Inventory Management – (Topic #3) - What I Would Change If I Were Running an Automotive Aftermarket Company Tomorrow Series

Before we get into inventory, it's worth looking back at where this series started.

In Topic #1: Product Development, I focused on solving real customer problems instead of simply looking at a competitor's product and trying to make it a little better. The point was simple: strong products should start with an unmet need, not with a benchmark.

In Topic #2: Pricing & Channel Pricing, I talked about building the right pricing structure around that product, understanding your brand value, protecting margin throughout the channel, and making sure the manufacturer, distributor, retailer, e-commerce partner, and consumer all have a reason to participate.

That brings us to Topic #3: Inventory Management.

Because once you have the right product and the right pricing strategy, the next question is just as important: Can you actually deliver it when the customer is ready to buy?

You can have the best product in the category, the perfect margin structure, and strong distribution relationships, but if the product is constantly out of stock, none of it matters.

Inventory is where product strategy, pricing, sales, operations, supply chain, and customer experience all come together. And in my opinion, this is one of the most misunderstood areas in the automotive aftermarket.

You can have the right product.

You can have the perfect price.

You can have great distribution.

But none of it matters if the product isn't available when the customer is ready to buy.

That is why inventory management would be the third area I would focus on if I were running an automotive aftermarket company tomorrow.

Inventory is one of those topics that can quickly become a battle between operations, finance, sales, and marketing. Finance wants less inventory. Sales wants more. Operations wants predictability. Marketing wants product available when a campaign launches.

The truth is, they're all right.

The goal shouldn't be to carry as little inventory as possible.

The goal should be to carry the right amount of inventory for the channels you serve.

I wrote about this recently in my article "Lean Manufacturing Isn't a Strategy—It's a Tool." Lean manufacturing can be extremely effective, but it becomes dangerous when a company confuses being lean with being understocked. The right strategy depends heavily on the sales channel.

Read: Lean Manufacturing Isn’t a Strategy—It’s a Tool

OEM Suppliers Are Different

One area where I believe extremely lean inventory management makes the most sense is a true OEM-only supplier.

An OEM supplier can operate from purchase orders, production schedules, long-term forecasts, and relatively predictable demand. In many cases, a continuous flow of forecasting allows the supplier to manufacture against future requirements rather than guessing what the market will purchase.

That is a great model. But not every company can grow using an OEM-only platform.

The moment you start selling to consumers, jobbers, specialty retailers, e-commerce companies, third-party marketplaces, or distributors, the rules change.

Those customers expect availability.

Consumers usually don't care that you have a container arriving in three weeks. A retailer doesn't want to tell their customer to wait six weeks. A distributor doesn't want its purchasing team chasing backorders every day.

If your product isn't available, another brand probably is and will take your sale.

That means carrying inventory becomes part of serving the customer.

Treat Your Warehouse Like a Customer

One lesson I took away from my time at Rugged Ridge and AXC, Inc. was that inventory should constantly flow.

Product should be manufactured, received, stocked, sold, replenished, and moved back through the cycle.

It shouldn't arrive in the warehouse and become furniture.

One way I think about this is to treat the warehouse like another customer.

Sales are responsible for feeding information into that customer.

Operations are responsible for fulfilling it.

Purchasing and supply chain are responsible for making sure the next shipment arrives before the shelf becomes empty.

And management is responsible for making sure the company isn't tying up unnecessary amounts of cash while doing it.

That requires communication.

Your salespeople should be asking key customers for annual forecasts whenever possible. Those forecasts will never be perfect, but even imperfect information gives your supply team something to work from.

The important part is understanding that the forecast is a guide, not a promise.

The company still needs enough flexibility to pivot when demand accelerates or slows down.

That is why I believe a strong supply manager can be one of the most valuable people inside an aftermarket company.

A great supply manager understands sales velocity, manufacturing capacity, supplier lead times, freight, seasonality, channel demand, cash flow, and risk.

They aren't simply placing purchase orders. They are managing the connection between customer demand and company cash.

Availability Has Become Part of the Product

For D2C, third-party marketplace orders, and e-commerce retailers, I would build the operation around shipping products within 24 hours whenever reasonably possible.

Ideally, orders received today ship tomorrow, even when they come in late in the previous business day.

Customers have been trained to expect speed due to Amazon, Walmart, and other large warehouse retailers.

That doesn't mean every automotive product needs Amazon-level fulfillment, but a company selling a stocked item should not routinely need several days just to get an order out of the warehouse.

Distribution is slightly different because orders tend to be larger and more complicated. I would still establish an internal goal of fulfilling distributor orders within five business days or less whenever inventory is available.

Those service levels become part of the brand.

Customers may not understand your inventory turns or working-capital strategy.

They understand whether you shipped their product.

If This Is New To You - Start Small

One of the biggest mistakes a growing company can make is believing a stocking program requires filling an entire warehouse immediately.

It doesn't.

If I were starting an inventory program without bringing in additional financing, I would start small.

Take your five highest-volume SKUs.

Instead of stocking hundreds of units, start with five units of each—or whatever quantity your historical sales support.

Then measure what happens.

How quickly did they sell?

How long did replenishment take?

How accurate was the forecast?

How often did you stock out?

How much cash was tied up?

Then adjust.

You can build inventory intelligently over time.

The objective is not to have the biggest warehouse.

It is to understand the movement of every dollar sitting inside it.

A Simple Inventory Formula

Sophisticated inventory systems can calculate this automatically, but a growing company can start with a very basic model.

The first number I want is average demand.

For annual planning: Annual Demand = Average Monthly Unit Sales × 12

For quarterly planning: Quarterly Demand = Average Monthly Unit Sales × 3

For monthly planning: Monthly Demand = Average Daily Unit Sales × Selling Days in the Month

From there, I want to calculate how much inventory we need during the supplier lead time.

A simple reorder point is: Reorder Point = Average Daily Sales × Lead Time in Days + Safety Stock

For example, assume you sell an average of two units per day. Your supplier requires 45 days to replenish the product. That means you will consume approximately 90 units while waiting for the next order.

If you decide that another 30 units should be held as safety stock: 2 units × 45 days + 30 safety-stock units = 120 units

When inventory approaches 120 units, it is time to reorder.

That doesn't mean 120 is automatically the right number.

The purpose of the calculation is to create a starting point.

Safety Stock Should Be Calculated, Not Guessed

Safety stock exists because almost nothing happens exactly as planned.

Sales increase.

A supplier gets behind.

A container misses a vessel.

A port becomes congested.

Weather delays freight.

A factory shuts down for a holiday.

A large customer unexpectedly places a bigger order.

Your safety stock protects the business from those variables.

For a simple starting model, I like: Safety Stock = Average Daily Sales × Additional Risk Days

If your normal lead time is 45 days but you believe international freight could realistically be delayed by another 15 days, you should account for those 15 days.

If you sell two units per day: 2 × 15 = 30 units of safety stock

Again, this is a starting point.

As the business collects more historical information, the calculation should become more sophisticated.

Manufacturing and Sourcing Require Different Thinking

Inventory management also changes depending on whether you manufacture domestically or source products internationally.

If you manufacture your own product, you have more control over the process.

You can monitor raw materials, work in process, finished goods, machine capacity, labor, and production schedules.

The goal is to understand how quickly finished inventory can be replenished when demand increases.

For manufactured goods, I would monitor raw-material availability almost as closely as finished goods.

Having enough components to make 500 products isn't very helpful if one missing bracket prevents you from completing all 500.

That is where bill-of-materials planning becomes extremely important.

Every critical component needs its own lead-time and replenishment strategy.

When sourcing finished products overseas, the planning window becomes much longer.

Now you're managing factory production, quality inspections, consolidation, vessel schedules, port congestion, customs clearance, domestic transportation, and final warehouse receiving.

A product with a 60-day factory lead time can easily become a 90- or 120-day replenishment cycle once you consider the full supply chain.

If you only calculate factory production time, you're not managing inventory.

You're hoping everything else goes perfectly.

This is where supply-chain experience becomes extremely valuable.

You can't predict every disruption, but you can identify the obvious risks.

Weather should be considered.

Hurricanes can disrupt ports.

Winter storms can slow trucking.

Flooding can affect factories or transportation.

Wildfires can close highways.

Ocean conditions can affect vessel schedules.

Port strikes and labor actions can change transit times.

Chinese New Year can dramatically impact manufacturing and shipping capacity for companies sourcing from Asia.

Other regional holidays can do the same thing.

Tariff changes, customs inspections, political instability, and changes in shipping lanes can also affect delivery schedules.

You don't need to panic every time something happens.

But your supply manager should understand where your products are coming from and what could prevent them from getting to you.

If the product normally takes 75 days to arrive, and you know a major factory shutdown is approaching, placing the normal purchase order at the normal time probably isn't enough.

Inventory planning has to look forward.

Daily Inventory Management

Inventory shouldn't be something leadership reviews only at the end of the month.

Every day, someone should understand what is moving and what is becoming a risk.

I would want a simple daily dashboard showing top sellers, items approaching reorder points, stockouts, open purchase orders, late suppliers, backorders, and unusually large customer orders.

You don't need 50 reports.

You need visibility into exceptions.

If a SKU normally sells five units per week and suddenly sells 30 units in two days, somebody should notice.

That could be a promotion.

It could be a new dealer.

It could be an influencer.

It could be a competitor stocking out.

Or it could simply be temporary demand.

Whatever caused it, your supply team needs to know before the inventory disappears.

Monthly Inventory Management

Monthly reviews should become more strategic.

I would look at inventory turns, days of supply, fill rate, backorders, slow-moving inventory, excess inventory, aged inventory, forecast accuracy, supplier performance, and cash tied up in inventory.

One of the simplest measurements is: Days of Supply = Current Inventory ÷ Average Daily Sales

If you have 300 units and normally sell five per day, you have approximately 60 days of supply.

That number becomes much more meaningful when compared against lead time.

If replenishment requires 90 days and you only have 60 days of supply, you may already have a problem, even though the warehouse looks full.

Another useful metric is inventory turnover: Inventory Turnover = Annual Cost of Goods Sold ÷ Average Inventory Value

Higher turns generally indicate that inventory is moving efficiently, but I would never chase turns at the expense of customer availability.

An amazing inventory-turn number doesn't mean much if your best-selling SKUs are constantly out of stock.

Quarterly Inventory Management

Quarterly reviews should look beyond individual purchase orders and ask whether the overall inventory strategy still matches the business.

Which products are gaining momentum?

Which ones are slowing?

Which SKUs should receive more inventory?

Which ones should be reduced?

Should any products become build-to-order?

Are there products that should be discontinued?

Are supplier lead times improving or getting worse?

Are sales forecasts becoming more accurate?

Are new customers changing the demand pattern?

Are there upcoming vehicle launches, seasons, events, promotions, or regulatory changes that could affect demand?

This is also when I would review inventory by channel.

D2C will behave differently than distribution.

A large distributor may order quarterly while consumer orders happen every day.

One major customer can dramatically change your average demand.

The business needs to understand those differences instead of combining everything into one sales number.

Measure Your Forecast Accuracy

If you're asking customers and salespeople for forecasts, you should measure how accurate those forecasts actually are.

A simple formula is: Forecast Accuracy = 1 − |Forecast − Actual Sales| ÷ Forecast

If someone forecasts 100 units and actual sales are 90 units, the forecast is roughly 90% accurate.

Over time, patterns emerge.

Some customers consistently forecast high.

Others consistently forecast low.

Some salespeople are extremely accurate.

Others are optimistic by nature.

That information helps your supply manager interpret future forecasts instead of treating every number equally.

The goal isn't to punish someone for missing a forecast.

It's to improve future planning.

Inventory Is Cash

Salespeople sometimes forget another side to this conversation. Inventory costs money.

Every product sitting on the shelf represents cash that can't be used somewhere else.

That cash could be funding marketing, hiring employees, developing products, buying equipment, paying debt, or investing elsewhere in the company.

Warehousing also costs money.

Insurance costs money.

Handling costs money.

Damage costs money.

Obsolescence costs money.

And eventually, aged inventory usually turns into discounted inventory.

That is why I am not advocating for simply filling warehouses.

I am advocating for intentional inventory.

Enough inventory to protect the customer.

Enough inventory to support growth.

Enough inventory to absorb normal supply-chain disruptions.

But not so much inventory that the warehouse becomes a storage facility for bad decisions.

Use the 80/20 Rule to Prioritize Inventory

One of the simplest ways to improve inventory management is to apply the 80/20 rule.

In many businesses, roughly 20% of the SKUs generate close to 80% of the sales, margin, or transaction volume.

That does not mean the ratio will always be exactly 80/20, but the principle is incredibly useful.

The mistake I see some companies make is treating every SKU as if it deserves the same inventory strategy. It doesn't.

Your top-selling products should receive the most attention, the best forecast, the strongest safety-stock protection, and the fastest replenishment strategy.

If you have 500 SKUs but 75 of them generate the majority of your revenue, those 75 products should probably be managed very differently than the bottom 200.

I would break inventory into simple groups.

Your A products are the items you absolutely do not want to run out of. These are your strongest revenue generators, highest-volume items, or products that are strategically important to your customers. They should be reviewed frequently, carry appropriate safety stock, and have purchase orders placed well before inventory becomes critical.

Your B products are steady sellers. They matter, but a short-term stockout may not create the same financial impact as an A product. These can normally be managed with slightly lower safety-stock levels and less frequent purchasing.

Your C products are slow-moving or low-volume items. These should be managed much more carefully because this is often where companies tie up cash unnecessarily. Some may need very little inventory. Others may be better suited for build-to-order, special-order, or limited stocking programs.

The key is not to confuse a large catalog with a successful inventory program.

If one SKU generates $500,000 per year and another generates $5,000, I would not automatically give them the same days-of-supply target.

That is where the 80/20 rule becomes powerful.

You are putting the most working capital behind the products that have already demonstrated that customers want them.

Measure 80/20 by More Than Revenue

I also would not look at revenue alone.

A high-revenue SKU with weak margin might be less valuable than a slightly smaller product that generates much stronger gross profit.

Depending on the business, I would rank products using several measurements, including annual unit sales, annual revenue, gross-profit dollars, inventory turns, customer demand, and strategic importance.

You may discover that 20% of your SKUs generate 80% of your revenue, but a different 20% generate 80% of your profit.

That is important information.

Inventory decisions should support profitable growth, not simply volume.

Protect Your Best Sellers First

This becomes especially important when cash is limited.

If I only had enough working capital to improve inventory on 20 products, I would not spread that money across 200 SKUs.

I would identify the products responsible for the majority of the business and make sure those products were available.

That is another reason I suggest a new or growing company start with its top five SKUs.

Get those right first.

Measure demand.

Build the reorder points.

Establish safety stock.

Improve supplier reliability.

Then move down the list.

You can eventually build a much broader stocking program, but your first objective should be to protect the products your customers are already proving they want.

The 80/20 rule gives you a simple way to decide where to start.

And it also helps answer one of the most important inventory questions:

Where should the next dollar of inventory investment go?

Most of the time, the answer should be toward the products that generate the strongest combination of demand, margin, and customer value.

Slow-Moving Inventory Needs a Plan

Every company eventually has slow-moving inventory. The mistake is ignoring it.

I would create aging buckets and monitor them closely.

Something that hasn't moved in 30 days may be perfectly normal.

At 90 days, I want to understand why.

At six months, there should probably be an action plan.

At a year (or sooner), leadership needs to decide.

Can it be bundled?

Can sales target customers who historically purchase it?

Can it be used in a promotion?

Can it be repurposed?

Can it be sold into another market?

Should we stop purchasing it?

Should we discontinue it?

The worst strategy is allowing obsolete inventory to sit in the warehouse because nobody wants to acknowledge the problem.

Inventory doesn't become more valuable because you avoid talking about it.

Good Inventory Management Is Really Good Communication

When inventory management works well, sales, operations, purchasing, finance, marketing, and leadership are communicating.

Sales understands what customers are planning.

Marketing communicates upcoming campaigns.

Purchasing understands lead times.

Operations understands capacity.

Finance understands working-capital requirements.

Leadership understands risk.

And the supply manager is connecting those pieces.

That is why I view the supply-management role as much more than purchasing.

Done correctly, it becomes one of the central information hubs of the company.

The Goal Is Availability Without Waste

If I were running an automotive aftermarket company tomorrow, I wouldn't tell my team to carry less inventory.

I also wouldn't tell them to carry more.

I would tell them to understand demand better.

Build accurate lead times.

Create realistic safety stock.

Develop reorder points.

Talk to customers.

Track supplier performance.

Monitor risk.

Review inventory daily, monthly, and quarterly.

And most importantly, never forget why the inventory exists in the first place.

It exists to serve the customer.

Because you can build the best product in the category.

You can price it perfectly.

You can create an outstanding dealer network.

You can spend thousands of dollars marketing it.

But when the customer finally says: “I'll take one.”

You better have one.

My Website: www.michaeltimmonsgg.com

My LinkedIn: www.linkedin.com/in/miketimmons

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