It is no secret that the single largest consumer of your “net working capital” is likely to be your used vehicle inventory investment. Unfortunately, and for reasons I will never understand, this investment generally has the fewest controls, checks and balances and is likely to be one of the few inventories owned by the dealership that is not “actively managed” on a daily basis with an inventory management system. The results of these lack of controls and no real inventory management system, creates for many stores, a large amount of “frozen capital”. Have you ever had to “cash” some vehicles to make payroll? Are any of your used vehicles floorplanned? Do you seem to experience more “wholesale pain” than you think you should? Do you wish you really knew what your “lost sales” of used vehicles is? Do you think you would gross more if you had a different mix of inventory?
If the answer to any of these questions is yes, it is likely that your store has frozen capital that needs to be objectively identified, released and re invested.
Besides the real estate, your two largest recurring cash investments are likely to be used vehicles and parts. The average Franchised Automobile Dealership today has a parts inventory investment that is somewhere around the $400,000.00 area. The average cost per piece is around $38.00. Dealers would not even consider for a moment, not hav ing a system that allows the manger o phase in what he/ she needs and phase out what they don’t. The various inventory management systems are based on a lot of indicators, primarily demand and movement and can quickly tell the manager many things they need to know to make inventory decisions including rate of turn, gross profit as a percent of sales, return on investment, stocking guides, seasonality, and many more. We not only hope, but expect, to turn this inventory between four and six times per year. Turning a $400,000 parts inventory six times per year at the typical Gross profit as a percent of sales of 25% means that the Gross Return on Inventory Investment would be about 187%, or nearly 16% per month. These numbers are real, achievable and happen in a lot of Dealerships because of diligent, daily, inventory management. Having the right part on the shelf at the right time is one of the keys to making this happen. The hardware and software costs for parts inventory management typically fall into the $2,500.00 per month range.
You also have hopes and expectations for your much larger cash investment-Used Vehicles. In reality, the math here is quite different however. The average cost of used vehicles inventoried at Franchised Automobile Dealerships today is nearly $14,000 per unit. It is not unusual for a dealer to have 100 (or more) units in inventory or a total investment of $1,400,000.00. Assuming this inventory is a 60-day supply (six turns per year) that would mean the following: 100 unit inventory, 60-day supply = retail sales of 50 pieces per month times front end gross of $2,000.00 = $100,000.00 gross per month or $1,200,000.00 per year. Gross return on inventory investment then cal culates to 85.7% per year or 7.14% per month. Slightly less than half the return that your parts inventory generates (not to mention wholesale losses). To im prove upon this indicator, you have three choices: 1. keep the same gross while reducing the investment, 2. keep the same investment and increase the gross, or 3. reduce the investment and increase the gross by increasing turnover.
This can only happen by having more of the “right stuff” on your “shelf’ more of the time and by paying strict attention to diligent inventory management. The quicker the turn, the higher the gross and the investment required to do it becomes less. It is relatively simple, stock more of what your customers are looking for and your investment will become more active. A more active investment means quicker turnover.
Unfortunately, most of you rely on your manager who continuously claims, “I know what sells and what doesn’t, I just need more customers” are just a few of the common phrases they espouse. Have you ever changed Used Vehicle Department Managers and were told that your inventory was all wrong and you really needed to start over? Everybody has an opinion. Often times they aren’t the same. You need to have your investment managed by objective facts, not subjective opinions. Most Used Vehicle Department Managers are also largely resistant to inventory management systems. I have heard all the excuses. “I can’t control what comes in on trade”, “yes, I know I need some of those, just dial 1-800 used cars and order me some”, “no computer can manage my inventory better than me”, are just a few. Perhaps it is because they generally fear accountability. I really don’t understand the resistance to something that will increase their personal W-2’s. Let’s face it, this is sizeable investment portfolio. This department can often determine whether we make a net profit or not. The bottom line is that rriost dealerships need an inventory management system. There are many good ones out there. Mine is one. Most all are less expensive than what you are paying for your parts inventory management system. Do yourself a favor, commit to making a change in your used vehicle department and install an inventory management system. Demand that the process is inviolable. Monitor its use and progress at least once a week.You will be glad you did. When it is run-ning properly, and decisions are being made by the numbers, not by emotions, you will be turning your used vehicle inventory between 9 and 12 times a year. The numbers you can achieve will amaze you. It is not likely that you will begin achieving different results without changing current behavior. If you would like more information, please feel free to contact me anytime.