As a "pseudo-economist," I watch the economic indicators, listen to Mr. Greenspan, Bloomberg, etc. and try to figure out how all of this information overload relates to the automobile business.
My latest concern is the meeting of the Federal Reserve Board where an increase of one-half percent in the Federal Funds Rate was announced.
If my information and concern is correct, the Prime Rate will be 9.5%. Does anyone remember the last time we saw a rate that high? I'll help. It was for a 33-day period in January and February of 1991. Rates were on their way down from a high of 11.5% announced in February of 1989.
This time though, the trend is heading the other way, up from 7.75% in 1998.
Are you saying at this point, "What is he talking about? This article is supposed to be about the car business."
This is about the car business and taking as much of your gross to the bottom line as possible. This is about taking action and doing something about an item you can control, for the most part - your inventory.
If interest rates have increased by 1% during the past year, have you increased your new vehicle grosses an equal amount?
Actually, you should ask yourself if you have increased your grosses by that 1%, plus the amount of the price increase(s) because, in reality, there is more cost involved than just the 1%.
If you say 1% fast, it doesn't sound like much, but let's slow down a minute and think about the potential impact of a 1% increase on your floorplan expense.
The average cost of a new vehicle for our average non-highline client is $22,100. Paying a 9.5% rate, your annual cost is $221 more than it was with an 8.5% rate.
Extending this calculation, your annual inventory cost will be increased by $22,100 for a 100-unit inventory, $44,200 for an average 200-unit inventory, and so on. Do you get my point?
In 1999, the average NCM client, excluding highline dealers, spent 1.3% of their total dealership gross to cover their floorplan expense while the benchmark clients spent .6% of their total dealership gross. If you consider the number of clients included in the average and the dealer benchmark that ended 1999 with a credit in their floorplan interest account, the expense percentage grows. Compare these numbers to your results.
Many times in this publication I have emphasized the need to maintain a 60-day supply of new vehicles with an additional 15 days' supply in transit. In the near future, it may be increasingly more difficult to sell yourself out of an out of line inventory situation, so you need to take control now.
How do you take control? How often do you hear dealers comment that they have an inventory problem in certain vehicle lines? Why does this happen? How can it be prevented?
From experience I can tell you that out of line inventory situations don't just happen overnight. They happen as a result of not watching the individual model lines' sales rate and days supply.
Like you, I have had manufacturer representatives tell me that my failure to take less than desirable merchandise would result in my not getting the hot models. I realize that you can't totally delete these models from your inventory, but you do not have to warehouse these somewhat sales-proof vehicles. This is what increases your overhead.
The first thing you must do is to adopt a discipline whereby you weekly look at your new-vehicle inventory by model line. Do this without fail!
Calculate your total availability in terms of days' supply, by model line (which includes ground stock), vehicles in transit, and scheduled orders that will arrive prior to your next allocation. If your total unit day's supply for that model exceeds 60 days, you don't order any more, period, until your day's supply formula indicates a need for more inventory.
I have found that, by faxing a copy of your worksheet to your district or zone manager in advance of a visit to discuss your need to purchase additional inventory, you can avoid many unpleasant conversations and maintain some control of your own destiny.
One other very important item. You must communicate with your sales and inventory managers. You must let them know that this action is not a whim, but a firm policy that must have your personal approval prior to any deviations being made.
If you would like a copy of the inventory management worksheet I have mentioned, please contact me at NCM Associates and I will be happy to provide it and explain it without cost. The process works and your bottom line result will be a lower floor plan cost and an increased net profit.
Tony Noland is director of international operations for NCM Associates. He has 30 years of automotive retail experience.