I have noticed a spike in inventory levels during my recent visits to our dealer clients. In fact, it is often difficult at times to find a single parking space at a store, as the lot is jammed with new and used vehicle inventory.
Most stores are experiencing robust sales after a sluggish January and February. It is important to maintain the proper quantities of inventories even when sales are strong. Excess inventories reduce profitability even in a low interest rate environment.
It was only a few years ago that dealers were begging manufacturers for inventory. That trend has reversed and most manufacturers are producing considerable inventory and are pressuring dealers to take more vehicles. As you know, the goal is to have no more than a sixty day supply of new and used vehicles. Statistics have shown that once a vehicle reaches sixty days, a steady decline in gross profit or even losses occur.
Used vehicle ageing can be improved by prepping vehicles and having them on the front line available for sale within five days of purchase or trade in. Stronger dealers track this statistic.
Parts inventory levels must also be monitored. Profitable dealers have been able to reduce their parts inventories in recent years. They use reports from their DMS systems and sophisticated ordering processes to ensure that they do not have excess inventory quantities. Successful dealers are also making parts returns on a monthly or quarterly basis. Your parts inventory should be turning at least nine times a year.
Inventory management is often neglected in strong economic environments. If someone asked me to identify the most common failure of dealers, I would say dealers who do not realize and respect the cost of carrying excess inventories.
If you have any questions regarding this article or any dealership management issues, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or 800-849-6022.
