At some point, dealership floor-plan rates will increase to a more normal level. Having a process in place will help manage this huge expense.
I have had several discussions with dealers and general managers about new- vehicle inventory levels, days’ supply, turn rates and aging.
With few exceptions, auto makers offer some form of floor-plan assistance or purchase incentives to reduce interest cost. Dealers need to maximize the opportunity these programs afford.
For the past months, due to natural disasters and other events, dealer inventories have not been at a desired level. But there is a bright side to this. Reduced inventory levels normally translate to higher gross profits per vehicle retailed.
Reduced inventory also reduces floor-plan interest costs, which translates into an increased net profit.
If you don’t track your interest expense monthly prior to any credits, I recommend you begin this quick exercise. At some point, floor-plan rates will increase to a more normal level. Having a process in place will help manage this huge expense.
In theory, if I can sell each vehicle within a prescribed time period, I will have credits equal to or less than my floor-plan expense, so my challenge becomes turning my entire inventory quickly.
The National Automobile Dealers Assn.’s guide for new-vehicle inventory turn is eight times a year. Yet we can be turning our inventory at an acceptable rate but still have hidden expense in the form of aged units. How do we control aging?
First, as easy as it might be to say, minimize the units in your inventory that are not fast sellers. I know auto makers want you to have a representative sampling of their product lines, and consequently dealers have to buy less-desirable vehicles in order to get the most desirable models. But you often can minimize this situation through negotiation and marketing.
The next step in controlling aging is adhering to a process in which units are physically identified for your sales and management personnel once they reach the 60-day mark. Many dealers use hang tags or brightly colored adhesive dots affixed to the back of the rear-view mirror for easy identification of these vehicles lingering on the lot.
As a part of their new-vehicle monthly incentive plan, many dealers have a days-in-stock bonus for their sales personnel. Each time a vehicle is sold, the salesperson is given a credit representing the actual number of days the vehicle has been in inventory.
At month’s end, the salesperson having the greatest number of total days is awarded the bonus, usually around $250. This is a great way to have your entire sales organization focused on aging.
If you want to take it a step further, put a small incentive on aged units for your lot porters and they will ensure your aged inventory is clean, gassed and properly displayed. This works.
Another basic step in controlling your stocking-interest cost is to assign a desired days’-supply level to your inventory in total and by individual model, then track it weekly (actual versus desired) using the formulas provided below. Obviously, your desired numbers will change monthly, so by having current information available, you can prevent most out-of-line conditions.
There are two methods of computing days’ supply, one for units and one for dollars.
For unit days’ supply:
Most recent month’s vehicle sales divided by 30 days equals the daily sales rate. Then total month-end inventory count divided by the daily sales rate equals the unit days’ supply.
For dollar days’ supply:
The most recent vehicle-sales dollars divided by 30 days equals the daily sales rate. Then the total inventory amount in dollars divided by the daily sales rate equals the days’ supply in dollars.
Calculating your weekly and monthly days’ supply and having the results as an exhibit or reference when preparing for your monthly wholesale ordering could save you a lot of money.
Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.