The Direct and Indirect Costs of Failing to Track Inventory Turns

  • Posted by: Scott Berlin

Inventory Turnover Ratio = COGS (costs of goods sold) / AIV (average inventory value)

Knowing how much product or inventory being sold at any given time is good business. Unfortunately, it’s a calculation that’s often overlooked in service trades such as plumbing, heating and cooling or electrical. Most contractors will agree that its largely due to the fast pace of the trade. They are constantly moving from one call to the next, sometimes without completing a thorough inventory assessment. When technicians arrive on a jobsite missing critical supplies needed to complete the job, they’ve failed to track inventory turns.

Lacking the necessary parts and materials needed to complete a job creates a domino effect for the remainder of the day or week. If a technician must leave the job to purchase material, they risk paying more for spot buys and they lose valuable time. Even if a supply house is just down the road by the time they speak to the customer, organize their tools, drive to the supply house, wait for the part and then drive back to the customer they’ve wasted anywhere from forty-five minutes to one hour. Do that just once and the company loses time and money chasing parts.

On the other hand, companies with large amounts of inventory purchased in excess will be forced to sell more inventory to improve the turnover rate. Otherwise, your company will be looking at storage and holding costs including rent, insurance and transportation. By increasing turnover rates, you can drive profitability in three ways:

  • Reduce holding costs
  • Increase net income
  • Increase responsiveness to customer demands

The most effective way to improve inventory turnover is to align your purchasing and sales departments. Sales must match the inventory purchases, or you risk over purchasing or under purchasing, both of which ultimately hinder your company’s overall performance. Quite simply, high turnover rates indicate better performance while lower rates often signal inefficiency.

To gain a better understanding of the inventory challenges that contractors face, we spoke to MarginPoint customer and Aux Home Services’ General Manager Michael Fox about the affect that missing inventory items can have on a company’s success. He talked about how failure to effectively track inventory turns can cost service contractors relationships they’ve spent years building.

“If you have to push back or reschedule customers because of missing inventory, you lost them,” says Fox. “To that customer, their needs are an emergency. They have a toilet backed up or their air conditioning went out and they have a graduation party to host. They will call someone else.”

Another damaging side effect of ineffective inventory control is compromised workmanship warranties. By not accurately tracking mission critical parts, companies risk sacrificing quality and professionalism by using a lesser grade product found on a store shelf, something Aux Home Services refuses to do.

In this digital age, contractors are also feeling the pressure to outperform their competitors. With a click of a mouse, customers can have access to over a hundred companies to choose from. Those customers will not sit around and wait for a contractor to gather the right materials. There’s a sense of urgency that wasn’t a factor in the past. Today, whoever can get to the customer first wins the job.

Tracking inventory the old-fashioned way with paper and pen is tedious, unreliable and often leads to ineffective inventory control. Contractors need a faster way to track supplies for replenishment that is consistent, accurate and easy. MarginPoint’s Mobile Inventory management solution allows contractors to view the app on their phone or tablet, receive a daily consumer report on their fleet, identify what is deficient and restock quickly. It’s a single, integrated mobile solution to manage inventory for all material, both on trucks and in the warehouse. MarginPoint’s inventory solution helps every department effectively communicate the company’s inventory needs from the technician right on down to sales and purchasing.

“MarginPoint does a great job and has helped us manage material and improve our bottom line,” says Fox.

Learn more about MarginPoint’s Mobile Inventory management solution.

Author: Scott Berlin