Asset management 101 teaches that, at minimum, we should monthly review our days' supply of parts inventory, new and used vehicles, our dollar inventory levels and our receivables balance.
In addition, we are taught to monitor the aging of the components of these assets.
A while ago, I attended a parts-inventory management workshop conducted by expert Mike Nicholes. While discussing parts inventory turn and the factors that impact it, he drew a circle and labeled it parts inventory.
Within that circle, he drew a box with arrows headed both into and away from the box. He then noted that, when we calculate and discuss parts inventory turn, we are calculating the turn of the total dollar inventory.
But he added, “We have to look more closely at the factors that impact the turn. In many cases, we have great movement in the box. Fast-moving inventory comes into the box and is quickly sold while the balance of the inventory, represented outside the box, is sold less frequently.”
This leads to a decreased turn and a potential for obsolescence. This is why our dealership management system reports provide parts in inventory without a sale during the past nine or 12 months, he said.
I have often thought about Mike's example as it relates to new- and used-vehicle inventories. In both cases, we have a certain share of our inventories that turns quicker than others. But how do we manage the balance of those inventories?
In used-vehicle operations, most dealers now have at minimum a 60-day-and-out policy, with efforts increasing until then to sell vehicles that linger on the lot.
Unfortunately though, many dealers lack a formal new-vehicle aging policy.
Most auto makers offer some purchase incentives that provide an amount equal to the interest expense for a predetermined time period.
If we could sell each new vehicle within that time period, not only would we eliminate our floorplan interest expense, we would actually increase our departmental net profit due to the elimination of this expense.
I'm keenly aware of the challenges associated with actually selling each new vehicle prior to the expiration of the credits. But with increased attention on that portion of inventory over 90 days of age, you can limit your floor plan cost.
Many dealers give incentives to sales people to focus on moving this aging inventory. One incentive rewards the salesperson whose sales equal the greatest days in inventory.
For example, if I sell a vehicle which has been in stock for 110 days, I receive 110 points. At month's end, the sales person accumulating the greatest total days in stock receives the bonus.
Another incentive that works well is to place a saleperson's business card into a box each time he or she sells a new vehicle 91 days or older, 46 days and older for used. At month's end, the salesperson's name who is drawn receives the bonus. These incentives work and your sales force will help manage the aging.
The NADA Guides for our annual dollar inventory turns are as follows:
New-vehicle inventory = 8; used-vehicle inventory = 12; and parts inventory = 8.
The formula for calculating your inventory turn is: Month's cost of sales ÷ month-ending inventory = number of turns. Number of turns × 12 month = annualized dollar turns.
Much of our cash resides in our receivables and our used-vehicle and parts inventories. By focusing on monthly inventory turns and incorporating a policy for new-vehicle aging, you will not only limit your exposure from an obsolescence standpoint, you will likely see gross and net profits increase.
Veteran dealership consultant Tony Noland is at [email protected].