More Ways To Control Your Inventory - inventory control - Brief Article

In the June issue, I discussed the need for dealers to set up a process to control individual car and truck line days' supply. As noted, this will help prevent an out-of-balance inventory in terms of both vehicles and expense.

I received many calls, faxes and e-mails requesting that I expand on the subject. First, as some callers note, I realize that with some import franchises, you do wish for the challenges associated with maintaining a 45-60 days' supply. But, remember that obtaining and maintaining an inventory is only part of the equation.

With many franchises, dealers receive a credit equal to the floor plan cost for a specified number of days, excluding transit time. In theory, if you sell each vehicle within that allotted time, you will avoid an interest expense. But as we know, theory is difficult to put into practice. The essential item required to translate this theory to practice can be put into one word:

Discipline.

The June article mentioned the need for weekly inventory meetings for planning purposes. During these meetings you should review, by model line, vehicles in inventory that are 60 to 90 days, 90 to 120 days, and 121 days plus. List these units as a percentage of your total model line inventory and total inventory, both in terms of numbers and dollars.

Once you have identified the unit and dollar percentages, you need to physically inspect these units to determine why they remain unsold.

Is it color? Are they equipped with packages and options that are selling? Do the units have missing equipment (from pilferage) or lot damage? What are the odometer readings? Are demonstrators a part of the problem? Did you order these units or were they dealer traded? Are the new units you're ordering equipped the same way with the same color combinations? Do you have a process in place, to identify what sells from your lot by price, color and equipment levels?

Many dealers I work with have their aging (90 day plus) new-vehicle inventories displayed on their lots' front lines. Since theses units are highly visible, more attention is paid to their conditioning and the focus is on these vehicles.

The following are additional and proven components of the inventory process:

Inventory reports: Every Monday, each sales manager should be given two inventory reports generated by your in-house computer system, one for cars and one for trucks. These reports should list each unit in inventory by age with the oldest unit being listed first.

Sales incentives: Your sales personnel can help control inventory aging, but only if they are tied to it financially.

One successful incentive is a days-in-stock bonus. Each time a unit is sold, the sales person receives one point for each day that unit has been in inventory. The sales manager daily charts the month-to-date point totals for each sales person. At month's end, the sales person with the greatest number of points (most total days in stock) receives a bonus, such as $250.

Management incentive. Sales and inventory managers are assigned a goal based on inventory aging. If there are no units over 90 days old, they each receive a bonus, $250 maybe. If there are units over 90 days old, a comparable value is deducted from the bonus. If the total number of units exceeds the $250 bonus, there is a penalty or loss of income. This penalty is deducted from other pay plan incentives up to a maximum assigned value, such as $500.

Advertising: Many successful dealers include their advertising personnel in their weekly inventory meetings. Plans are initiated for the disposal of inventory before it is ordered, not after it has aged. If units are advertised or featured as the car or truck special of the day at a low price, these are chosen from aged inventory.

The other day, I had a lengthy conversation on new-vehicle inventory management with a respected member of our industry. 1-Le faxed me the following quote, which summarizes the points I've attempted to make here.

"Out-of-balance and over-aged vehicle inventory will cost your dealership excess interest, promotion and variable sales expense, a loss of unit volume and of gross profit dollars. An out-of-balance inventory occurs when levels of inventory are too high or too low for your current selling rate. This may be corrected or eliminated by proper ordering procedures, weekly prioritizing of orders and a better knowledge of your inventory.

"Acceptable gross profit is a 'state of mind' which is difficult to maintain when selling from an inventory that is out-of-balance and over-aged. With a proper inventory you should experience a substantial increase in gross profit, unit volume and lower expenses."

Point made... and good selling!

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