I talked to who is not doing well (I had planned to talk to more shop owners who are in trouble, but I found it too depressing).

His business is off more than 30 percent compared to last year. And he gave me reasons for each of the steps he is taking to manage the economic down-turn. I will share those reasons.

He canceled his limited advertising. He isn’t getting any new customers anyway, and his old customers already know him.
He stopped pushing motorcycles outside each morning. They just get dirty, and since he fired his lot kid, he has to do it himself.
He turned off the lights in his sign. He wants to save all the money he can, and his customers already know where he is.

Is it dark in there? Turning off lights in your shop turns off your customers, too.

He also turned off half the lights in the place. He says that will cut his power bill.
He turned down his thermostat to save on his heating bill.
He stopped making coffee. He said customers just came in to hang around and drink his coffee without spending any money. He cut out the Saturday doughnuts for the same reason.
He canceled his janitorial service.
His employees have less to do, so they can clean the bathroom themselves.
With few customers, the bathroom doesn’t dirty as fast anyway. The showroom floor is also staying cleaner now that he’s not rolling the motorcycles in and out each day.
He stopped sweeping his lot. The wind comes up once a month and moves his dirt to the other businesses anyway.
He is no longer open on Sunday and Monday, and he closes at 3 p.m. on Saturday. Why should he work so many hours if he’s not making any money anyway?
When I was there, he wouldn’t order parts for a bike that was down because it didn’t add up to a big enough order to qualify for free freight. He told me the customer could wait because he is probably short of cash, too.

I looked at his leather jackets, and he is missing a lot of the sizes. His T-shirt supply is down to mediums and smalls. He told me he’s cutting back on his inventory dollars, and the fast-moving stuff is the easiest to cut back on.

I was not able to ask his customers about the down-turn in the economy because during the three hours I was there, I could not find a customer to talk to.

He spends his days lamenting the economy and the old days.

It is not his fault that he can’t pay his bills; it’s the economy.

I learned a lot. I have known this guy for a long time, and he is not stupid. He just seems to be in a negative spiral that he is not able to escape.

Don’t start down that path. Change is the only constant in business. Embrace the change.