I've addressed the subject of new-vehicle inventory management numerous times over the years. Based on the conversations I'm having with dealers, the time is right to readdress it.
First, as a qualifying statement, this article will not include any revelations or magic bullets. But I hope it will provide a few reminders of best-management practices as it relates to new-vehicle inventory.
During the past three to four years, domestic dealers have been impacted the most by not staying on top of their days' supply; but I understand this concern may be expanding to potentially include most franchises.
If we believe the new-vehicle sales forecasts — and I do — we will see an industry sales decrease in 2008. Sure, there will be an increased demand for some individual products, but generally speaking, we must become proactive in managing our new-vehicle inventories and not allow this asset to manage us.
From a dealership profitability standpoint, I would encourage you to work toward a 60-day supply of the right vehicles and a much lower days' supply level of the not- so-desirable products.
All products don't sell in all markets, so you must identify your strong areas and order accordingly.
I'm not so naive to think the manufacturer will allow you to order as if you were choosing from an ala carte menu. But with a sound business plan and more importantly, proper execution (i.e., market share responsibility attainment), my experience has shown they will work with you. This business has always been, and will always be, a 2-way street.
From a process standpoint, calculate your current unit days' supply for each model you sell. Here's the formula for that:
Take the total retail unit sales count for the most recent month (by individual model) divided by the number of sales days in the month. This will be your daily sales rate. Take your inventory number for this model line divided by your daily sales rate to arrive at your current days' supply on the ground.
Next, do the same exercise, but this time increase your inventory level by the units in transit for that model to determine your availability.
Failure to calculate availability is a mistake I've learned the hard way, as have many of you. One variable you do need to consider is timing. By timing I mean this:
If we are planning an order for a period with traditional increased sales activity (i.e., March-April vs. January-February), we need to forecast this potential increased daily-sales rate when ordering.
In a perfect world, we could employ the just-in-time inventory management system much like we do in our parts departments. But unfortunately this isn't realistic for ordering new vehicles today.
What we can do is work to keep a 45-day supply of the right product on the ground with a 15-day supply in transit. If we miss, our inventory will balloon to maybe a 60-day supply by model, not a 75- or 90-day level. On the products that might not sell as briskly in your market, try to maintain a maximum 30-day supply level.
One successful process I employed in my retail life was to send my manufacturer's representative a copy of my inventory worksheet in advance of our wholesale meeting. By doing this, the representative arrived at the meeting prepared to discuss inventory needs based on the business case I had provided them.
Did I sometimes end up varying from my plan. Yes. I always tried to work with the manufacturer and take inventory I didn't necessarily need or wasn't part of my plan. But I only did so on a limited basis.
Is inventory management easy? We all know it isn't. But if we don't take control of this area of our business and establish a sound internal process, we will see our floor-plan costs increase and our net profit compromised.
Tony Noland (firstname.lastname@example.org) is the president and CEO of NCM Associates, Inc.
Questions or comments about this column? Send us an e-mail at Dealers@wardsauto.com.