Turn, Turn, Turn Inventory

What a difference a quarter makes. Remember a few months ago when dealers worried about low-inventory levels?

In group meetings, I always ask dealers to discuss their new-vehicle inventory levels and mix. During my most recent meetings, which included representatives of most franchises, low inventory was not an issue.

In fact, most dealers were concerned their inventories had risen to the point they were potentially going to face the possibility of turning down inventory.  To be fair, there was a lower days’ supply of some of the most popular models, but we all know the compromises required to obtain the best-selling products from auto makers.

December typically is a brisk month for car sales, and November sales were the highest seasonally adjusted sales month since 2007. So there are reasons to be optimistic.

That said, from an asset-management perspective, let’s realistically weigh the costs and benefits of larger inventories.

Interest rates continue to be at the lowest level in recent history, so that expense is minimized. But there are other associated real costs of high inventories, including pilferage, lot damage and “lot rot.”

In a perfect world, we would turn our new-vehicle inventory eight times a year. That would mean a 45 days’ supply of new vehicles on the ground and a 15 to 30 days’ supply in the pipeline. 

It is important to track each model’s days’ supply in stock and the travel rate for those models before making an order decision. Obviously, managed days’ supplies are higher or lower depending on the selling rate of a vehicle. That involves business decisions dealers must make.

A few reminders on how asset management relates to used-vehicle stocks. Our goal is to turn used-vehicle inventory 12 times each year or every 30 days. Do not confuse turn with aging. 

Most dealers have a rule that a vehicle will not be kept in stock for more than 45 to 60 days before it is sent to auction or otherwise disposed of. This is an aging policy. 

In terms of turn, I’m referring to higher return on investment. It is a fact that the more quickly you sell a used vehicle, the higher the gross profit.

Once a used vehicle is on the lot for longer than 30 days, the gross profit decreases drastically with few exceptions. So I contend this is the No.1 reason to concentrate on selling used vehicles quickly.

A few words about parts management. Our goal is to turn our parts dollar inventory every 45 days or eight times a year. With parts, your days’ supply and turn goal of 45 days are one in the same. 

Obviously with our ability to obtain parts more quickly, as long as we are not allowing our level of service to decrease, there are few cases for having a higher days’ supply or lower turn.  If you are a large volume wholesale dealer, your inventory level will most likely exceed the 45 days’-supply goal.

Receivables typically are an issue. Stay on top of them, keep your management team involved and don’t let an account linger past 30 days. This is not only a good practice, but an essential one. Tying management pay plans to receivables is one of the more effective methods of preventing issues from developing.

A quote from Harvard Business School as it relates to financial and inventory management is worth sharing:

“When turnover is quite rapid, that is when inventory is sold several times each year, the liquid character of inventory can provide funds if needed in the short term and may protect the firm against inventory obsolescence.”

Good selling.

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