Inventory Management—How Do
You Stack Up?
By Christopher Leedom
How would you rate your inventory management skills?
For many dealers this is an area that is often overlooked. Given the
current state of
the market it is more critical than ever that dealers understand and
master proper inventory management skills. Poor practices in this area
have put more than a few dealers out of business. So what are the basics?
Inventory
is usually a dealer’s single biggest asset, with the exception of buy
here-pay here dealers where it may be second only to outstanding
accounts receivable. But I am continually amazed at how many dealers
fail to practice good inventory management skills. Answer this question:
“How many times have I found myself in a cash crunch but had plenty
of cars on the lot?” If this scenario happens to you often you may
need
to evaluate your inventory management practices.
For many dealers
the critical issue is how much inventory is necessary to adequately
stock the lot and produce sales. Since 1995 I have
analyzed inventory management and gathered data to establish industry
benchmarks
for inventory management. Here are some key benchmarks with respect
to inventory management:
1. Maintain a 45 day supply based on
an average month’s sales
2. You should strive for 8 inventory “turns” per year
3. Less than 30 day supply and you may hurt sales
4. Greater than 60 day supply and you will have an aging problem
5. Units older than 45 days need attention
These are five basic rules
for inventory management that are tried and proven. But how do you
implement them? It comes down to one
word – DISCIPLINE.
Dealers are lulled to sleep by many flawed practices when it
comes to inventory management. You cannot always “sell” your way
out of an aged
unit. Many dealers fall in love with cars that then age 60,
90, 120 or more days. The bottom line is when you have a unit that
does not
sell
it is due to one of three reasons. They are:
1. The unit
is not being shown to potential customers.
2. The unit does not have eye appeal. Visually less than desirable.
3. The unit is mechanically deficient thus preventing a
sale.
Go grab a current inventory sheet and identify all of
your cars over 60 days old. You don’t have any? GREAT JOB. If
you do have
60 day
or older units then go carefully inspect these cars and
determine which
of the three reasons above apply. Then correct the deficiency
and sell the unit.
The result of poor inventory practices
is observed in several areas. First, dollars tied up in excess inventory
are “frozen”
and exposed
to depreciation. Remember a car is a depreciating asset.
They are not like
fine wine where they get better with age. Secondly, your
gross profit margins will suffer because you will be
selling from
a cost basis
that is typically higher than the current market. By
having fresh inventory
you are able to really maximize gross profits. Third,
all dealers know that sales people like fresh inventory. If
you allow aged
inventory to accumulate more and more of your precious
inventory dollars will
be tied
up and not producing gross profit to help you run your
dealership. |
