Other People’s Money
Date: WED MAR 14, 2018 Written By: Ray Stasieczko
As a business owner, you’d like to think that employees spend your money as if it were theirs. Especially in the imaging channel where parts, supplies, and field service operations are the main determining factors in your overall profit. “Other people’s money” is more than just a term, it’s the key term to measure your success. Your service organization must spend every dollar as if it’s their money, and not other people’s money. Here’s the bad news: most service technicians today are spending your money like it’s your money, and not theirs. The biggest factor here is inventory. The numbers should scare you.
Every month, BEI customers spend over $40 million on parts and execute over 850,000 service calls. Most managers know that the more often you can turn over inventory, the more efficient they are at managing your money. The problem is not so much the number of turns, it’s the inventory that doesn’t turn. Here’s a quick example: imagine you have a part that has not been used in any service call, nor any device for 18 months. Is it safe to say you will likely never need that part again? Keep in mind, that in our industry, devices are often turning themselves over, as new models are updated every 24 months or so. If you have not used it in a year and a half, it should not be in your inventory; if it’s ever needed, it’s okay to special-order it.
Here Are Some Numbers That Come Directly From Our BEI WordStats ™ Database
- Some dealers have a parts inventory value that is more than 12 times their monthly usage. They turn parts inventory less than once per year. An ideal target should be a parts inventory equal to about one month’s worth of usage.
- Once an inventory SKU has been left unused for 18 months, 83% of it WILL NEVER BE USED AGAIN.
- $22 MILLION, that is the combined value of inventory across our partner network that is over 18 months old! That number is increasing by $60,000 per month, so the problem is getting worse.
That last number is alarming. If you think of the initial number that we track, which is $40 million in parts per month, the $22 million in inventory that’s over 18 months old means that, at some point in the future, most of that inventory will be written off, and your money, and your profit, will take a direct hit. That’s not other people’s money. That’s your money.
What Can You Do About It?
The first step is to get a handle on your number. Service managers do not typically look at inventory as their number, after all, it’s other people’s money. You need managers to think of it like it’s their own money. A good estimate is that for every $100,000 per month you spend on parts, you have about $6,000 in obsolete part inventory. BEI can help immediately establish what your actual number is. From there:
Take steps to reduce the inventory. Car stock is a huge driver of inventory. It makes no sense to have parts rattling around in a service tech’s vehicle for six months or more, but it is common. When you monitor almost 4 million machines and 850,000 service calls per month, BEI knows what the right car stock for a service technician is.
Sell off excess and unused inventory. What’s remarkable about obsolete inventory is that it is useful to a dealer somewhere in our network. At the same time, you may need inventory that is obsolete to another dealer. We call this the Overstock Parts Network (OPN). While selling off obsolete parts at a low cost sounds tough, it’s way better than an auditor demanding you write it off. On the upside, with the OPN you can also buy the stock you actually do need at a great low cost as well.
- Be smart about OEM “sales” and rebates. Loading up on OEM parts when they are on sale can be a great way to save money, but it can also be a great way to balloon your obsolete part inventory. Use BEI intelligence to ensure you are stocking up on the right parts.
Here’s the biggest issue with expecting employees not to treat your money like other people’s money: they need to be able to see how the current problems are costing money. They also need to know that you have a way to see just how well, or how poorly, they are doing managing your money. No employee is trying to waste money, but that’s not the point, they need visibility so they can make good decisions. They wouldn’t spend their own money without knowing if they were spending it wisely. Without visibility, it’s just other people’s money.
“During diligence to understand the facts emotions can hijack common sense so, beware of those who fight to hold on to yesterday instead of seeking the better way.”
— R.J. Stasieczko