Car Dealers Rarely Pay Much Mind to This Costly Expense

Dealers are typically expense-conscious.

They’ll often sign every check, and pressure-test monthly bills: How many leads did we get from that third-party website? Is that F&I manager really worth $12,000 per month? Couldn’t we find a less expensive tire supplier? 

But here’s the check they effectively sign every month that rarely gets much scrutiny: $2 million spent on new-vehicle inventory orders.

Each month, managers order new vehicles from the factory, and there’s little, if any, accountability for these decisions. The wrong cars are ordered. Inventories pile up. The cycle repeats.

No doubt, manufacturers occasionally will encourage or even beg dealers to take less-desirable inventory. But this pressure cannot explain the entire glut of aged units in stock on dealers’ new-car lots.

I conducted an informal test. I examined the inventories of different dealers with the same brand. The results were striking: Some dealers had less than 10% of their new cars older than 180 days, while many others had over 60%.

The same manufacturer. The same ordering constraints. The same everything.

What’s the difference? The answer is the focus and attention the dealer and their managers pay to inventory-management software systems that show assorted data related to market supply and demand.

With new-car gross margins razor thin for many brands, the importance of efficiency-minded inventory management has never been more important. Dealers stand to make significant money by increasing inventory turns, which drives more downstream profit opportunities in their F&I, parts, service and used-vehicle departments.

Similarly, improved inventory management can turn floorplan expense into a consistent money maker. Witness the $65 million in floorplan income AutoNation achieved in 2015.

There are two things dealers can do today to improve their new-vehicle inventory management.

First, take advantage of technology. Nearly 90% of dealers rely on an inventory-management solution to help them become better, more profitable used-vehicle retailers. In new vehicles, I’d estimate less than 15% of dealers use an inventory-management system to make market-based pricing and stocking decisions.

I’ve come to understand dealers often don’t believe these tools are necessary. The OEM system works just fine. The problem? OEM systems can fail to highlight current in-market opportunities such as the days’ supply of a particularly  configured vehicle is too high or, conversely, you own a configured vehicle you should absolutely not trade to another dealer.

Over the course of a year, these daily insights produce a dramatic impact on a dealer’s profitability.

Second, tie sales managers’ pay plans to inventory turns, monthly floor plan income or a combination of both.

With used vehicles, managers often must meet inventory age/turn benchmarks to optimize their compensation.

With new vehicles, you’d be surprised to see how quickly the number of aging units will quickly vanish once a portion of the sales manager’s income requires efficient inventory management.

Brian Finkelmeyer is vAuto’s director-conquest business development.