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Are You Really Managing Your Inventory?

October 2010, Auto Dealer Today - WebXclusive

by David Keller, CPA, CFE - Also by this author

After reviewing many dealerships’ financial statements over the last six months, it seems the used vehicle department is the king of profits and volume. Most dealers, with new vehicle sales still depressed, are selling more used vehicles than ever. This is evident also by the prices used vehicles are selling for wholesale (I meant almost retail) at the auctions.

It is more important than ever to manage your vehicle inventories. It is very tough to manage your new vehicle inventory, as the factories are all over the place with incentives, lack of certain product, etc. It’s much easier to control your used vehicle inventory. Used vehicles are much easier to buy, wholesale and retail than new vehicles. Your gross profits in this area, on average, are also much better.

If you are not selling at least three to four used vehicles for every two new vehicles you sell, you need to find out why. Yes, used vehicles, especially trucks and SUVs, are going for almost retail prices at the auctions, but they are still being retailed at very nice profits. So, adjust to market pricing and get going before it is too late.

The market price is driven by demand, especially a pent-up demand right now for trucks and SUVs. This is happening because many people, due to the high price of gas a while back, unloaded their trucks and took large hits on their vehicle equity just to save the few dollars they could on gas. Most people thought gas would continue upwards as it had been doing and panicked. Therefore we ended up with a glut of trucks and SUVs, which drove the price down. In fact, it drove the prices down to almost ridiculous levels for some vehicles. Now those same vehicles are bringing higher prices than ever before.

If you are managing your inventory, you should be stocking more of what you are selling. If the prices are going up, other dealers are buying the vehicles and leaving you in the dust because you are leery of giving too much for a vehicle. It may be because you just haven’t adjusted your mentality to where the market currently is. The dealers who have adjusted quickly to the market shifts and are not afraid to spend the money necessary to stock their lots are getting the majority of customers and gross profits.

After looking at many Cross-Sell reports, dealers’ inventories and sales histories, it is very apparent to me trucks make up at least 33 percent of the market, SUVs and crossovers make up 33 percent of the market and cars the remaining 33 percent. This indicates a shift from cars back to trucks and SUVs (gas guzzlers) from a year ago. When I look at dealers’ inventories, I normally do not find the same mix of vehicles as their sales indicate. This means there are many vehicles which are aging on their lots with little hope of being sold.

If you have small, gas-friendly cars to sell, good luck right now. The market for those smaller vehicles has shriveled up as gas prices have dropped. Until gas goes over $3 per gallon, I don’t foresee a large shift back to the smaller cars. And for that shift to happen, people will have to be shocked not only at the high price gas may reach, but also the speed at which they rise. That is what caused the problem a year ago when truck prices hit bottom. Smart dealers were steadily buying those trucks at the time of the lowest prices. The market almost always comes back after the shock wears off. People will always need trucks and larger vehicles for hauling people and their stuff. Old habits are very hard to break.

Good inventory management will generate a much higher overall gross profit. For example, if you had $500,000 invested in your used vehicles and currently average 10 percent return and six turns per year, your gross profits would be $300,000 annually ($500,000 x 10% x 6 turns) with a 60 percent return on investment. If using the same $500,000, you averaged 12 percent return and nine turns per year, your gross profits would be $540,000 annually ($500,000 x 12% x 9). This is an increase of $240,000 in gross profit over the previous example and a 108 percent return using the same $500,000 investment.

Most dealers rely solely on trade-ins and factory program vehicles for the correct mix of inventory and quantity. No other industry does business this way. For example, in a manufacturing or warehousing industry that has anywhere from $500,000 to $4,000,000 of inventory in stock, there would be at least one full-time person whose sole job would be to maintain the correct mix and ensure that an adequate inventory is available at all times. Dealers rely on their sales managers or general managers to perform this function, but those managers normally don’t because they are too busy or don’t know how or where to start.

For example: A grocery store stocks and sells 100 loaves of bread per week. It knows it must stock different types of bread (e.g., white, wheat, rye, etc.). It also knows the quantity per type changes on a regular basis but still remains somewhat predictable over time. If the store suddenly sells the 100 loaves in four days or sells all of its white bread in four days, it immediately orders and obtains delivery of additional stock so it doesn’t lose any bread sales to a competitor. In comparison, a dealership normally doesn’t know what quantity or mix of vehicles to stock, or they stock mostly used Fords because they are a Ford dealer, not a GM dealer.

Another thing I see in this industry that I don’t understand is when you have the same inventory in stock priced below what you are currently buying at the auction at a much higher price. Why don’t you re-price the old inventory at the new higher retail price to match the market? I call it the “fresh fish” theory. The prices on the same type inventory should be what the market will bear today and has nothing to do with what you paid for it or how long you have had it in stock. It is a mind game you are playing with yourself, and you are losing gross profit during times of rising wholesale prices.

Don’t wait! Those profits will be lost forever! Remember: If you always do what you have always done, you will always get what you have always gotten! You must be willing to change to achieve better results.

Vol. 7, Issue 8 

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