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.
Tags: Counterman Pro, custom, develop the right attitude, inventory, inventory control, motorcycle, motorcycle inventory software, New Business, Point of Sale Software, PowerSports Dealer