I'd like to add to Richard Bonilla's input on this subject - especially as
it refers to the accounting side of things. For the last 30 odd years, I've
been very active in the autoparts business and I've paid a great deal of
attention to the finances of Inventory Management. For a number of years I
was retained by a number of importers in the UK to train dealer staff in
this general subject.
In virtually any business that buys stock for re-sale, a phenomenon called
Pareto's Law can be seen to be in operation. Pareto's Law is often known as
the 80/20 and the corollary is 20/80. Simply this means that the majority of
sales will emanate from a relatively small minority of stock by value or
line item - viz 80% of the sales comes from 20% of the stock. The corollary
is that the other 20% of the sales will dribble in from the remaining 80% of
the stock. Further analysis will usually show that the retail value of
selling stock is generally of a pretty low nature - often less than one
pound / two dollars or whatever. This poses an important consideration. How
much is any business prepared to invest in largely dead (?) money if its
only going to provide the remaining 20% of its sales revenue?
Retailers will say with conviction and many with total honesty that they
attempt to provide a service to their customers. Many achieve that and even
in these days of computerised inventory control it is still inevitable that
retailer and wholesaler stocks will fall into three broad bands of Low,
Medium and High value in which accruing sales will mix in of a Fast, Medium
or Slow nature. The management skill is balancing that overall inventory
such that it focuses on product in the Fast and Medium moving Low and Medium
value sectors. Slow sellers of high value will probably feature prominently
in TRF type company inventories and largely to provide a customer service.
>From an accounting perspective Slow/Highs are for the birds. So how much
does TRF, Moss, Vicky Brit, BPNW have to buy to maximise the return on
investment, consistent with the lowest possible investment value. High stock
turnover is crucial and laser accuracy stock mix is a fundamental minimum.
Parts is relatively easy-peasy these days if you're selling product for
current production models. There are dealer returns programmes, scrapping
discounts and a raft of other manufacturer induced incentives to help the
dealer maximise profit and keep inventory free of crud. In reality, a
franchised dealer needs only enough stock to meet virtually guaranteed
demand. Buy tomorrow what he needs tomorrow - but it can't work like that
'cos we aren't in a perfect world. The Classic Car specialist is pretty well
on his own in this field and whatever he buys, he's stuck with until he
either sells it or scraps it. Furthermore, with the vagaries of
intercontinental shipping rates (air or sea), customs clearance charges,
volatility of exchange rates and the all too human cock-up factor, it's
something of a miracle that inventories get balanced at all.
IMHO and I have no involvement whatsoever in how TRF runs it's business and
I don't need to buy from them anyway, I don't think the lister who got
stuffed a $5 on-cost has all that much to complain about. If his total order
value was only a few whatever's at 50 cents each, the fact that TRF has
supplied the order in full totally endorses its objective of providing a
service to its customer. In the example quoted, no-one could reasonably
expect TRF to make a profit on the deal. That's a cost to TRF which they
recognise will raise it's head from time to time - and probably far more
frequently than they'd like to see. But that's business. Perhaps the time
might come when classic car parts retailers find themselves forced into
insisting on a minimum order value. One could hardly blame them because
whether the item required is a turnbutton stud or a set of replacement
wheels, the operating cost of processing that order and getting it to the
back door, packed for shipment is pretty much the same. In other words the
Order Opportunity Cost is relatively fixed and short of paying employees in
glass beads it ain't going to go down.
I think it would be very interesting to know what TRF feels is a
commercially viable order for them and what that retail order value has to
be so that they at least meet break-even on their costs. One thing that we
can all be sure of is that that figure, whatever it is, is probably one
helluva lot higher than most people would find acceptable. Give them a break
guys - no parts operation can always be perfect all the time and where would
we all be if those we patronise for our hard to find parts decided to throw
in the towel on purely economic grounds. I'll tell you - deep Deep DEEP in
the brown stuff!
John Mac
Book 1: http://www.toolbox.ndirect.co.uk/triumphbook
Book 2: http://www.toolbox.ndirect.co.uk/crocus
Triumph Over Triumph magazine: http://www.cyberware.co.uk/~chips11
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