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 (Refer
to my article a few months ago: "Brokered Parts, Blessing or Curse?").

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 per month.

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 be competitive.

The bar has been raised. Will you compete?