Don’t Let Inventory Devour Your Profits
“I have had my ups and downs and all around.” — Paul Revere & the Raiders
It’s certainly no secret to anyone reading this that the motorcycle business is cyclical. There are “up” times of prosperity, followed by “down” times of extreme belt tightening. And those can repeat many times over the lifespan of a successful business.
Right now, most people would agree that our industry is in a down time. In the overall scheme of life, though, the ups and downs average out, as long as you’re savvy enough to weather the slowdowns.
Look around at successful businesses, whether they’re in or out of the powersports field. Some have been around for decades or even a century, weathering not only recessions but wars and depressions, too. If you examine their way of doing business, you’ll likely find one thing in common: they work smart, year in and year out, regardless of the external factors impacting the economy.
And one of the key aspects those successful companies focus on is inventory cost.
If your business is a retail location, inventory is one of those things you just can’t do without. When people walk into your shop with money, they expect to leave with products.
The problem is that your business cannot stock every single item that a potential customer might want. Your inventory could easily run into millions of dollars, and most of us don’t have that kind of coin to tie up in parts, accessories, apparel, or vehicles. That’s impractical for any size dealership, ranging from a small, local shop to a megastore.
You know the problem: if a customer comes in looking for a specific item, he usually wants it right then. If you tell him you’ll have to order it, that’s one more hurdle in the way of making the sale.
Your job is to figure out how to balance the customer’s need for instant gratification with sensible business practices. Here are some ideas.
Stock the necessities. Your suppliers are your friends, but they’re not your best friends. They’re in business, too, and they make their money by selling products to you — even products you can’t sell. If you own a V-twin dealership, don’t let your parts rep talk you into buying a case of two-stroke oil or a box of spark plugs for the Chinese MX bikes kids are riding around town. They are not your market. Six months later, the oil and plugs will be gathering dust in the parts room, and those bikes will have Wal-Mart spark plugs in them.
Remember, no matter how nice a guy your sales rep is, he works on commission. ’Nuff said.
Of course, it’s also important to know who your customers really are, even when that doesn’t match up with your expectations. Maybe you thought you were opening a V-twin shop, but if you find out that a fair number of the people coming in the door are looking for sportbike parts, that should be a message to you.
That’s why it’s a great idea to talk to your customers. When your salespeople are ringing up oil purchases, train them to ask what kind of bike that oil is going into. Then use that information to stock the appropriate filters, spark plugs, and tires for your customers’ most popular makes and models. Just don’t go overboard and load up on ignition points or even tires for a 1966 Marusho Magnum 500. It’s a waste of your inventory money and shelf space. Guys with vintage and oddball machines are used to having to wait a few days to get their parts. It goes with the territory. Make sure they know you’ll be happy to order those parts and get them as quickly as possible.
These days, most suppliers can routinely get you parts and accessories from their stock within two or three business days, or even overnight in an emergency. Use your suppliers’ huge warehouses to your advantage.
Don’t overstock on standard items. If you order weekly from a certain supplier, don’t buy a four-week supply of standard items like oil or filters. Plan your inventory to have a small reserve, but not an excessive one.
Let your inventory get down to a two-week supply, then order a one-week supply every week. You’ll always have an extra week’s supply in reserve, but you’ll only be invoiced a week’s worth at a time, and you’ll only have to store half as much.
When you lay out this inventory plan, make sure you account for seasonal fluctuations. As the first warm days of spring arrive, you can anticipate a run on standard tune-up parts. So build up your supply in advance, then let it shrink down again once the spring rush is over.
There’s no use tying up your money in parts and supplies that someone else is willing to warehouse for you and send just in time. Just-in-time inventory control is one aspect of today’s state-of-the-art supply line management for the big manufacturers. It can work just as well for your shop.
Floorplan costs can eat a dealership alive. Paying interest on vehicles that are gathering dust is depressing and can be debilitating. Keeping those costs as low as possible can require some creative thinking.
Obviously, the ideal situation is to own the inventory and not have to pay any flooring costs, but that’s not practical for many businesses. So you need to take a smart approach to flooring.
The big financial companies that most manufacturers use for their flooring arrangements are neither friendly nor personal. To them, you’re just a faceless account number. On the other hand, your local bank has a vested community interest in your success. It may be willing to extend a line of credit at a much lower rate than the multinational conglomerates, and you can probably negotiate payment terms, too. The bank may request that you send some customer-vehicle financing to its loan officers, but that can often be a win-win situation for you and them anyway.
Here’s another option to investigate. Though they’ll seldom volunteer it, motorcycle manufacturers may be willing to negotiate interest-free consignment deals for some vehicles. It certainly doesn’t hurt to ask. It benefits them more to have shiny examples of their latest machines attracting attention on your showroom floor than it does having them in a crate in a warehouse.
Looking for a way to increase your available inventory of motorcycles without going broke on floorplan costs? Develop a relationship with other dealers.
If your shop is a franchised dealer, your manufacturer rep will want you to stock every color of every variation of every model the company makes, whether you can afford it or not. Remember, your area rep gets bonuses for moving merchandise, period.
But if you’re smart, you can find ways to make sure you can supply your customers’ needs without incurring huge costs in the process. Let’s say a customer wants the latest cruiser in black, and you’ve only got red. Locate another dealer in your area with a black model and make a trade. Be willing to return the favor when he needs it.
Some cooperating dealers even go so far as to specifically order different colors and models with the intention of working off each other’s inventory. It’s smart planning that benefits everyone. For all the customer knows, you have the bike he really wants “in your warehouse.” He doesn’t need to know that your “warehouse” is actually another dealership 50 or 100 miles away.
Cash is king. That’s true anytime, but it’s particularly true when things get tight. If you’re not working on a cash basis, whatever interest you’re paying is added to the cost of your merchandise, whether that’s vehicles, parts, or accessories.
Just as floorplan fees can drive the costs of stocking vehicles through the roof, financing costs can eat up your profits on parts and accessories. If your inventory is financed, either through a credit card or a bank line of credit, those parts are costing you a lot more than the invoice shows. That’s why you don’t want to stock things that don’t sell quickly or be overstocked on certain items.
Instead of making the inventory fit the space, consider doing the opposite. Some stores have been known to stock excess items just to make the racks look full. Here’s a better idea: change the racks to accommodate the number of products you can actually sell.
If you have enough racks for 50 jackets, but you know you’ll really only sell 20, get rid of a rack. Sheesh, they’re portable! Give a couple to Goodwill and take the donation off on your taxes.
The same is true with shelf space. Cut down on the number, or just use narrower shelves. They look fine when they’re filled with stock that would only half fill larger shelves.
Here’s one more great way to save money on inventory. If your suppliers offer a discount for paying within 10 days of invoicing — and many do — then you’re throwing away money if you don’t take advantage of it.
Some companies offer a 2-percent net discount for early pay. That’s more than you could possibly earn on your money in the short time you keep it, and the net effect adds up. If your invoices with that supplier average $1,000 per month, that’s $240 per year in your bank account rather than theirs.
Controlling costs with these tips has the effect of putting money in your pocket instead of someone else’s, which is pretty much the whole idea behind being in business. So while you’re looking to increase your income, don’t overlook the ways in which you can control your costs to make more money.
In the business world, you need to look out for your own interests, because you know no one else will.