September 2015, Auto Dealer Today - Feature
Controlling your inventory is essential to maintaining profitability and growth. The number of factors involved in determining the quality of your inventory is virtually infinite, and many of those that will have the largest impact are out of your control. Your inventory isn’t something that can be changed quickly and certainly not cheaply. So let’s take a look at the key considerations to keep in mind as you fight to take control of your inventory.
1. Pick your battles. The list of factors you can’t control includes availability, factory rebates and incentives from the manufacturer, not to mention moves made by your competitors. All of these things can conspire to rob you of your ideal stock. And if you represent multiple brands, you know there can be a big difference in the ordering process and unit lead times from one factory to another.
Couple that with items such as your desired and expected sales, pricing and business plan, and you have a three-dimensional, 10,000-piece crossword puzzle. Since so many items are out of your control, the importance of focusing on what you can control should be obvious.
2. Know the rules. Determine the optimal inventory for your store. You know more vehicles and a larger selection leads to increased sales, but at what cost? Remember, the larger the inventory, the more challenging it becomes to adjust or rebalance on the fly. You need to know how much you want to invest up front, a question I ask myself every month during open allocation — and usually every day of the month, even when allocation is closed!
A great inventory plan has a heavy mix of the vehicles that consistently sell. Review your past sales history, but don’t forget that it will reflect, to a large extent, the vehicles you had in stock, as well as clearance sales you held to clear out aging units. Depending on your business model, that may be perfectly acceptable — after all, volume sales lead to volume fixed gross. But if your OEM provides reliable, detailed data on area sales, use it to your advantage and tailor your inventory to match the larger market demand.
3. Tag-team your opponent. Your salespeople must have a way of relaying information about missed opportunities, because it is very difficult to sell what you don’t have. Ram dealers need to know if a customer asked for a 1500 crew cab with a six-foot, four-inch box and all they had was the five-foot, seven-inch box. Again, sales largely depends on what you have on the ground. Try ordering a few vehicles you typically haven’t stocked and watch them closely. If they sell fairly quickly, order more. Be willing to take a few calculated risks.
4. Keep an eye on the stats. Do you enjoy dealer trades? Me too, and I’ll give you a little tip: If you are calling other dealers more frequently than they are calling you, that means they are ordering the units people want. Track your trades closely and work to improve your ratio.
5. Keep your cool. Avoid the temptation to overreact to rapid sales increases on a specific model. It is strange how a marginal seller can get hot for a short period of time. You have a reasonable number on your lot, and within a few weeks, you are almost out. Do you make panicked phone calls, pay too much for additional units and order up what would normally be a six-month supply during your next allocation? If so, don’t be surprised if you find yourself holding a big clearance sale on that model in a few months.
Some dealers use pricing to manage their inventory. Others use inventory to manage their pricing. Why not do both? Effective inventory management takes a lot of time and effort, but it’s a silent driver of success: Paying attention can grow your bottom line and ignoring it can slowly kill your profitability. So roll up your sleeves, get in the ring and wrestle your inventory into submission.
Steve Fox is general manager of Lithia Chrysler Jeep Dodge in Santa Rosa, Calif., and a 25-year auto retail and service veteran. SFox@AutoDealerMonthly.com