Magic Inventory

As published in RVBusiness September/October 2022

It’s always about the inventory!

As I travel to 20 Groups and visit with dealers, I hear the same questions and comments over and over again: What are we going to do about inventory? After two years of having no inventory and scrambling for more, some dealers find themselves with too much inventory, even needing to cancel orders to manage rapidly-changing demand. And, wholesale price inflation further complicates the picture;  some dealers need to expand their flooring lines even as they reduce their number units in inventory! Having the right units in stock, at the right time, is as difficult and important now as it has ever been … no wonder dealers are spending hours and hours working on the jigsaw puzzle of inventory management.

So it might be a bit of a surprise for most sales-oriented dealers that there could a bit of inventory that they are overlooking, day in and day out; inventory that, if properly accounted for and sold, could profoundly change the bottom line of the dealership.  What I am talking about is the inventory of unsold labor.

Wait, wait – labor isn’t inventory! It’s an expense! This is just playing with numbers! Or is it? When properly-analyzed, time is the only inventory you have that is totally under your control, that you are guaranteed to have more of every day, but which if not used properly, is irrecoverably gone at the end of the workday.

Imagine if you had a product line that guaranteed you ten units every morning at 7:00 AM. Like a magic factory, there they were – prepped and detailed, ready to be sold that day. Just profit waiting to happen! Sound good? I am sure lots of dealers would love to have this line on their lots!

But there’s a catch to this miracle product: If you don’t sell it by the end of the day all of the product disappears … and you still have to pay for it. If you think about it, that is the reality of technician time.  It is the only asset in your company that depreciates completely every day!

Let’s do the quick math:

  • You’ve got ten techs in the shop when the day starts
  • Your labor rate is $150 per hour

Collecting on 100% of their time should drive $1,500 per hour, or something like $12,000 per day in service labor. Do that for a full year and that shop is collecting a little over $3,000,000 in labor sales, all at 100% gross margin.

Let’s compare that to other kinds of inventory you sell. What kind of big-ticket sales volume would you need to generate $3,000,000 of gross margin? Just to give an example, if your average gross margin on unit sales is 15%, the answer to that question is $20,000,000! And to add real perspective, let’s think about how much inventory you would probably need on hand to drive those sales. In more normal times, three turns is a pretty good job of inventory management. Given that, you would need close to $5,700,.000 of merchandise in stock to generate that kind of volume!

None of this is to suggest that service labor actually is inventory from an accounting perspective, or that unit sales should be compared directly with labor sales. But this is an important reminder that service labor deserves top-of-mind attention from all owners and general managers.

The sales market is historically fickle, but the service market is almost always consistently strong. It’s your life savings and your choice, but putting the effort and energy into building a world-class service department seems like a solid bet, especially when the risks of generating comparable amounts of gross margin dollars elsewhere in the dealership are considered.