Tools For Success: Inventory Turns and Purchasing

The first article in this series listed more than 25 tactics to increase your business success, all of them based on my experience. I started with nothing and didn’t get to college, so I know you can achieve maximum success, regardless of your education. E-mail me to get the first article (or any of the other articles) in the series. Each takes a closer look at one of the tactics listed in that first article.

There is likely nothing more critical today to an auto recycler’s success than purchasing and inventory turns. I was around in the 80s, when purchasing didn’t really matter. Our cost of goods was 20%, meaning that for every dollar we spent we got $5 in sales. We had no idea about turns, with an 80% margin, it didn’t matter.

Today, most of us have gross margins of 40% to 60%. If you’re gross margin is 60%, your cost of goods is 40%, meaning that for every dollar you spend buying cars, you get $2.50 in sales. It’s important that you understand this math, and reconcile it with your situation. I find that most yards want more sales, but they aren’t buying enough inventory to obtain those sales. If you don’t buy enough, you just won’t hit the sales goals you have. If you want to sell $100,000, and your cost of goods is 40%, then you must buy $40,000 in cars. It’s that simple. If you buy $30,000, you won’t sell $100k.

How do you know your cost of goods? Simplistically, look at last year’s purchases of cars and your sales of parts from your own stock. You do track parts sales from your stock, rather than including brokered parts, which you track separately, right? And new parts and rebuilders? Divide your car purchases by your parts sales from stock to get the percentage.

But now, let’s talk about turns. To complicate things, turns are hard to model. But let me try to make it simple for you.

If you buy a car for $1,000 and you sell $1,000 in parts off of it in one month, how many turns do you have? 12 turns annually, because you got your money back in one month, and there are 12 months in a year. Now, if that same $1,000 car has $1,000 in parts in 6 months, you have 2 turns per year. It took you 6 months to get your money back, and there are 12 months per year. The best yards get 4+ turns annually; many middling yards get fewer than 2.

Make sure you pay attention to your days-to-break-even on your reports. Look at cars you bought from 360 to 720 days ago. They’ve been in stock at least one year, but not more than 2 years. What were the days-to-break-even on each car? It’s easy to see which were the winners and losers.

Now, what does that mean for cash flow? That car that had 12 turns means that, if all your cars had had that turn rate, $1,000 spent on cars would have produced more than $12,000 annually in cash flow. The $1000 car with 6 turns will produce $6,000 in annual sales. WOW. A 100% increase just from faster turn. Make sure that you are focused on
days-to-break-even in addition to cost-of-goods percentage.

I’ve tried to make it simple enough to get you started and to give you enough so that you will know where to start looking to make improvements. Most yards are still buying what they think will sell, without doing the work to know what to buy. It’s simply not good enough in most markets. You have to understand which parts on which cars will sell, for how much, and how fast. Your computer or BidBuddy (an aftermarket product) will put that data at your fingertips. It’s more work, but it’s not an option to do it any other way.

By the way, after you get a handle on these functions and start meeting weekly or monthly with the buyer, you will see instant results. Teach them these factors to consider and then intice them with bonuses based on the decreased cost of goods and increased turns they can achieve. This is the single biggest cost you have, and really, perhaps the easiest path to improving your financial results and cash flow.