Should We Order a Lot?

New-vehicle inventory management became a top challenge of 2004. Record days' supply levels occurred, hitting 78 days of unsold vehicles on Nov. 1, the highest level for that date in 10 years.

Japanese auto makers on average had the lowest days' supply, 51, while others had levels in the 80s, 90s and even 100s.

One thing we know for sure in the retail world is that a manufacturer's inflated supply of unsold inventory equals high incentives. Let's hope they bring inventory levels down.

The real question we, the retail dealership operators, must ask is: How aggressive do we become in our inventory planning and purchasing this year?

Now is the time we historically have increased our levels of inventory to meet the spring demand. Do we order aggressively this year or are we better off to take a wait and see approach? Whichever, I hope all dealers are involved with their management teams in determining future inventory mix and levels, and not delegating this responsibility.

I can't look into a crystal ball and predict this spring's sales rate. But I can, as you can, review inventory levels and sales for this same time period in 2003 and 2004. When reviewing sales for a prior period, it's important to factor in the incentives that were in effect during that time.

From a profit and loss standpoint — and that's the reason most of us are in this business — we must put an end to the high days' supply levels many dealers have learned to accept.

Interest rates have been low for the past few years and now are beginning to increase at a steady pace. One percent doesn't sound like much, but if we are looking at increasing our floor plan cost by 1% on a $5 million inventory, we have just increased our annual overhead by $50,000.

So, what do we do? To accomplish your assigned sales objectives, first determine the necessary days' supply level by individual model.

Next, compare the desired days' supply level with your actual level, making sure to include the vehicles in transit to your dealership.

Take your total unit sales by individual car and truck model for the past 60 days and divide it by 60 to determine your daily sales rate. Then take your current inventory, including units in transit, and divide it by your daily sales rate. This will give you your individual days' supply.

At a minimum, this needs to be calculated weekly. This is the only way you can determine the need for inventory. Long gone are the days when we could place orders based on a hunch.

The next real test comes when your manufacturer's representative sits down to discuss future inventory needs. Regardless of how badly you need a hot product, resist “the package deal.” Is it really prudent business to buy three or four slow-moving product to get one hot vehicle?

Sometimes you must negotiate, but there's a tremendous difference between making exceptions to a rule and making the exception the rule.

If you will commit to a goal of a 55 to 60-days' supply of new vehicles and work each day to maintain that commitment, not only will your overhead be reduced, but you will be in a better position to react as market conditions dictate. Good selling!

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