Are You Making Sound Inventory Investments?22 Mar, 2010 By: Jack Duncan imageSource
Are You Making Sound Inventory Investments?
In today’s business climate, we cannot afford to tie up cash or tap lines of
credit for parts and supply inventory, yet I often find inventory on hand
exceeding required inventory by $200,000 or more.
In my opinion, there are three critical success factors related to good
• Inventory turns
• Hold for parts service calls
• Inventory obsolescence
All three elements are interrelated and if any one metric is pushed too far,
will result in inefficiency and lost profits. For example, if inventory turns
for parts is pushed too high, meaning inventory level is low, the risk is an
excessive amount of service calls being rescheduled for parts. When inventory
turns are too low, meaning inventory levels are high, we risk obsolescence and
ultimately the need to write off inventory resulting in profits taking a hit.
Let’s first explore the result of having an excessively high hold for parts
rate. For each service call we must return to with parts that were not available
on the first call, we will effectively double our travel expense for time and
mileage. Additionally, we will nearly double our labor cost. We expect a
reschedule rate of between 8 and 10 percent, but as those rates rise above 11
percent we are actually throwing labor at a parts problem. Adding insult to
injury, if we have to emergency order the part we will probably have an
overnight freight bill as well as a charge from our vendor to place an emergency
These poor processes can easily raise the cost of a 10 dollar part to over
100 dollars. Due to return trips we must have additional technicians on staff
to handle the excess service calls. In the end, our customer satisfaction will
suffer as well. With significantly increased cost and lower customer
satisfaction—two characteristics you usually find in poor performing service
departments—it is clear that low inventory levels for parts is false economy.
The success of service goes hand in hand with a successful restocking program.
On the other side of the coin, I have seen excessively high parts inventories
that result in a low hold for parts percentage, but tie up cash that could be
invested in company growth. When comparisons are not regularly made between
parts purchases and parts cost of goods we do not have a measurement of our
purchasing process. You should consider establishing target levels for both
parts and supply inventories and monitoring them on a monthly basis. Targets can
be established by determining the average monthly cost of goods for parts or
There can be several legitimate reasons for purchasing more inventory than
you are using, such as taking on new product lines, new models, adding
technicians, or even purchasing to meet discounts or rebates. These should be
occasional anomalies however and not trends.
Dealer’s management systems (ERP) should be setup to monitor usage trends and
adjust either restocking or purchasing accordingly. Logic should be set to
adjust purchasing or trunk stocks levels, up slightly on items that have an
ascending usage, but a descending trend should drop those same levels
dramatically. The inability to spot a downward trend and adjust accordingly will
surely result in the eventual write off of obsolete inventory.
Another critical factor in achieving inventory success involves the
measurement itself – inventory turns. By definition, turns means turning your
inventory over – inventory coming in and then being used or consumed. Purchasing
once or twice a month as well as erratic restocking is a recipe for disaster.
The most effective dealers will purchase parts and supplies and restock their
technicians twice a week – effectively “turning” their inventory. Restocking
technicians on a daily basis however can cause other problems because it sets
the expectation that we will see the technicians every day to pick up restocks.
Remember, when you can see your technicians they are not doing what you pay them
Inventory counts must not only be accurate, but service call closing and
supply order entry into your ERP system must be real time. If your system does
not know what has been consumed from service calls or supply shipments,
purchasing and restocking will not be accurate.
Often overlooked is the impact of drop shipping from vendors straight to
customers. It eliminates the need for your investment in supplies such as toners
and inks and will dramatically increase supply turns. Additional benefits of
lower freight costs and less handling costs since you never touch the inventory.
Last but not least, you should determine the dollar amounts of obsolete parts
and supplies and remove that inventory from your active stock before calculating
inventory turns. Having a large value of obsolete stock included when you
calculate turns will have a dramatic effect in that it will overstate the value
of your inventory and lower your inventory turns. You may think that you have
plenty of inventory on hand when in fact, much of it is obsolete and you do not
have enough. Having a high value of obsolete inventory also creates and
environment where management pays no attention to the critical metric of
So I ask you, are you making intelligent investment decisions with your
inventory? What is your current hold for parts percentage – is it over 10
percent? What are your turn levels and how often do you purchase and restock?
How much cash do you have tied up in excess inventory? Just how much labor are
you throwing at a parts problem?
Jack Duncan is a consultant with 30 years experience in all aspects of field
service operations, including with Strategy Development and US Fleet Tracking
Corp, among others. His unique skill set allows him to extract vital information
used to improve the management decision process through better information and
training. Duncan will present on field service issues at an ITEX 2010 Power
Hours education class. Contact him at: