If you’re reading this, there’s a good chance you view your inventory as a love-hate relationship. You love the fact that the merchandise you carry makes you money, but hate the fact it’s something you constantly have to monitor. Let’s face it, you have other things in your business to focus on, and quite frankly would rather spend time on. So it tends to be one of the first things to take a backseat.
Well, you’re not alone!
The fact is, the majority of dealers neglect their inventory – and it’s costing them dearly.
Did you know that if you happen to misplace $100 worth of parts because you don’t have organized bins, or accidentally damage $100 worth of parts because they got in the way, it could take as much as $1,000-$1,200 worth of sales to make up the loss, since the dollars you make come in net profit?
Have you also considered how much extra you’re paying in insurance and inventory taxes at the end of the year because you aren’t keeping your stocking quantities lean? Most importantly, have you really tried to comprehend how much money you currently have tied up in over-stocked items and obsolete parts that you may never get back?
It’s time to take control once and for all and this guide will help get you started with the toughest part, the actual inventory count.
With help from Jon Schreibfeder, president of Effective Inventory Management, Inc., and Jeff Sheets, owner of OPE Consulting Services, we’ll show you how to accurately determine what’s on your shelves by offering tips on how to prepare your dealership and your employees for your count and recommended tools and methods for counting.
Let’s get started!
Preparing for a Physical Count
Before you can begin to control your inventory, you must know exactly what is on your shelves. As dreadful and time consuming as it sounds, it’s not as hard as you think – if you first implement a process that will enable you to easily perform the task.
Many dealers think purchasing dealership software solves their problems because all their quantities are contained in the system. But where are you getting these quantities from in the first place?
You can have the best dealership system in the world, but it won’t do you any good if the quantities you put in the computer aren’t right. And even worse, if you do happen to have the wrong quantities in your software system, it will make your employees less likely to trust your system.
This, in turn, can affect your customer service. If you tell a customer you have something in stock, but then go back to grab it and realize you’re out, you’ve just hurt your credibility. Not only that, you just made a customer wait at your counter while your employee wasted minutes of everyone’s time looking for something that isn’t there.
Therefore, it’s extremely important that you and all of your employees understand the value of a physical inventory count.
The end of the year is a great time to plan a full physical inventory count. It’s your slowest time of year, plus it puts you in great shape heading into the next year.
TIP: Start planning your annual physical inventory process no later than 12 weeks before the count date. You should also avoid planning around holidays when you know employees will be occupied.
Three methods for conducting an inventory count:
1. Bar-Code Readers or Mobile Device: This is the most accurate method, however the most expensive given the fact that your items/bins need to be labeled and you need a software that can register the counts. The benefit, however, is that your inventory levels are more accurate because human error is greatly reduced.
2. Count Cards: These are generally index cards that contain the individual product so you can go through and count each bin in sequence. This process is relatively quick because the card that records the count is already in the bin. Schreibfeder recommends, however, that each counter also has a supply of blank cards to accurately record discovered or misplaced merchandise. The blank cards should also be printed on brightly colored card stock so parts that need to be moved to a proper location (after your count is completed) can be easily located after your physical count is finished.
3. Count Sheets: These are usually 8 ½” x 11” pieces of paper that list roughly 25 inventory items. Schreibfeder recommends that if you use count sheets, make sure the counters also take into account misplaced material and products not listed, rather than just focusing on only the items listed on their sheets.
Who should count the inventory?
You have to come up with a strategic plan of who is counting your inventory. If you use the bar code/mobile device method, that can be handled by one person. If you use cards or sheets, Schreibfeder recommends you put together two-person counting teams.
The teams should consist of an experienced employee, paired with someone with less knowledge. Let the experienced person count and the inexperienced person record. This method will also help your inexperienced employee become more familiar with your merchandise.
Preparing the stocking area
Cleaning your stocking area is an extremely important task that gives you the perfect opportunity to make sure that every item is in its proper bin or location and not floating around somewhere else. If you start out with all of your items in the proper place, it’s going to make your counts go much, much faster – and your quantities more accurate. This can also help you get in the habit of putting your parts in their correct place on a regular basis. In order to help develop this habit, Schreibfeder suggests you clean your stocking area no less than two weeks before the count begins.
Make sure you have all the necessary supplies needed to conduct your counts in an orderly fashion such as cards, clipboards, pencils, etc.
Executing the Count
Step 1. Break up your Counting into Small Groups: Schreibfeder recommends that the first step in getting ready to count is to break up your counting into small groups. This eliminates your employees from becoming too overwhelmed at the thought of having to count thousands of parts all at once.
Step 2. Create a map of your stocking area: Next, you must create a map of your stocking area. This should include every shelf, bin, drawer, receiving dock, and return area. All of the products in your inventory must be counted for this to be worth your time, and a success.
Step 3. Divide your stocking area into counting areas: Your counters should be assigned to geographic areas, not product lines. This is due to the fact that some parts located between major product lines could be missed. Schreibfeder also suggests that you consider counting surplus areas and slow-moving products before your scheduled count. If you know that some of your seasonal products aren’t going to sell before your count, get that out of the way first, and make sure you mark the bins and shelves that are pre-counted. This will put a little less stress on your employees when the big count hits.
Step 4. It’s now time to start counting! When you are finished with a small section of bins, let your designated manager verify the counts. It’s best to first start with your items that bring in the most money and are your fastest movers. Focus on these items first, because they are the items that are most likely to contain counting errors. As soon as the counts are verified, enter them into your dealer management system, or spreadsheet.
A couple other things you should implement into your pre-counting plan:
- Pull all parts out of inventory that are needed for your current service orders.
- Pull or ship everything on order.
- Don’t move misplaced material while you count.
- Do not fill orders or receive material during the count process.
After your count is completed, you must print and review discrepancy reports in your dealership system. You should also review your whole counting process and document your procedures. Meet with your employees and determine what worked, what didn’t, and what you can change for future counts. This should make your next full physical inventory count run much smoother.
If you’re looking to ease the burden of conducting the demanding task of an annual inventory count, there’s an alternative and that’s cycle-counting. It’s a method where you take counts of different areas of your inventory spread out over the course of the year. And the best part, it actually makes your inventory more accurate because you are paying attention to specific areas more often, rather than everything as a whole.
With cycle-counting, you aren’t going to be able to take the time to count inventory items during your busiest times of the year, but there are generally eight solid months out of the year where this is feasible. The best way to conduct your cycle-counting is by using what Schreibfeder refers to as “The Ranking Method.”
What is the Ranking Method?
The Ranking Method implies that you count your inventory items with the larger number of dollars flowing through your inventory more often than your slower-moving products. Schreibfeder states that this ranking is based on Pareto’s Law – 80% of the results of any process are produced by 20% of the contributing factors. So that means that roughly 20% of your inventory is responsible for 80% of your stock sales.
Schreibfeder feels that you should break your inventory levels, or “rankings” like this:
- “A” rank items (those responsible for the top 80% of sales) count six times per year.
- “B” rank items (responsible for the next 15% of sales) count three times per year.
- “C” rank items (responsible for the next 4% of sales) count twice per year.
- “D” rank items (responsible for the last 1% of sales) and products with no sales count once per year.
An advantage of cycle-counting is that you can basically put the full task of inventory counting in the hands of your Parts Manager, something that dealership consultant Jeff Sheets feels is beneficial for maintaining more accurate counts.
If you put the Parts Manager in charge of maintaining counts and handling the parts, rather than techs or other employees, you have much more control. Initially, it may seem like a huge task to put your inventory solely on the shoulders of your Parts Manager. Sheets recommends offering an incentive plan based on accuracy levels.
Congratulations for taking the first steps and making the commitment to counting your inventory!