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One of a continuing series of articles on increasing profits and cash flow.

Increasing sales often takes months and requires the capital to buy more cars and absorb more marketing expenses. Want a quicker path to increased profitability?

You can get back to the level of profitability that you once enjoyed by lowering your costs. The beauty of increasing profits by cutting expenses is that it can be done immediately and often produces better cash flow and profit numbers within weeks. Having achieved better cash flow and profits, you can then use the surplus to buy more cars and get the inventory to drive higher sales.

Are you always behind inventorying cars? Vehicles should be inventoried and in your system within two or three business days. The sooner parts are in inventory, the sooner parts from them are getting sold.

Wouldn’t it be nice if cars got inventoried as fast as they arrived? How would you like to see the inventory people so caught up that they were ready to start inventorying as soon as the transport truck arrived with new vehicles!

Pay for performance can move you a long way toward this goal and remove a bottleneck that slows turns and hurts cash flow. Car inventorying is one of the easier departments to transition to pay for

I recommend that you make sure that your people do the full job of inventorying: book in, inventory, research pricing issues, and enter data in the computer system. By ensuring that your people do the job cradle to grave, you can make them fully accountable.

One of the reasons that some yard owners give for not switching the people who inventory cars to pay for performance is that they don’t know the right amount to pay. Don’t let that stop you. You can gather data on how long it takes your people to inventory a vehicle currently. Depending on complexity of vehicles and other tasks included (I favor having each person doing the job accountable from cradle to grave). The time involved should be between one to three hours per vehicle.

How much is the right amount per vehicle? How much are you currently paying per hour? (Take current wages for this person and divide by number of vehicles in a given period and you can get an idea of how much you are really paying per vehicle).

You should expect that putting your inventory people on incentive pay will produce a 50 percent lift in productivity.

If your inventory guys get finished early, let them go home early or issue them a purchase order for other work and use the hourly rate they earn inventorying.

So, if your best inventory person is productive enough to earn $15 an hour getting cars into the system, that’s what he gets to sweep the warehouse or for any other side work you give him. Once he realizes that his pay for any work depends on how fast he is at inventorying, he will fly whenever new cars arrive.

Once you switch to pay for performance, your people will begin to earn more and they will be happier and easier to retain. Some will not be able to keep pace and they will leave and you will be better off.

When you bring in new people, you will gain even more because they will always be innovating to try to get more done in less time. Sometimes you get an outsider who finds ways to do things so well that he resets the bar and your inventory group will become more productive than they imagined they could be.

You labor expenses should be at or below 20 percent of your total parts sales. If you are not hitting this benchmark part of the reason may be that you are not on pay for performance. Don’t wait. Making this change is a lot easier than you think and makes a far larger difference than you imagine.


Published in the August 2014 Edition of American Recycler News