It is no secret that the single largest consumer of your “net working capitol” is likely to be your used vehicle inventory investment. Unfortunately, and for reasons I will never understand, this investment generally hos 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 o doily basis with on inventory management system. Lock of controls and having no real inventory management system creates, for many stores, o large amount of “frozen capitol.” If the answer to any of the following questions is yes, it is likely that your store hos frozen capitol that needs to be objectively identified, released and re-invested.
- Hove you ever had to
“cash” some vehicles to make payroll? - Are any of your used vehicles on your floor pion?
- 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 hod a different mix of inventory?
Besides the real estate, your two largest recurring cash investments ore likely to be used vehides and ports. Today, the average franchised automobile dealership has o ports inventory investment of approximately $400,000. Dealers wouldn’t consider for o moment, not having o system that allows the manager to phose in what he/she needs and phase out what they don’t. The various inventory management systems ore based on o lot of indicators, primarily demand and movement. They con quickly tell the manager many things they need to know to make inventory decisions including rote of turn, gross profit as a percent of soles, return on investment, stocking guides, seasonality, and much more. We not only hope, but expect, to turn this inventory between four to six times per year.
With a monthly investment of $400,000, you con expect $800,000 in gross profit per year. This is based on a 25 percent profit on You get this figure by multiplying annual soles of ($3,200,000) by 25 percent – a benchmark percentage for figuring gross profits.
To figure your annual return on investment, divide your gross profit ($800,000) by your monthly inventory investment ($400,000), which totals your annual return on investment (ROI) at 200 percent.
If you wont to go a step further and figure your monthly ROI, just divide the annual ROI (200 percent) by 12 months, and you will get a 16.67 percent as your monthly ROI.
These numbers ore real, achievable and happen in many dealerships because of diligent, daily inventory management. Hoving the right port on the shelf at the right time is one of the keys to making this happen. The hardware and software costs for ports inventory management typically fall in the $2,500 per month range.
You also hove expectations of your much larger cash investment-used vehicles. However, getting the some figures for vehicle inventory is a bit different. The average cost of used vehicles inventoried at franchised automobile dealerships today is nearly S 14,000. It is not unusual for o dealer to hove l 00 (or more) units in inventory, or o total investment of $1.4 million. Assuming this inventory (100 units) is o 60 doy supply (six turns per year), you will retail 50 units per month.
To figure your yeorly ond monthly ROI percentages, first you mus1 colculote gross profits for both. To get monthly gross profits, multiply how many units you will retoil per month (50) by the front end gross per unit ($2,000}. This gives you $100,000 gross profit per month. Multiply that number by 12 months to get annual gross profit ($1,200,000).
To figure your onnuol ROI, divide your annual gross profit ($1,200,000) by your inventory investment ($1,400,000). Your onnuol ROI is 85.7 percent. Divide that percentage by 12 months to get 7. 14 percent os your monthly ROI.
This equols slightly less thon half the return that your ports inventory generates – not including wholesale losses. To improve you hove three choices.
- Keep the some gross while reducing the investment.
- Keep the same investment ond increose the grass.
- Reduce the inves1menl and increase the grass 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 lo diligent inventory management. The quicker the turn, the higher the gross ond the lower the investment required to do it. It is relatively simple, stock more of who! your customers ore looking for and your investment will become more active. A more active investment means quicker turnover.
Unfortunately, most dealers rely on managers who continuously claim, “I know what sells ond what doesn’t.” Hove you ever changed used vehicle deportment managers and were told that your inventory was oll wrong ond you really needed to start over? Everybody hos on opinion. Often times they aren’t the some. You need lo hove your investment managed by objective facts, not subjective opinions. Most used vehicle deportment managers ore also largely resistant to inventory management systems. There are numerous excuses; here’s just o few: “I can’t control who! comes in on !rode.” “Yes, I know I need some of those; just dial 1-800-used-cors ond order me some.” “No computer con manage my inventory better than me.”
Perhaps it is because they generally fear accountability. I really don’t understand the resistance to something thot will increase their personal W-2s. Let’s face it, this is sizeable investment portfolio. This deportment often determines whether we make o net profit or not. Dealerships need on inventory management system. Most oll ore less expensive than o ports inventory management system.
Do yourself o favor, commit lo making o change in your used vehicle department and install on inventory management system. Demond tho! the process is inviolable. Monitor its use and progress ol least once o week. When it is running properly ond decisions are being mode by the numbers, not by emotions, your used vehicle inventory turn will be more like nine to 12 times o year. It is not likely that you will begin achieving different results without changing
current behavior. =ADM