Beware of Aging Inventory on Car Lots

We are in a position to match or exceed the best new-vehicle sales year since 2000, and the sales outlook for used vehicles promises strong results as well.

This is great, and we are enjoying the fruits of our labor and the strong market. But dealers need to take some specific actions to make sure we have our house in order.

Actions we take in the fourth quarter will go a long way toward dictating our results in the beginning of 2016.

Following are thoughts on housekeeping actions I would suggest taking in the next two to three months to position for a strong first quarter of 2016.

Since December 2008, our Federal Funds rate has been 0%. There is speculation in some circles that rates could increase by year-end.  So, how does this impact us?

Through May 2015, according to NADA Data, the average dealer had a floor plan interest of $126 per retail vehicle compared with $89 per retail vehicle in 2014.  How does this compare with your operation? 

What impact would an anticipated interest increase have on your dealership net profit? Granted there isn’t anything we can do to affect the Federal change, but there is a lot we can do about how it impacts us.

First, monitor the aging of our new-vehicle inventory. As we know, most manufacturers offer some type of floor plan assistance program. These program benefits are tied to a theoretical period in dealer inventory. 

If we are able to sell each vehicle during this “free” period, our net interest cost is covered by the incentive. Once the days in stock exceeds the incentive, our interest costs begin to accrue.

I hope you have a process in place that identifies any vehicle that has been in stock for 75 days or longer. I suggest placing some type of physical marking on the vehicle to alert sales personnel that this is an aged vehicle. 

In addition, ensure that aging inventory is not “buried” behind newer inventory in your storage areas.

I fully support offering salespeople an incentive to sell these vehicles. My personal favorite incentive is a days-in-stock bonus. Each time a vehicle is sold, the corresponding number of days the vehicle has been in stock is credited to the sales person.

At month end, the sales person having the greatest number of total days receives a bonus. I know from personal experience this incentive works for both new- and used-inventory control.

A very important item this month is getting used-vehicle inventory in line, both from a dollar standpoint and also aging. Look at your historical used sales and dollar inventory level for the October, November and December period and compare it with your current inventory. 

If there are differences, take the necessary actions to bring it into line. Also, take a look at any vehicle that is 45 days old and move it while the market conditions and prices are close to your inventory value. 

Look at your inventory profile. If there are vehicles that don’t fit your profile, dispose of them now. It will be much easier to minimize losses if you take action now rather than waiting until the weather and market change and you begin to compete with the holiday season.

Early during the fourth quarter, look at your receivables. Look not only at your vehicle and customer-accounts receivables, but your manufacturer receivables (i.e. incentives and warranty). The more quickly you can identify and address any issues, the better chance you have of collecting and not having to reserve or write them off at year-end.

Recently I’ve heard about open repair-order issues from fixed-operation directors at what I consider to be good dealerships. Unfortunately, it appears that someone wasn’t monitoring the reports, and as a result there are unpalatable actions they now have to take.

Regarding personnel, the closer we get to year-end and the holiday period, the more difficult it becomes to make personnel moves or adjustments. Sit down with your departmental managers individually and review their staffing level and personnel productivity. I’m not making any suggestions here other than it’s important to monitor and compare your needed staffing level versus your actual staffing levels.    

Good selling!

Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.