Inventory ControlWritten By: Ron Slee
Article Date: 11-01-2006
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
Who is in charge?
It has taken a while but I'm finally ready to discuss the changes that are necessary in dealership inventory control systems and procedures. Inventory management deals with two basic questions; how much to order and when to order. In 1968, we ran batch computer systems and placed orders once a week (with some vendors every two weeks) We'd put the stock order in the mail and wait. It was not unusual to wait six to eight weeks for the initial shipment.
Today, we place stock orders with many vendors daily, send the order electronically and get the initial shipment from some vendors in three days.
On the "how much to order" question, a similar dilemma has presented itself. The cost to place an order has changed dramatically.
With the advances in computer technology, the cost to place an order has been reduced dramatically - so much so that it doesn't cost anything to process a stock order. The order cost is approaching zero. That throws the benefit of the Economic Order Quantity (EOQ) theory on it's ear.
So what have you got? You have order points that are set too high and quantities higher than you need.
In other words, you are overstocked on parts. This is reflected in the turnover, whether you consider the true turnover (excluding backorders) or the gross turnover (including backorders). Today, high performance dealers run at a gross turnover of 6 or more. From a conservative point of view, you should be operating at a turnover rate of 12 or more. In other words, you have twice as much inventory as you should. Yet many of you continue to do what you have always done and that will continue to deliver the same results.
So who is in charge? The computer uses rules established by people, but who is setting the rules in your company? Have you changed your rules to reflect the new reality?
If you're achieving a gross turnover of 6 and have a stock order ratio of 60 percent (60 percent of the orders you place with a vendor are on stock orders), your true turnover is 3.6 (60 percent times 6). With a turnover of 3.6, you have 101 days of sales (365 divided by 3.6) in inventory.
If your vendor provides stock orders in 10 days, why carry 101 days of sales on the shelf? Change the order points to keep 30 days on hand.
I know your systems have a hard time with this but you can set up rules so this is exactly what happens. Contact your systems supplier and explain to them that their system is creating an overstock situation and they need to fix it.
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