October 2009, Auto Dealer Today - WebXclusive
Numbers Don't Lie
The importance of precise vehicle inventory management has never been more clearly defined than it is today. It is well known that precise vehicle inventory management can be the difference in whether or not we operate our stores at a profit or loss.
The first principle (and a concept that is difficult for many managers) is that the investments in vehicle inventories are no different than any other type of investment portfolio. Some investments clearly perform better than others. You have made these investments expecting a return on investment (ROI). It is only natural that when a specific portion of your investment portfolio is producing a significant and rapid return, you would want to do more of it.
Conversely, when other portions of your investment portfolio are underperforming, you would want to do less of it. The secret to growing your ROI and maximizing this profit center is to know exactly what each individual investment has done for you in the past, what it is doing for you now and how the investment needs to be re-structured to grow the ROI in the future.
An example of the financial impact to your bottom line that you can achieve for your new vehicle inventory is as follows:
# New units sold on an average month 65
# New unit inventory for an average month 200
Average cost per new unit $29,655
Current Floor Plan Interest Rate 6.25%
When you crunch these three simple numbers here is what you will find:
Your current days’ supply of inventory is 95. If you can get your inventory down to a 90-day supply, you will release frozen capital of $148, 275 and have a direct savings of $9,267 per year. If you reduce your days’ supply to 75, you would release $1,112,062, resulting in a direct savings of $69,503. Better yet, by operating with a 60-day supply of new vehicles, you would free up $2,075,850, earning you an interest savings alone of $129,740.
This is not a pipe dream. Many dealerships are doing this. This does not include the additional gross you will capture by having a quicker-turning inventory (the clients I work with typically see an additional gross of $100 per unit and this would mean another $7,800 per year for this example store) or the direct expense savings you will realize by the reduction in policy and delivery expense.
Similar savings can result for your used vehicle department by achieving the target days’ supply of 37. Any good vehicle inventory management system will:
1. Allow you to continually phase in what you need and phase out what you do not based on facts
2. Be easy to read, use and understand
3. Recommend some specific action that needs to be taken
To fully develop the potential of this additional profit center, you need to have several key pieces of information for every single one of your investments. This information does exist in your DMS, regardless of brand. The hard part for dealerships seems to be the ability to assemble this information, update it every day, develop and implement action plans and monitor the results. In other words, you need an automated, reliable, ongoing vehicle inventory management system. You would never allow your parts inventory investment to be managed without a system. How is your vehicle inventory any different?
It is clear that precise vehicle inventory management is here to stay, and the sooner you take a proactive approach to this all-important topic, the sooner you will begin to realize the positive financial impact in your operation.If you would like to see what kind of revenue impact could be achieved for your operation, drop me an e-mail and I will send you a revenue impact calculator file.
Vol. 6, Issue 9