Control Your Inventory Costs

Those who know me know of my passion for the automobile business and dealer profitability.

Each month, I spend hours looking at statistics and testing scenarios to identify the greatest areas of opportunity for improving dealer profitability. We all know the challenges of managing our personnel cost, advertising cost and last ,but certainly not least, our new-vehicle floor-plan cost.

There are two major items and several small ones to consider when looking at the cost associated with new-vehicle inventory.

First, there is the physical dollar amount of inventory we choose to stock. Second, there is the interest rate or floor-plan rate we are paying. To explore this more closely, I asked our data department to produce a special composite, based on more than 2,000 dealerships. The total report focus was asset management.

As of May 31, 2007, the average dealer client in this study had an outstanding new-vehicle inventory balance of $5.9 million, represented by 109 cars and 126 trucks.

This meant a dollar days' supply for cars of 60 days and 65 for trucks based on May 2007 sales.

Considering most manufacturers are moving into the annual model balance- out mode, the days' supply levels are not in bad shape.

Ideally, we would like to have a 45 days' supply of the right vehicles on the ground and an additional 15 days' supply in transit or in process to replenish our ground stock. But carryover has to be factored in during this period.

The other consideration, and the one that impacts us so much financially, is the interest rate we pay.

From experience, the gross floor-plan rate is 1% over prime, or 9.25% today. With certain performance incentives available from many captives, we can reduce that rate by as much as 1.5%, leaving a 7.75% net.

If we take the previously mentioned average client's new-vehicle inventory level of $5.9 million, we find there is a $59,000 annual cost per 1% of rate. So, assuming you are at a 7.75% net rate, this equates to an annual new-vehicle interest expense of $457,250 prior to any manufacturer purchase incentives, a.k.a. interest credits.

One option many dealers are now employing is a floor-plan rate program based on LIBOR (London Interbank Offered Rate). I don't want to cloud or challenge your relationship with your finance source, but I do want to introduce you to another option.

As of this writing, the three-month LIBOR rate is 5.36%. So, if you were able to arrange a package which, for example was LIBOR + 1.6%, then your rate would be 6.86%. Restated in dollars and cents, it represent a gross savings (excluding inventory insurance) of $52,510.

Couple this potential savings with a disciplined approach to inventory management, and it starts to add up to “real money.”

This disciplined approach includes focusing on the aging, the turn and (most importantly, in my opinion) ordering a realistic amount based on market conditions and customer demand.

As one wise dealer client commented a few months back: “There are few, if any, home runs left in this business. So we have to score runs by hitting singles.”

I don't know if the ideas discussed here represent potential improvement to your bottom line profitability, but there is the possibility that they just might.

Good selling!

Tony Noland ([email protected]) is the president and CEO of NCM Associates, Inc.

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