INVENTORY MANAGEMENT
To a large degree your success will be determined by how well you can manage your inventory. There is more to inventory control than just simply buying new products. You have to know what to buy when to buy it and how much to buy. In order to do this you have to keep track of your inventory either through a good manual method or by computer and apply the knowledge gained from that system to your purchasing process.
Inventory Control
Many small-business owners fail to realize the importance of inventory control. An adequate stock-control system will tell you what merchandise is in the store what is on order when it will arrive and what has been sold. With such a system you can plan purchases intelligently and quickly recognize fast-sellers that need reordering and slow-moving items that should be marked down or given special promotion.
If you can’t afford big square footage combine your inventory storage with your display floor. Make liberal use of any advertising enhancements provided by your supplier or manufacturer.
Inventory control is a means of cutting costs so that you can maintain a consistent gross margin that will yield the profit you want to realize. Failure to control your inventory properly will result in wasteful expenses that cut into your net profit.
These expenses include interest required to maintain your inventory personal property taxes on the inventory insurance markdowns and shortages. A merchandise consultant Entrepreneur talked to indicated that it costs the average retailer anywhere from 20 to 30 percent of his original investment in inventory just to maintain it. So if you turn your inventory four times during your fiscal year it will cost you from 5 to 7.5 percent of your sales just to maintain that inventory (more on inventory turnover below).
Retailers usually devise their own inventory systems or adapt those recommended by accountants. Each store’s system differs according to the amount of inventory carried on store shelves the amount of backup stock required the diversity of merchandise and the number of routinely reordered items versus new items or one-time purchases.
Some retailers find that tracking inventory via a manual tag system is effective. A manual tag system can be updated daily weekly or even monthly and is based on the tags removed at the point of purchase. The tags are cross-checked against physical inventory to determine what has been sold and in what quantities.
One retailer we talked to used a manual method that is both very simple and accurate. Using the tag system he maintained his sales records and from those records he produced a monthly chart representing sales according to product line brand name and style. Along the top of the chart he listed the various product lines and down the left margin were listed the various brand names and their different styles.
For instance suppose at the top you placed the names of various product lines. At the intersecting spaces down the column you would mark how many of each brand name were sold in what style and color and any other distinguishing features whether they were on sale or discounted and any other relevant information.
Dollar-control systems reveal the cost and gross profit margin on individual inventory items. Some stores use computers to record inventory by type volume cost and profit. Such systems available from suppliers banks and accountants show the amount of money invested in each merchandise category.
A computer can also log the time of orders and sales providing help in determining when to reorder. But a basic method of dollar control begins at the cash register with sales receipts listing the product quantity sold and price. Sales receipts are matched with delivery receipts to determine the gross profit margin.
Unit-control systems range from simple eyeballing of shelves to using sophisticated bin tickets tiny cards kept with each type of product that list a stock number description maximum and minimum quantities stocked cost (in code) selling price and any other descriptive elements desired. Bin tickets correspond to office file cards that list a stock number selling price cost number of items to a case supply source and alternative source order dates quantities and delivery time. Physical inventory checks are made daily weekly or as often as practical once a year at the minimum.
Sometimes a store owner will assign each employee responsibility for keeping track of a certain group of items or if the store is large enough will employ stock personnel to clean and count the stock.
Tire Distribution
As a general rule you’ll have at least one major tire wholesaler close to you. In some major-metro market areas tire distributors can move inventory to retailers on an hour’s notice. Many do nothing but run warehouse trucks delivering a minimum of four tires on any single stop. In near-metro areas delivery of tires can take place within a day. In rural areas the lead time may be up to a week.
Thus if you’re locating outside major urban centers you may have to start with a larger opening inventory than someone in a city of more than say 35 000 where several dealers may be located. At the same time you may not feel the urban dealer’s need to develop economies of scale when buying. Inventory size depends heavily on the quality and quantity of distribution in a given area. For the very reason that a metro-area dealer has limited square footage he must rely on distributors to make more or less piecemeal deliveries each of which carries a new invoice. To meet this dilemma the National Tire Dealers and Retreaters Association (NTDRA) suggests that independent dealers become a part of a buying group whose volume purchasing power could streamline deals with the distributor and lower the per-unit cost to individual dealers thus increasing their margins and making them competitive. Such a group would have much the same effect as a franchise whose main office can buy in volume and redistribute to franchisees at a competitive price.
Distributors have various delivery schedules. Typically however they bill once a month. Industry custom is 2/10 30 60 90 which means that you get a 2 percent discount if you pay within 10 days. Otherwise depending on your credit rating with the supplier you have 30 60 or 90 days to pay the balance due. This depends on the volume you buy from a distributor. If you are buying 10 000 to 12 000 tires a month the supplier will be much more lenient than if you are buying 500 tires a month.
Most dealers agree that tire suppliers are fussy about credit. Many warehouses have a no-rectum situation, if you order four tires they’re yours forever. Or if the distributor takes them back he will charge 15 percent to take them. So it makes sense to order only presold tires particularly in the start-up phase when cash is so important. In this regard it also makes sense to get a nonrefundable deposit from a customer on any orders that may not be completed.
Inventory Turnover
Turnover represents the number of times per year your inventory investment revolves. Inventory Turnover equals Net Sales (or Cost of Goods) Inventory Value on Order and On Hand. This ratio measures the efficiency of funds invested in materials and inventory and how often inventory is liquidated.
If inventory turnover is low in relation to the average for the industry (or in comparison with the average ratio for your business) there is a higher risk that some obsolete or otherwise unsalable inventories continue to be carried. On the other hand if the turnover is unusually high compared to the average figure your business may be losing sales because of lack of adequate stock on hand.
Inventory turnover is one of the most important aspects of this business. Unfortunately it is also one of the most variable. The NTDRA told Entrepreneur that according to its studies dealers with gross sales of less than $750 000 have 6.7 inventory turns per year. Dealers grossing more have fewer turns. Reasons for this vary but you can readily appreciate that smaller dealers keep a very tight rein on their inventories. However a small dealer who does a very high volume of business might turn his inventory over two times a month.
To determine how much of each stock item it is necessary to either have in the store or on order retailers evaluate projected turnover rates for their merchandise against actual movement (sales) of that merchandise. For example say the turnover rate on steel-belted radials based on your inventory control system is 6.7/year. Divide 52 (weeks in a year) by 6.7 and you comes up with 7.7 weeks the amount of time it should take for your inventory of steel-belted radials to turn over (sell).
Now if your sales of steel-belted radials averaged $3 000 per week during one complete turnover (7.7 weeks) then you know that you need to eventually buy about $23 100 worth of steel-belted radials (at retail value) when you next order from your supplier(s). (We recognize that this is an elementary illustration of how inventory planning is done. You will learn best how to plan your inventory from experience and through the use of consultants and other experts.)
Tire stores work on volume and there is no way around that. We will cover methods of attracting customers in large numbers even to a tiny 3 or 4-bay shop later in this report. Additionally be aware that though margins on tires as such are comparatively small tire shops offering a host of automotive services can increase their profit margins substantially.
BUYING RESOURCES
Depending on your inventory selection you may need just a few suppliers or dozens of them. Sometimes the suppliers will find you contacting you through their sales reps at your store. More often particularly when you’re starting out you’ll need to locate supplier sat tradeshows wholesale showrooms and conventions in buyers’ directories through industry contacts in the Business-to-Business Yellow Pages through trade journals etc.
As a tire retailer you’re only as good as your goods. Reliable suppliers will steer you toward hot-selling items increasing your sales. However it’s your money and you should dilute any such counsel with strong doses of common sense and an awareness of what your customers want. Suppliers can be divided into two general categories:
- Manufacturers: Most retailers buy either through company salespeople or independent representatives who handle the wares of several different companies. Prices are usually lowest from these sources unless the retailer’s location makes the shipment of freight costly.
- Distributors: Also known as wholesalers or jobbers these operators use quantity discounts to buy from two or more manufacturers and then warehouse the goods for sale to retailers. Although their prices are higher than a manufacturer’s they can supply retailers with small orders from a variety of manufacturers. (Some manufacturers refuse to break case lots to fill small orders.) Also the lower freight bill and quick delivery time from a nearby distributor will often compensate for the higher per- item cost.
DEALING WITH SUPPLIERS
Reliable suppliers are an asset to your business. They can bail you out when your customers make difficult demands on you but they will do so only as long as your business is profitable to them. Suppliers like you are in business for the same reason: to make money. If you go to the mat with them on every bill if you ask them to shave prices on everything they sell you if you fail to pay their bills promptly after their goods or services have been delivered don’t be surprised when they quit calling and leave you dangling.
Business is competitive and you must look for the best deal you can get on a consistent basis from your suppliers. But no worthwhile business arrangement can I continue for long unless something of value is rendered and received by all those involved.
Don’t expect at first to receive the same kind of attention a long-standing customer would get, however you can develop excellent working relationships that will be profitable over the years for you and your suppliers. Be open courteous and firm with your suppliers and they will respond in kind. Tell them what you need and when you need it. Have a specific understanding about the total cost and expect delivery on schedule. In other words expect from your suppliers what your customers demand from you.
Obtaining Credit
Arranging initial credit for supplies and services is fairly easy. While most service organizations bill you automatically without requiring credit references equipment suppliers and merchandise wholesalers are more cautious. Since you are just getting started you will not be able to supply trade references and your bank probably will not give you a credit rating if your account has just opened.
Honesty and a personal financial statement are the answer. If your supplier is small the manner in which you present yourself will be an important factor in obtaining initial credit. If you are dealing with a large supplier and the credit manager is protecting his position you may find the going cold. Again a personal visit will accelerate your acceptance.
Present your financial statement and a description of your prospects for success in your new business. Follow this by saying “I have always honored my obligations and any time you care to discuss anything with me you may call me at my office or home.”
Don’t even think of inflating your financial statements to cover a lack of references. This practice is illegal a felony. It’s also easily detected by most sophisticated credit managers today.
Some suppliers will say “All right we will put you on a COD basis for a couple of months and then issue you a line of credit.” Go along with this. They know that if you are underfinanced you will have problems with COD soon. If your position is solid you will have valid credit references after a few months which you can present to new suppliers. It will be easy for you to obtain credit from then onif you pay your bills on time.
It makes a lot of sense to review the terms of purchase and to never pass up discounts. Those discounts in the long run can add up to a substantial amount of money. The most common discount is given for prompt payment. For example “2%10 days, net 30” is often printed on invoices. This means that the payer may deduct 2 percent from the total invoice if payment is made within 10 days and that the entire amount (with or without the discount) must be paid within 30 days. If you can pay immediately with cash ask your supplier if an additional cash discount is available.
BUYING TERMS AND DISCOUNTS
Most beginning tire dealers have commercial bank accounts and pay all initial orders at the time of delivery. As a novice you can use these early paid-upfront orders as credit references until credit agencies accumulate enough data on your store to give the “thumbs up” sign to suppliers.
Occasionally suppliers grant customer’s discounts for buying in quantity usually as a freight allowance for a specific amount of merchandise purchased. Some suppliers pay an increasing percentage of the freight bill as the amount of the retailer’s purchase increases, others simply cover the entire freight cost for purchases over a minimum amount.
If you order merchandise from suppliers on the opposite coast or from across many states then freight can equal as much as 10 percent of your merchandise cost. Tire store owners usually welcome any freight allowance because they have been increasingly forced to pass freight costs on to the consumer in the form of raised prices. This of course makes the retailer less competitive. The alternative is to bury the freight increases in the “cost of goods” (aka “cost of sales”) and thus take a lower gross profit. Either way it’s not a pretty picture.
Ask what a manufacturer’s or supplier’s freight policy is before ordering and make sure that the order is large enough to warrant the delivery charges. If the manufacturer does not pay freight on back orders you might consider canceling a back order and adding it to the next regular shipment.
The golden rule in pricing your merchandise right is buying right. Always consider what the final shelf cost of any item will be. Carefully consider all costs discounts and allowances before deciding to buy an item, when you can specify on all orders how the goods are to be shipped so that they will be sent in the least expensive way (and hopefully the fastest too).
Minimums and Exclusives
Suppliers often establish a minimum order for merchandise a retailer wishes to purchase. The usual minimum order is about $100 although the minimum for first orders may be $250 or more to cover the cost of setting up the new store owner’s account. Some suppliers also demand a minimum number of items per order which prohibits the retailer from purchasing only one or a few of a given item.
While it is virtually impossible to secure exclusive rights to a manufacturer’s goods you can ask that a sales representative not sell identical merchandise to another store in the immediate vicinity. Some tire retailers say that they demand these local exclusives from their sales reps. The flip side to this position is that the supplier assuming he agrees to give you the exclusive might expect you to buy substantial amounts of his product to make up for lost sales to other stores in the territory.
Ordering and Receiving Goods
It’s important for you to learn each of your suppliers’ order-filling priorities. Some suppliers fill orders on a first-in first-out basis, others give first attention to the larger orders while customers with smaller orders wait. Consequently most retailers specify a cancellation date on their orders. Goods shipped after this date is returned to the supplier. By including such a cutoff date you increase the probability that orders will receive prompt attention and that goods will arrive in time for the selling season.
Give careful attention to arriving shipments checking to make sure that the correct amount of merchandise is delivered and that the quality of the goods matches the samples shown.