Interest Rates Are Your Next Big ChallengeBy Ron Slee
Article Date: 07-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Get serious about cleaning out nonproductive parts inventory now, because time is not on your side.
Have you heard the new acronym: PIIGS? It stands for Portugal, Ireland, Italy, Greece and Spain, and they’ve received worldwide attention because their debt is considerably above their respective Gross Domestic Products (GDP).
It’s a serious problem. Portugal’s external debt is 235 percent of its GDP. Ireland’s is 1,312 percent; Italy, 147 percent; Greece, 170 percent; and Spain, 186 percent. By the way, the external debt of the United States is 96.5 percent of GDP. (Source: World Bank and the CIA World Factbook)
You might be asking how this applies to you. If you have debt, I believe it does. Currently, we have interest rates for banks that are near zero. Banks now have the greatest ability to make money and clean up their balance sheets. We are also seeing a larger number of banks going bankrupt than ever before. At the same time, it is extremely difficult for businesses to get necessary financing at interest rates that are manageable. The quality of the assets that we can collateralize has become a subject of scrutiny with banks and other financial institutions. In other words, credit is still tight.
Well guess what: Loans are going to become harder to get and more expensive. Interest rates will be going up and perhaps up a lot. I believe that forewarned is forearmed. We have a lot to do to clean up our inventories, and we don’t have much time.
Typically you can borrow on 50 percent of the value of your parts inventory. Some manufacturers don’t allow you to borrow against parts inventory at all. The collateral is established at a value of purchase price or market value, whichever is lower. Parts that have not had sales in a year or two typically have no value. So where are you now?
The parts inventory profile reveals 40 percent or more of the items in inventory have not met the dealer stocking criteria. That means that they have sold twice a year or less. Now I understand the demand distribution and everything that it represents, but I believe that this is seriously excessive and should be corrected. The problem, however, is that a lot of these parts are not returnable. Problem No. 2: This “nonproductive” inventory keeps on growing. Recognizing problems is one thing – let’s fix these problems before it is too late.
Reviewing your parts return policy is the first step. Is it appropriate in today’s environment? If not, make changes. Do you take back nonreturnable parts? Why? Do you treat your service departments the same as any other customer? If not, how do you get your mechanics to modify their behavior? After all, the largest percentage of the purchased and returned parts comes from mechanics. How diligent are you on correcting things when you are notified that a part is going to become nonreturnable or replaced? Do you continue to order these parts? Do you make sure that the old and new part numbers are kept in the same location in the warehouse? Do you return parts within the supplier’s time limit that are nonstock? Are nonstock parts nonreturnable? Perhaps they should be. You need to stop this category of inventory from growing.
Once you have the nonproductive inventory at a standstill (no longer growing), you can start to dispose of it. Ask for special returns or use your supplier’s dealer surplus parts network, if one exists. Or sometimes your business system software supplier has a network for surplus disposal. Remember, inventory parts that do not sell are in all likelihood selling somewhere else for your supplier. There are also your customers who own machines on which these parts will work. Contact them and see if they are interested in a deal. But one thing I hope is clear: You haveto get rid of this nonproductive inventory.
1.)Establish an obsolescence reserve, one that you use for scrapping parts instead of holding for profits at the end of the year. This reserve is usually best set to be equal to 2 percent of the parts cost of sales on a monthly basis.
2.)Add a small markup on all nonreturnable parts. Perhaps 1 or 2 percent above your normal selling price; there is a cost associated with these parts that is higher than your regular parts.
3.)Be careful with your equipment inventories too.
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