I recently gave an inventory-management presentation for the American International Automobile Dealers Assn. Not wanting to air just opinions on best-management practices, I researched this subject in-depth.

The first issue to think about is the global manufacturing capacity vs. the global market's ability to absorb this capacity. Worldwide, according to a PricewaterhouseCoopers study, is an estimated 24% industry overcapacity.

Dealers may ask: So what? What does this have to do with my business and my profitability?

Consider this: 2006 U.S. auto industry sales are forecast at 16.7 million units followed by China's 6.4 million and Japan's 5.9 million.

Question: Which country do you think will shoulder the biggest responsibility of absorbing the bulk of this overcapacity? That is a clue to what global over-capacity might have to do with U.S. dealers' business and profitability.

Meanwhile, since mid-2003 the Federal Reserve has increased rates each quarter by .25% In June of 2003, our prime interest rate stood at 4% compared with 7.5% as of this writing. These percentage climbs have increased dealerships' new-vehicle inventory costs dramatically.

Looking at our NCM client base as an example, in 2005 the all-franchise average net floor plan cost increased more than $105,000 compared with 2004. This one fact, if nothing else, should help focus our attention on managing our inventory.

Inventory decisions, once delegated to a sales manager, now need a general manager's or dealer's approval. For any discussion of inventory-management best practices, the absolute first priority should be a sound plan.

Inventory management is not easy. I know that. But what is easy in our business? We all know dealers who, regardless of the franchise, end each year with a net floor-plan credit, while others have tremendous interest costs. One basic trait, common to the dealers with a credit balance, is advanced planning.

In our parts operations, we know the count and dollar level of each and every part on our shelves. Do we have similar information readily available on our new-vehicle inventory?

We track the historical sales of each part, we have a predetermined stocking level for each and we know the best reorder points. It's ironic that we have this information available on a $5 part, yet on a $29,936 average-cost new vehicle, we don't capture and utilize comparable data.

The following are inventory-management recommendations. There's nothing magical here nor anything we haven't learned in our careers. But I will tell you that the best-performing dealers consistently use these best practices:

  • Dealer and management involvement in purchase decision.
  • Establish day's supply guidelines for each individual model.
  • Monitor/measure individual model sales and stocking levels weekly.
  • Base your buying decisions on hard fact, not raw emotion.
  • Control your dealer trades.
  • Monitor the aging of each new vehicle.
  • Employ a method (i.e., colored dots) to easily identify each new vehicle 60+ days in inventory.
  • Consider special salesperson incentives for 60+ day old inventory.
  • Place your oldest units in the front of the model display.
  • Put older units on showroom floor.
  • Daily/weekly new-vehicle inventory stock walks.
  • Monitor the turn rate of your inventory.

At times you need to make exceptions when a manufacturer's representative needs assistance in moving models. In fact, I would encourage this selectively. But don't let an exception become the rule.

Good selling!

Tony Noland is president and CEO of NCM Associates Inc. He is at tnoland@ncm20.com.