The "How To" of Inventory Management

Inventory is your most valuable asset. It also uses up most of your working capital. Carry too much, and you risk cash shortages and astronomical interest charges on your floor plan and line of credit. Carry too little, and you risk losing business to competing dealers and independent service stations.

Many dealerships order vehicles, parts and accessories using gut instinct. But more scientific techniques for managing inventory can minimize inventory carrying costs.

PULL, NOT PUSH

Start with an honest evaluation of your relationship with your franchisor: Is the factory pushing you to accept vehicles you don't want, say, a large quantity of undesirable models or colors? Does your dealer operations manager aggressively talk you into buying parts and accessories every time he or she visits?

Manufacturer relationships call for both give and take. Sure, everyone has to accept some less-than-desirable items allocated to them by the factory. But stores with high volume, strong Customer Service Index ratings, and amicable relationships with factory representatives have the greatest leverage and are rewarded with the option of building more of their own vehicles.

Whenever possible, try to order the inventory you want (a pull ordering system) rather than accept every item the factory pushes onto you.

FIND THE METHOD TO THE MADNESS

Manufacturers have used cost accounting to improve operating efficiency for decades. Only recently have dealerships begun to look at their businesses in other terms:

Product-by-product margins. Analyze your gross profit for each product line, and stock more high-margin items. Accessories, navigation and tire package upgrades, for instance, are known to be moneymakers. Fuel- efficient new and used cars also sell for more today.

Before eliminating unprofitable products, evaluate why margins are low. For instance, a Nissan dealer discovered he was losing money on new Jukes, a hot new model with limited availability. Turns out, his salespeople were selling Jukes below invoice, because his pay plan offered bonuses based on volume, not gross margin.

High demand, limited supply models should bring a premium price, if your salespeople know their stuff and your pay plan motivates the right behaviors.

Product mix. Next evaluate whether your product mix is sufficiently broad and in tune with consumer demand. New car buyers often access online inventory lists and contact a store that has their new vehicle specs already on the lot. Foster your relationships with neighboring dealers to expand your inventory base. If you can swap with another store quickly, you may prevent lost sales just because your inventory is lean.

Also stock a sufficient supply of aftermarket parts in addition to OEM parts. You may lose service revenues to independent service shops if you don't offer cheaper fixes using generic aftermarket parts to customers after their warranties expire.

Turnover. Consider, too, how quickly each product line is selling. Stop ordering slow moving items, especially if they can be restocked quickly by the manufacturer. If you have a used car that been on your lot longer than, say, 45 days, it may be time to discount the sticker price or sell it at auction.

Whenever possible, return excessive supplies of slow moving parts and accessories to the manufacturer. Often factories allow some returns within a prescribed time frame.

Reorder point. Estimate a reasonable reorder point for every inventory item. That the quantity level that triggers a new order. Reorder point is a function of your volume and the purchase order lead time.
If you install 25 air filters each week and it takes two weeks to process an order of filters, for example, you'd reorder anytime there are fewer than 50 filters on the shelf.

RETAKE YOUR INVENTORY

When sales are down, every sale must count. Inventory carrying costs include interest, storage, insurance, obsolescence and pilferage. These can quickly add up. With less working capital tied up in inventory, you'll need to borrow less and possibly have more cash for rainy day projects, such as sales training or remodeling. Imagine the possibilities!