With the speed at which we innovate new and more efficient vehicles and engines, obsolescence is an ongoing issue in the automotive industry - tying up capital and creating losses.
To optimize your inventory, it is important to identify low turning stock using inventory turnover which denotes how many times your inventory is sold and replaced in a specified period of time.
While the optimal turnover varies from industry to industry, when looking at the turnover, the higher the ratio the better. This means that your parts are moving through your dealership quickly and are not spending unnecessary amounts of time on your shelves, potentially losing value and increasing obsolescence.
Lower inventory turnover rates, on the other hand, indicate slow moving parts, overstocking and increased holding costs.
To determine your inventory turnover, use the following equation:
Turnover = COGS / Average Inventory
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
To determine how this number translates into time, you will want to use the following equation:
Inventory Turnover Period = 365 / Turnover
Your COGS on your annual income statement is $200,000 while the beginning and ending inventory are $10,000 and $30,000 respectively.
Therefore, using this example, a turnover rate of 10 becomes 36.5 days.
While understanding your inventory turnover for all of your inventory is important, it is just as important to understand turnover as it applies to your individual SKUs, which will help you make better business decisions and optimize inventory levels.
To pinpoint parts with high turnover, you want to use the above calculations on a part by part basis using your inventory management system.
Once you have pinpointed parts with low inventory turns, you want to determine why they aren’t selling - are they seasonal, discontinued, obsolete?
You will also want to consider unloading these parts using alternative methods, to help you retain the maximum amount of value possible. You may want to consider a promotion to offload the parts quicker, or even whether there is another shop who uses these parts regularly and would be willing to buy them from you.
Doing so will ensure a lower overall inventory turnover ratio, reducing holding costs, increasing net income and profitability and ensure you maintain an optimized stock of each part allowing you to better meet customer demands.
For help determining your inventory ratio, unloading slow moving parts and ensuring your inventory is well managed, contact Pro Count West today.