Inventory Issues: It’s More Than Just Having Too Much.
If you ask anyone in the Equipment Business if they have any inventory issues most of the time the conversation will revolve around how they have too much inventory. The conversation will lead to the models or category causing the biggest problem and “If I could just get rid of X number of units how wonderful life would be.” Very rarely does the conversation start with “I have a big inventory problem; I don’t have enough!” In this article, I am going to talk about what happens if your inventory is to low and holes in product mix won’t allow for the washout cycle to be complete. Lack of inventory will have the same effects on Used Equipment Matrixes and Ratios as having too much. These three examples outline why.
Because of holes in your product mix turn will go down because of lack of sales. When your inventory does not have what customers want, they look elsewhere. This will affect Inventory turn because of the way it is calculated. R12 Average Cost of Goods Sold / R12 Average Inventory. If sales aren’t available to support the COGS then your turn will slowly eat itself alive! The same thing happens when Used Inventories are too high. Sales Dollars can’t outpace Inventory Dollars and Turn continues to drop month after month.
Margin can’t escape unscathed either. When inventories are too high several things happen but the biggest two are Inventory Write-downs and Inventory Liquidations. This was the norm in 2015-2016 and 2017 has had its fair share of Inventory Corrections as well. Mass reduction of inventory does come with a price, believe me I know, just like having to little inventory. The biggest pressure here comes from stagnate inventory. I am a firm believer that a machine has a 9-month self-life. Anything beyond 9-months Sales Reps begin to lose faith in the machine and sits on the lot. The margin loss comes from Interest costs, possible write-downs, good old fashion lot rot, and if it has been inventory long enough it might find its way onto an auction.
The Washout Cycle. It’s hard to complete the Washout Cycle if you don’t have the proper inventory mix to support it. I will give you an example. Let’s say your High Horse Power Row Crop Tractor mix is made up of 15 2000-3000 hours units. That’s it, that’s all you have to work with. At this point, your target customer is the 3500-5000 hours Owner. When you have exchanged the current inventory for older; higher hour machines, or a cash no trade scenario, your inventory will not service 75% or more of your customer base eager to refill your Washout Cycle. You will have to either sell a bunch new equipment to start the Washout Cycle and face the same fate just on the other end of the spectrum or, you will be forced to buy equipment at auction, wholesale, or lease returns. These actions are not bad but you are always behind the eight ball. Your customers will be forced to look elsewhere to fill their equipment needs. That means you have lost margin potential, downstream margin potential, and a machine to help complete the Washout Cycle. The last thing you want to give a customer is a reason to shop somewhere else!!
Like every Remarketing Manager, I am fighting inventory issues every day, month, quarter, and year. The only problem is this is the first-time lack of inventory is the issue. Trying to find machines to fill gaps in inventory is proving to be as hard; if not harder than trying to correct a bloated inventory. I am victim to the circumstances in this article and because of it, I have had to have a paradigm shift in my thinking. This too shall pass and there will be a new issue to get a handle on. Nothing stays the same and everything is relative to the current environment. I think “Those who do not know their history are doomed to repeat it” fits very well in the Remarketing Used Equipment. If you would like to hear more topics like this you can tune into my podcast, Moving Iron Podcast. You can find it at www.MovingIronLLC.com, iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud. So, until next time lets go move some iron!