Are The Costs of Your Inventory Increasing?
It seems that everyone who consults with me
has concerns about his increasing cost of salvage. Most folks
aren't computing their monthly cost of goods sold (COGS) properly;
so they don't see this problem right away, although they do
see one problem. They are having trouble buying enough cars
as they run out of money in any given period. Now to varying
degrees, this has always been true. When we bought $25,000 worth
of cars monthly, it seemed we were broke, and when we bought
$1,000,000 monthly, we were broke too. But it is worse than
ever and seems to go on month after month. This is very dangerous,
as fewer purchases lead to one of two things:
1. Reduced sales, as our wagon gets emptier and emptier.
2. Increased brokering of parts, which makes our margins terrible
to my article a few months ago: "Brokered Parts, Blessing
Intuitively, you know your COGS is increasing. Please understand
that if your COGS increases one percentage point, unless you
trim other costs by the same amount, you lose one point of profit.
It hasn't been uncommon to see COGS increase 10 points in the
last few years. Some (but very few) folks have actually trimmed
their labor costs or other costs by that or more, and are doing
quite well. Most of us, however, aren't reacting that well.
I always show my clients how to install pay for performance
and re-evaluate their complete employee roster in order to make
the required improvements.
Remember, you should be selling at least $15,000 per month for
every employee (and most of those sales should be from your
stock, not brokered parts), and some are now achieving $20,000
The need to rely on our inventory management system for the
right information has increased dramatically. We need our systems
to tell us how to price, and what we need to buy, and what we
can pay for it. It's a little-thought-of phenomenon, but "you
don't know what you don't know". Many folks think they
have the best because they have never had anything else. If
your system won't give you the tools to automatically price
your parts based on supply and demand, and it won't tell you
automatically which vehicles to buy, and what to pay for them,
and then which parts to pull or leave on the car, then you have
a competitor that is getting ahead of you.
The coming years are going to be tough for those that refuse
to change; changing includes increased use of computers with
better software. This ranges from our inventory management system
to our ability to email and process images, analyze complex
budgets, etc. It means that employees will need training. I
am always amazed at the willingness to spend big money on new
wreckers and forklifts while the reluctance to upgrade technologies
remains (even though it makes us money every day, and works
at night). I am convinced that our industry will continue to
have fewer and fewer recycling sites. Falling by the wayside
won't be the result of consolidation (all that does is make
those who are thinkers better operators). Those that fail will
do so solely because they didn't take the necessary steps to
The bar has been raised. Will you compete?
To submit your letter to the editor here at American
Recycler, click here.