Wednesday, July 30, 2008

Inventory control

Inventory control.
Inventory is money on the shelf. National averages for a typical shop range from $10,000 to $20,000 worth of inventory and 30 percent of that inventory is dead! A 21-month study conducted recently on what shop owners sell and what they stock, revealed that 11 percent of shop owners sell spark plugs but don't stock them, while 18 percent stock spark plugs but don't have what they need.

What is the purpose of inventory? Many shop owners think it's there to facilitate shop operation by reducing rack time and increasing gross profit. In reality, however, inventory exists to improve your level of service. How? The right amount of the right part numbers will provide you with what you need when you need it, without enormous stress on your operating capital.
Consider the following two methods of inventory control. Last In First Out (LIFO) means that when there is more than one of a given part number, you sell the last one received, first. The rationale being that the newest is probably the most expensive. First In First Out (FIFO) means that when there is more than one of a given part number, you sell the one you've had the longest, first. The rationale? To keep your stock rotating. Whether you use LIFO or FIFO, the actual transfers are only taking place on paper. The old dusty part may be pulled off the shelf, but it's the new expensive one that's reduced from inventory. Ask your bookkeeper which is the correct method for your business.

Compare the value of your inventory to the value of some piece of your equipment. When you purchased the expensive piece of equipment, you probably considered various things. You probably shopped for the best price and considered return on investment. If the equipment wouldn't pay for itself, you probably would not have purchased it. After the purchase, you monitored your investment to maximize its use and, therefore, its return.

All the same rules apply to your inventory investment. There are some fundamental differences, however, between your inventory investment and your capital investments. Your equipment is depreciable, while your inventory is taxable. Your capital investments happen suddenly, while your inventory value creeps up gradually. At some point, most shop owners end up with a large inventory investment on which they pay taxes, yet rarely do they monitor or control it properly. Face it, it's a time-consuming process in an industry that holds time at such a premium that you charge for it in six-minute increments.

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