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Chaos Theory?: Managing Inventory in Today’s Tire Industry

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Inventory management today is more important – and more complicated and challenging – than it has ever been in the history of the tire industry, according to Daniel Brown, senior vice president of procurement at American Tire Distributors.

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“Today’s consumer expects a multi-brand offering at the point of sale,” Brown wrote in a recent article crafted for the Tire Industry Association (TIA). “At the same time, the variety of tire and wheel sizes and styles continues to expand, challenging the distributor and dealer.”

In addition, “much of this expanding variety involves products that have a higher unit cost. The typical tire dealer does not have the space or the capital to be able to have on-the-floor inventory coverage for all the possible purchase options,” Brown stated.

Tire sizes and styles continue to proliferate, Brown says, and the lifecycle of wheels is much shorter than it has been in the past. Wheel fashion trends are changing so quickly that it is becoming nearly impossible to have the right wheel style in stock every time and at all times.

“Meanwhile, the volume of imported products flowing into the U.S. replacement market continues to grow,” says Brown. The increase in global sourcing on the part of tire manufacturers and the growth of import brands mean larger quantities have to be ordered – to fill a container – and the very nature of overseas shipping encompasses more variability and risk. Importing by container loads also requires much longer lead times and limits the number of different sizes that can be loaded onto a single container, according to Brown.

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Considering these trends, it’s clear that managing inventory is a universal challenge in the tire industry. It’s a harrowing task for tire retailers and wholesalers alike. Big or small, metropolitan or rural, regional or national, retail or wholesale, multi-brand or single-brand, consumer or commercial, passenger or OTR, they face the same challenges, just on varying scales. Any business attempting to make money in today’s tire industry is facing enormous inventory challenges. This should come as no surprise.

What may be surprising, though, is the fact that there are important lessons – secrets of success, you might say – that even the smallest tire retailer can learn from larger retailers and wholesalers, as well as from the distribution industry in general.

Best-Kept Secret

The best-kept secret of success in inventory management can be summed up in a single word: balance. When it comes to inventory, you can’t afford to have too much or too little.

Too much inventory is a costly liability. It takes up space, costs more in overhead and cuts into the bottom line. In fact, distribution experts have said that the simple act of storing merchandise costs the average company anywhere from 20% to 30% of the original investment. And, with price increases coming from tire manufacturers on a sometimes quarterly basis, it’s easy to see how expensive inventory can become when it just sits there.

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But too little inventory is just as costly. Not having the right tires in stock when customers need them will result in lost sales, time-consuming backordering, unhappy customers and even bad word of mouth.

So, what can be done? For starters, consider that the root cause of having too much or too little inventory is misalignment in supply and demand. For a tire retailer, this means the business is not selling what it is ordering and not ordering or receiving what it is selling.

Late or missing deliveries and poor fill rates on the part of tire manufacturers or distributors can result in shortages, which ultimately lead to lost sales. To guard against this risk, some tire dealers will carry a certain amount of “safety stock” to cover sales should a delivery fall through.

But holding too much safety stock is risky business. As mentioned earlier, it’s costly and ultimately will eat away at the bottom line. This is the essence of the inventory management challenge: finding the right balance between supply and demand. As misalignment is minimized, the less safety stock will be needed.

No Single Solution

Though managing inventory is a universal problem, there’s no universal cure. Methods of balancing supply and demand are numerous, so it’s important to choose the strategy that makes the most sense for a particular business.

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Howard Fishman of International Tire & Wheel Corp., a tire wholesaler in Commack, N.Y., uses the get-it-while-you-can method. “If an item is difficult to get, and frequency of sale is high, we beef up the stock level of that SKU when it is available from the supplier,” says Fishman. “It’s not a perfect science,” he admits. “The risk is always there.”

Software helps Fishman align his ordering and selling. He uses ASA Tire Systems’ TireMax software to analyze how many units are sold, and how often. The software’s calculations guide him on what items, and how much of them, he should order from tire and wheel suppliers.

For Mark Griffin, president and CEO of Tandem Tire, a retail and wholesale operation located in Dubuque, Iowa, monitoring fill rates from suppliers and choosing suppliers carefully makes the most sense. “If fill rates deteriorate, we can’t get the product we need,” says Griffin. “We monitor fill rates, which determine the performance of the vendor.” Obviously, Griffin will buy more quantities more often from suppliers with the best fill rates.

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Some dealers choose to maintain relationships with multiple suppliers, so that if one has poor fill rates, another can step in and deliver the goods. “Being dedicated to one supplier today is difficult because fill rates are a problem,” Griffin says. “And fill rates are a larger issue with offshore products.”

According to Ross Kogel Jr., director of marketing at Troy, Mich.-based Tire Wholesalers Co. Inc. (TWI), low fill rates due to offshore ordering primarily affect commercial light truck and low-end passenger tires. So, having a back-up plan for these tires is a good idea.

Kogel also says having more than one supplier is a personal choice best left to the individual dealer. “Some have only one wholesaler; some have many,” he says. “It may depend on the brands offered by the wholesaler. The customer may need brand X, but that wholesaler only carries brand Y.”

Generally, there are two camps of retail dealers, Kogel notes. “One buys direct from the manufacturer. This is usually a larger dealer with multiple locations, and a wholesaler is used as a back-up if that dealer needs a product quickly to make a sale. The other camp includes a smaller dealer that tends to use a wholesaler.”

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Echoing Fishman’s words, Griffin says: “It’s a risk business. You have to make sure that what you purchase and stock is what you sell. It’s about aligning what you’re buying with what you’re selling.”

Just in Time

Having a back-up supply plan is one way to reduce the risk of having too little inventory. Many tire retailers take another approach – one that keeps inventory levels lean. They request just-in-time (JIT) delivery service from suppliers as back up. That way, when a tire or wheel is not in stock, they can request an emergency delivery to prevent a lost sale.

As a general rule, Griffin makes sure his suppliers can handle emergency deliveries if necessary. “We align ourselves with a vendor that can give us next-day service or has a large inventory,” says Griffin.

And because half of his revenue comes from wholesale and half from retail, he has to provide his customers with similar services. Tandem Tire’s wholesale operation offers hot-shot delivery – emergency shipments – to retail customers that request it. “Retail dealers within a 100-mile radius get daily service,” adds Griffin.

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“When distributors provide JIT delivery, it helps the dealer secure sales from customers seeking a product that the dealer does not have in inventory,” says ATD’s Brown. Asking distributors to provide JIT deliveries will minimize the amount of inventory that retailers have to carry. And, this reduces investment and improves cash flow. Retailers get an item right when they need it – no earlier and no later.

The trend towards the JIT mindset has resulted in many retail tire dealers ordering fewer items more often. Several tire dealers who buy from TWI have successfully adopted this strategy. “We have quite a few customers who use our same-day or next-day delivery services,” says Kogel. “Retailers within a 35-mile radius of our warehouse get deliveries three times a day.”

Buying solely based on volume and pricing and holding large quantities of inventory is, in general, a dying strategy for companies in all industries, including tires. “We used to buy a couple of times a year and load up,” Griffin says. “Those days are over. Today, we have to create relationships with companies that offer on-time delivery so we can get it in and get it out.”

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Turns and Earns

The cost of inventory itself, the cost of keeping inventory and SKU proliferation, combined with the dynamic nature of the tire business and its already thin margins, makes the inventory balancing act extremely difficult. To ensure they’re not tying up too much money in excess inventory, tire retailers and wholesalers alike must be intimately aware of which items generate the most turns – and earns. In other words, it’s important to know which items sell the fastest and generate the most sales. How often an item sells depends on customer demand. More popular items will turn faster and so will require more frequent deliveries.

In distribution, turns are common benchmarks for measuring the effectiveness of inventory management. “Turning inventory” means that everything that has been ordered has been sold. In other words, when a business has replaced 100% of its original stock, it has “turned over” its inventory.

Tandem Tire uses turns as benchmarks for performance and sets specific turn objectives. “Our goal is six turns or more on the retail side, and 10 turns a year on the wholesale side,” says Griffin.

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Turn rates measure how well Tandem Tire is managing its inventory. If turn rate is too low, for example, it could mean the business is ordering more of a particular item than can be sold. In that case, supply is more than demand. On the other hand, if the turn rate for an item is high, the company might consider ordering more quantities of that high-turn-rate item more frequently to satisfy the high demand.

Griffin chooses to use software that reports on how fast different items are moving so that he knows which items have the highest demand and must consistently be in stock. “We have a higher risk of losing a sale if we don’t have fast-moving products in stock,” he says.

And that helps Griffin decide what to purchase. His advice to other wholesalers and retailers is simple: “Buy it right and make sure you’re turning it. Find the best mechanism to do that.”

Review and Rate

Like Brown, Griffin also believes inventory management is more important than ever. It only makes sense, then, for dealers to understand their inventory as thoroughly as possible. To effectively match supply and demand, they have to know what they have, what they’re selling and which items they need monitor the most. And because of tire and wheel size and style proliferation, this is much easier to do with software than with old-style ledger books and index cards, according to Griffin.

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Knowing that tying up too much money in inventory can damage cash flow – particularly for a single-location dealership – it may seem logical that the most expensive items should get the most attention.

But that’s a myth. In reality, it’s the less expensive items with the higher turn rates that have the greatest effect on profits. If a dealer focuses only on high-dollar-value items, that dealer risks running out of lower-priced products that actually contribute more to the bottom line. “The unusual tire is not the one that typically causes you to lose a sale. It’s the common tire that should be in stock but isn’t,” says Griffin.

In general, the fastest-moving items make up the greatest share of inventory. As much as 80% of any given company’s revenues come from only 20% of its products. This rule tends to cross industries and geographic markets. That vital 20% of inventory is made up of the best sellers and the most profitable – not necessarily the most expensive – items. Fast-moving items, then, should have the most accurate, detailed and complete records. These tires and wheels are responsible for the majority of sales, so they need the most care and attention.

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In the distribution industry, this process is known as the “ABC approach.” Inventory is classified in the following way: A items are fast movers, B items have moderate sales, and C items are slow movers. Some companies have a D classification for “dogs” – items that never move.

There are many different ways for tire retailers and wholesalers to apply the ABC approach. For example, they can choose to classify tires by product class, size, manufacturer’s part number or brand and then into A, B and C turn categories. It’s ultimately up to the individual dealer to implement what’s best for the specific business.

Brown recommends that dealers establish specific inventory targets and turn objectives by product category – consumer tires, commercial tires, ag tires, wheels, etc. – and monitor inventory turns by SKU. “Identify the products that are slow moving, discontinued or obsolete, and put a special effort into disposing of those,” he advises.

No matter how products are classified, though, conducting regular inventory reviews is essential. “Review inventory often enough so that you can liquidate those items you’re not turning,” Griffin advises. “Inventory that hasn’t turned just gets more expensive as it sits there.”

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Griffin advises dealers to review their inventory at least quarterly or, preferably, monthly. Once armed with this information, dealers can make informed decisions about how to handle individual items. “Certain SKUs are in higher demand than others,” says Griffin. “Those are the ones you have to keep in stock.”

Alternatively, “anything that hasn’t turned is reduced in price,” says Griffin. “We’ll also add a spiff (bonus commission) for salespeople to get rid of that inventory.” Dealers can reduce the price of their slow movers or combine them with faster-moving items, Griffin says. The point is to get those dogs out of the dealership.

Griffin warns that waiting too long between inventory reviews can result in products being so old that they’re impossible to move. At that point, the business takes a loss.

For example, if a tire retailer or wholesaler never – or rarely – reviews inventory, it’s likely that there are once-popular wheel styles or tire sizes in the storeroom that are completely dead today.

Those items are taking up valuable floor space that could be devoted to fast-moving, profitable wheel styles and tire sizes. They are collecting dust and eating away at profitability.

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And, with continued size proliferation, inventory obsolescence is a bigger problem for tire dealers than it has ever been. Today’s hot size can very easily become tomorrow’s dead stock.

Regular reviews can prevent this profit drain from happening. How? Those old items could have been tagged as slow movers earlier, when there was still the chance of a sale, even at deep discount. Most tire dealers would probably agree that selling something at a reduced price is a better option than just throwing it away. Scrap tires don’t bring profits, just costs.

Smarter Safety Net

As mentioned earlier, carrying safety stock to prevent lost sales is risky business. But it becomes less risky the more often inventory is reviewed and analyzed. If a dealer knows which items are most profitable, it’s wise then for that dealer to carry safety stock only on those fast-moving items, and order them more frequently.

When inventory records are accurate and well maintained, tire dealers can begin to reduce their inventory levels and improve their cash flow while, at the same time, experience less risk of costly stockouts, time-consuming backorders and business-damaging customer dissatisfaction.

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Of course, there will always be the risk of not having an item. That’s a danger that will never just disappear no matter how inventory conscious you are. Having a good relationship with a supplier that can help you meet customer demand at a moment’s notice is a definite plus.

The People Factor

Regardless of how often and from where product is ordered, both Kogel and Griffin agree that it pays to make at least one employee responsible for inventory management. Though TWI uses software to help manage its inventory, Kogel says software without a person in charge is like radar without a weatherman. “It’s a good idea to have both software and a person accountable for inventory,” he says.

Griffin agrees. “We use software to set and monitor stocking levels,” he says. “But it’s only as good as when it’s being monitored on a daily basis or as often as possible.” So, one employee at Tandem Tire is completely dedicated to purchasing.

But that doesn’t mean other employees are left out of the inventory equation. “We make sure everyone in the organization understands the importance of inventory management,” says Griffin. “Sometimes employees will have ideas that are beneficial to the business. Employees are, after all, your greatest resource.”

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Remember, too, that without basic business policies allowing effective inventory management, no computer system, no matter how sophisticated, can bring inventories under control. Software may be essential in the complex world of tire inventory, but it’s not magic. Dealers must adopt smart strategies for controlling inventory complexity in the first place. Only then can technology step in.

SIDEBAR:

Quick Guide to Inventory Management Software

When it comes to selecting software to help manage tire and wheel inventory, Mark Griffin, president and CEO of Tandem Tire, offers the following advice: “Shop them. Test them out. See how they work, and visit stores that are using them. Focus on the reports they produce, and seek out the ones that are most proactive in managing inventory.”

Some of the features tire dealers should look for in an inventory control software package, according to Griffin, include stocking level reports, reorder reports and slow-mover reports. “Also, the ability to adjust pricing quickly and efficiently by SKU or store is important,” he adds. “You can lose margin by not being able to keep up with rapidly changing prices.”

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Is software a must for tire dealers in this day and age? Griffin thinks so. “A single-store operation may be able to get away without software, but not for long,” he says. “With SKU proliferation, the task is more difficult. You need a computer to print reports, then someone has to read and study them.”

Here is a brief round-up of some of the software and systems that have been developed specifically for the unique needs of independent tire dealers. Keep in mind this is not a complete list of every offering available, but rather a sampling of some of the more popular systems on the market.

Company: American Business Management Systems

Web site: www.tireguru.net

Product(s): Tire Guru Business Center

Selected Features: Supplier integration; inventory categorization; color codes; inventory status and lookup; automatic inventory updates.

Company: ASA Tire Systems

Web site: www.asatire.com

Product(s): TreadX; TireMaster; TireMax

Selected Features: POS inventory updates; hand-held counting units; reorder program; inventory costing and evaluation; slow-moving “red-line” reports; purchase recommendations based on desired turns; automatic restocking by location; inventory movement tracking; real-time stocking levels; supplier integration.

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Company: CarParts Technologies (subsidiary of Auto DataNetwork Inc.)

Web site: www.carpartstechnologies.com

Product(s): Tradera Tire Management System

Selected Features: Shipment manager; real-time inventory status; parts procurement; inventory tracking and costing.

Company: Compu-Power Inc.

Web site: www.compu-powr.com

Product(s): TRACS Tire Management System

Selected Features: Stock status information; item availability by location; POS inventory updates; item sales history; slow-moving reports; inventory turn analysis; sales ranking reports; overstock reports; inventory valuation reports; stock replenishment reports.

Company: E-Solution Professionals (ESP)

Web site: www.esprofessionals.com

Product(s): Tireweb; Wheelweb

Selected Features: Real-time inventory status; electronic ordering.

Company: FreedomSoft

Web site: www.tireshop.info

Product(s): TireShop

Selected Features: Inventory analysis; sales reports; purchase histories; customer buying patterns; profit analysis; remote inventory data to PDA.

Company: Goodyear Tire & Rubber Co.

Web site: www.tire-hq.com

Product(s): Tire HQ

Goodyear Business Management System (GBMS)

Selected Features: Product availability; promise date; net shipment, delivery and purchase reports; order status reports.

Company: MaddenCo Inc.

Web site: www.maddenco.com

Product(s): Inventory Control software

Selected Features: Reorder reports; slow-moving reports; unit movement reports; turnover reports; automatic order generation; shipping notification; tire and inventory tracking; physical inventory count system; maximum/minimum inventory level calculations.

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Company: Mitchell1

Web site: www.mitchell1.com

Product(s): OnDemand5 Manager; ManagerPlus

Selected Features: Customer and vehicle history; reporting and scheduling; inventory tracking; PO control.

Company: Signal Software

Web site: www.signalsoft.com

Product(s): TireWorks Gold

Selected Features: Barcode pricing; automatic inventory updates; inventory tracking; inventory categorization.

Company: TCS Software

Web site: www.tcstire.com

Product(s): Tire Company Solution

Selected Features: Inventory status and lookup; inventory tracking; on-order reports; multi-level pricing; inventory value reports; inventory item activity reports; backorder reports.

Company: Tire Point Software

Web site: www.tire-point.com

Product(s): Finger Point 4

Selected Features: Real-time inventory updates; touch-screen monitor; detailed item history; inventory movement reports; order reports; backorder reports; sales history.

Company: TireWare LLC/Broad Street Software Group

Web site: www.tireware.com

Product(s): TireWare

Selected Features: Real-time inventory status; multi-location inventory reports; warehousing tools; sales history reports; POS database; tiered price matrix.

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