Thoughts on Managing Inventories
January 2013, Auto Dealer Today - WebXclusive
Have you ever thought about how much cash you have in inventory? Cash is a form of inventory. You have to manage how much you have. You have to restock on a regular basis. You have to make sure you have enough cash or your sales will most likely be lower than normal. You have to make sure you don’t overstock or you could wind up with a lower return on investment in your business. The only good thing is, you don’t have to worry about cash falling out of popularity.
New vehicles are either purchased from the factory or other dealers. Some dealers stock certain vehicles they know will work for dealer trades so they can get a specific vehicle for the customer when they need it. Have you ever tracked the number of dealer trades as a percentage of your sales or current inventory? You may be surprised to find how large the percentage of vehicles sold you had to dealer-trade for. If this is the case, should you change your ordering patterns to more closely align with the number of dealer trades you have to go get versus what you order for stock? Makes sense to me, but I don’t see many dealers reviewing their ordering practices to adapt to this idea.
A dealership’s used vehicle inventory has become a full-time job to manage. All I hear from dealers in different parts of the country is they can’t find the vehicles they need. They buy vehicles in a multitude of ways, such as from online auctions, brick-and-mortar auctions, other dealers, advertising to the public, trade-ins, Internet sites, etc.
Why am I giving you a lesson on inventory that you already know? Inventories are all about processes. Do you have processes in your dealership to actively manage your inventory? As I travel around the country and talk to dealers at conventions and at their dealerships, it seems for most it is still a “hit or miss” process to obtain new inventory and manage the inventory they already have.
Why is an inventory process one of the most important things you should have in your business? Because inventories are the only things which make you money! Inventory is normally the largest asset on your balance sheet. It is also the largest liability you owe money on. Shouldn’t you have a central manager/team whose priority is to manage these assets and liabilities? Most dealerships don’t. Most manufacturing companies do, and they normally stock much less inventory than you do.
I can’t tell you how many times I have heard from dealers and their used car managers about how far they have traveled and how many different auctions they have had to go to for the used inventory they need. I hear from dealers and buyers from southern states who are going to northern or western states to buy the vehicles they need. Then, I hear from northern or western dealers who are going to southern states to buy the same types of vehicles. Does this make sense?
Dealers and buyers may find the vehicles they are looking for at the auctions, but they are going for crazy prices. Wait a minute. I thought auctions were third-party transactions where vehicles were sold at fair market value. So, what I am hearing is, the auctions are now selling vehicles for something other than fair market value? How dare they participate in something like that! We have to stop this practice before it gets out of hand!
I also hear how close some of these vehicle wholesale prices are to the same new model you are stocking. Are these used vehicles at auction being bought by new or used car dealers? If they are bought by used dealers, then they are trying to compete with the new model you have and will advertise it as such. How does your customer know they can buy the same vehicle new from you for just a few more dollars due to factory incentives and special offers? They normally don’t because you don’t advertise in a way to let them know this. I haven’t seen any advertisements which show you can buy a new vehicle on your lot for a few more dollars than a used vehicle of the same model on your lot. What a novel concept, huh?
It also amazes me when dealers who own multiple stores seem to find it difficult to move aged inventory—both new and used vehicles—to another store where it will be “fresh” inventory and have a much greater chance of selling in the next 30 days. It seems the managers at the various stores all think their inventory is much better, they are better buyers and remarketers than the other store managers, and they own their inventory at the right price as compared to the other stores. I could go on and on and on.
Dealers and managers, all I am saying is, make inventory management—and the processes needed to manage it properly—the utmost priority in your dealership if you want to maximize your sales opportunities and minimize write-offs and write-downs. Let me know how you are going to change to make this happen.