Think back to when you were a kid. Remember the Slinky, that famous metal spring toy that “walks downstairs, alone or in pairs and makes a ‘slink-ity’ sound?”
There’s a “Slinky Effect” that’s happening in our industry. And you are most likely dealing with it as I write this editorial.
Here’s Jon Zurcher, chief operating officer of Best-One Tire Group, which encompasses 285 locations, with some more insight.
“When using the Slinky analogy, we’re looking at the quantity of tires on-hand,” he says.
“When demand exceeds supply, the Slinky gets stretched out. Inventory levels get thin because tires are literally going out the door as soon as they come in.
“The last two years, inventory was stretched thin through the supply chain. In November and December 2022, we felt inventories compress. Months of back-orders all shipped at the same time. Multiple containers of tires suddenly appeared at once.”
Does this sound familiar?
At the beginning of the Slinky Effect, Zurcher continues, dealers — particularly those who sell commercial truck and ag tires — felt compelled to place larger orders, while ordering inventory “several months out, to make sure they had tires in the queue.
“Some manufacturers were even taking and asking for orders as far as 12 months out, so they could plan production. Some dealers placed larger-than-normal orders to communicate need and demand. They also put orders further out in the queue than normal, hoping to lock their place in line.
“When supply caught back up at the end of the fourth quarter, all those back-order shipped at once,” says Zurcher. “It literally flooded dealers with inventory.
“According to P&L statements, most tire dealers performed very well this past year. Net profits were strong. The challenge is that much of the paper profits have not equated to cash.”
Now I bet that sounds familiar!
So what is his advice to you and other dealers who find themselves in a supply imbalance situation? Make sellout your priority. Here, programming becomes important, “as does service.”
If you’re struggling with commercial tire sellout, exercise caution when extending credit, he advises, as “some trucking companies are going to feel a crunch.”
Another piece of advice is manage your buying with a careful eye.
“Prior to the pandemic, we set minimum and maximum stocking levels by article number and we ordered accordingly. We got away from this practice the past two years and we’ve circled back to it now.”
And benchmarking inventory will be more important than ever, he says. “We’re measuring in days, instead of turns.”
Twelve months ago — when inventory was stretched thin like a Slinky — dealers had little cash tied up in stock.
“Because of payment terms offered by manufacturers, a dealer could purchase a tire, receive it and sell it before the payable date became due. For most dealers, this is no longer the case.
“Because inventory compressed in such a strong manner during the fourth quarter, the number of days of inventory on-hand is by far exceeding payment terms offered by suppliers.”
He recommends running an inventory report to see how much money is tied up in stock and then “compare that to accounts payable. This will help answer the question of how much of your cash” is frozen in inventory.
“Right now, dealers should focus on getting quantity carrying values back to normal levels — having the right quantity of tires on the floor and in stock,” says Zurcher.
“Due to the series of price increases over the last two years, even if we see some price corrections, the carrying cost of inventory will still be high.
“I’ve seen some dealers’ inventory as much as double when comparing prior-year to current-year carrying value. This will level out. But the new baseline will be higher due to the price increases we’ve absorbed into inventory over the past few years.”
The good news is that we’re heading into summer, which should help alleviate pressure on inventories. And if we’re lucky, the Slinky will bounce back again.
Wouldn’t that be nice for a change?
