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The True Cost of Inventory

PartsTires and parts are an integral part of an auto repair operation. So how do you determine the true cost of inventory? There’s a cost associated with carrying inventory but there’s also a cost that comes with not having inventory. So where do you find the balance that will result in the best service to your customer and allow you to maximize your profits. The most efficient way to handle vehicle repairs is to put the vehicle in a bay, perform all necessary repairs with no dead time involved, then move the vehicle from the bay and start the next one. However, this would require all parts needed to be available right away.

 Just-In-Time

 Conventional wisdom says that it is undesirable to keep inventory on hand and that it’s better to order it for delivery as needed. Just in time inventory is a popular philosophy based on the theory that the best approach is to have inventory delivered exactly when needed at exactly the location it’s needed. However, the preciseness of the time and location can vary considerably according to circumstances. In a good percentage of instances, parts requirements aren’t known until a diagnosis has been performed and the vehicle is on site and occupying a bay in the shop. When this happens, the vehicle can be left in the bay until the parts arrive or moved until they arrive so another vehicle can be serviced in that bay. There are costs associated with either alternative. Leaving the car in place waiting for parts incurs the cost of the bay. Moving it incurs the cost of employee time and lost time in between vehicles.

Maintaining stock levels

Maintaining on hand balances of items that are used often is a widely used practice. Having stock on hand can allow vehicles to be repaired more quickly and also allow more vehicles to be repaired in the same time frame. Also, buying inventory in larger quantities will generally lower purchase costs. But the actual cost of carrying inventory should be considered. The first element of cost is the money invested in the inventory. If the value of inventory kept in stock is $50K then this the starting point for inventory carrying costs. The space that the stock takes has a cost associated with it. The cost per square foot including overhead such as utilities and salaries should be included in inventory carrying costs. Based on this method of valuation, the longer a part is kept on hand the more the cost will increase. Finally, like it or not inventory must be counted periodically and this takes time.

To Stock or Not To Stock

 So if carrying inventory (assuming it is the correct inventory) results in being able to process more repairs the first question to answer is: Is there enough demand to justify the higher inventory investment? If the answer is no, then carrying inventory may not be the right way for your shop. What is the utilization of the shop floor (the number of hours available vs. the number of hours work space is occupied by a vehicle)? If utilization is 100 percent or close to it, then a higher inventory investment may be warranted. The second question to answer is: What is the common wait time for part deliveries? If your primary supplier is next door then parts should arrive very quickly when needed. On the other hand, if parts need to be delivered from a distance then stocking more inventory may be the answer.

Conclusion

There is no hard and fast rule for inventory. But it is a very big part of any tire or repair operation and should be evaluated. Having inventory can cost money and not having inventory can cost money. However, not paying attention to it at all will cost more money than recognizing your situation and making the most of your inventory investment. So looking at different types of inventory and determining whether or not to carry stock and if so at what level versus purchasing as needed should be done on an ongoing basis to maximize profit and provide optimum service to your customers.

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