In most stores, the current management’s “intuition” seems to be the predominant inventory management process. There’s nothing wrong with management intuition, nor experience, “gut feel” or the “school of hard-knocks”. They are all attributes that come with any personnel decision we make. Every new manager we hire comes with these attributes.
Stores experiencing sales gains and positive growth to their bottom line in the current economic climate are doing things differently today than they were just a short time ago. Effecting change can be a difficult task, but if you are not changing the way you do things, chances are you’re not making gains either.
I often ask dealers if they invest in the stock market. For those who do, I follow with, “How often do you look at your personal portfolio and the associated key performance indicators”? An overwhelming number respond “everyday.” To make my point, I tie their response back to the “investment portfolio” they are being paid to manage at the dealership.
How are individual or corporate investments any different? The truth of the matter is – they’re not. Each one of those corporate investments (units on the lot) is expected to generate a return. Sure, most savvy managers can tell you how many vehicles were sold, what the front end gross per unit retailed is or the total gross month to date, perhaps even how much back end gross was generated. They also can usually tell you the amount of wholesale pain (or gain) they suffered or earned, in total, for the given time period. The question then becomes, “Are these indicators enough?” Do these indicators really tell us how our “portfolio” is performing? Is there more that we can do to tell us more? The answer is, “Yes, there is.”
One of the key, universal investment performance indicators is known as return on investment, or ROI. For the purpose of this article, let’s call it gross return on inventory investment. It’s a quality measurement indicator and is measuring the total gross profit return (both retail and wholesale) compared to the total investment required in the inventory to generate that return.
The formula used to calculate this key financial management is below and as the name implies, measures the gross return of the total inventory investment. This is a relatively easy number to calculate, and it’s also relatively easy to compare this indicator for cars and trucks. Unfortunately, this is where most stores stop, when in actuality, this is where we should all begin.
Here’s an example of the formula used to calculate this key indicator:
Retail Gross Profit: $38,325
Wholesale Gross Profit: + -$6,550
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Total Gross Profit: $31,775
Cost of Retail Sales (Inventory Amount): $365,244
Cost of Wholesale Sales (Inventory Amount): + $82,349
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Total Cost of Sales: $447,593
Current Inventory Amount: $522,325
Total Investment: $969,918
Total Gross Profit Generated: $31,775
Total Investment: $969,918
Gross Return on Inventory Investment: 3.27%
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).
You’re likely aware that some of your sales segments and model years perform better than others, but can you name them? Can you list your quickest turners by segment, model year and make? By calculating the gross return on investment, you can get definitive answers on if specific segments and model years of inventory should be increased.
Increasing vehicle turnover is simply offering and selling more of the right product. This sounds easy enough, and with a well thoughtout system, it can be accomplished. At the very least, develop and implement a system that will separate your sales, gross and inventory by categories of vehicles (small, mid-size, sporty cars; etc), by model years within categories (i.e. used vehicles) or specific model numbers within each new vehicle sales category.
Your stocking guide needs to include your target supply number for each type of vehicle (45-day supply for used, 60-day for new), based on the actual sales rate, not a forecast. Not only do you need to know how many units you should have on the ground, but also the dollar value for the quickest-turning units in your store.
The decision to determine your stocking guide number of units and corresponding investment should be based largely on your gross return on inventory investment. This stocking guide number should then be compared to the actual total availability for each category. If you are long or short in any category, develop an action plan with your managers to correct the condition. Vigilance when implementing your plan of action is vital.
The hardest part of true inventory management, once you have a workable system and process in place, is separating emotion from the decision making process. for some reason, people who order inventory or manage used inventory become emotionally attached to the decisions made when acquiring the inventory. This bond is very difficult to overcome for many people. However, when they begin making decisions based on hard facts and they see those decisions pay off, they will become your strongest advocate of the inventory management system.
The basic principle of economics tells us, supply and demand equal price. All to often, dealerships make decisions that determine supply, without effectively measuring and monitoring actual demand which results in lower than expect gross profits.
In essence, do yourself a bottom-line-producing favor. Measure your gross earning investment; then implement and monitor an inventory management system in your store. The return will far exceed the investment.