Complex Inventory Modeling

The Automotive Recycling industry presents a unique challenge. How do you assess cost to a product the viability of which is unknown?

The automotive recycling industry buys totaled vehicles for parts. Automotive recyclers will remove undamaged parts from the vehicle for sale into the car repair industry. The problem? The un-damaged parts are not fully known until the car is purchased and inventoried. Further, not all inventoried parts sell before they scrap it.

So if a totaled vehicle is purchased for $1000, how much cost is associated with each sale?

There was an industry-standard used that associated costs to inventory sales based upon historical averages. The industry standard took 18 months of activity, and assessed cost to sales based upon this period of activity. This standard works very well when the business is unchanged to purchasing frequency or value, utilization per vehicle, or type of vehicle purchased. When any of these inputs are changed dramatically, accounting records could deviate from the reality of the business for no less than six months.

Our experts reviewed the facts above. We developed a financial model that associated costs to inventory based upon the probability of a sale by part number. This new model captured changes in the business on average three to six months earlier than the industry standard.