By Scott Dreisbach & Richard A. Secor, CEO & CIO, Valuinsight, LLC.
In automotive sales, inventory management can either increase revenue, sometimes up to 10 times as much, or cause a single lot to go out of business forever. After analyzing inventory data from a single location, a dealer principal can proceed to make decisions that will positively impact the location in ways undreamed of before.
What is Inventory Management?
Generally, inventory management is working to have the right amount of a product at the right time for those purchasing that product. The goal is to have a product available, in stock, when it has someone ready to purchase it, a buyer. While at the same time not having too many of a product available, collecting dust, taking up space, and costing unnecessary amounts of money.
Trade Gecko explains Inventory Management as “[having] the right stock, at the right levels, in the right place, at the right time, and at the right cost as well as price.”
Investopedia gets a little deeper explaining that “two major methods for inventory management [have been developed] just-in-time and materials requirement planning.” Inventory management in Automotive Sales lines up with Materials Requirement Planning, or MRP, which answers these three questions:
What is needed?
For New Vehicles, this would tell which Model, Model #s, Colors, and Equipment Packages for which there are none in stock. For Used Vehicles, this would tell us which Makes, Models, Colors, Classes, Sale Cost Ranges, and Sales Price Ranges for which there are none in stock.
How much is needed?
For both New Vehicles & Used Vehicles, knowing what sells most, and how many are currently in stock, will determine how many are needed.
When is it needed?
For both New Vehicles & Used Vehicles, knowing what sells quickest, and how many are currently in stock, will determine how many are needed.
Ultimately, these questions together are able to tell how many specific types of vehicles are needed in order to have an available stock ready for them quickly to sell. At the same time these questions are also able to do the reverse, tell if there is too much stock of something in inventory that should be traded to another dealer or sold at wholesale sooner rather than later.
How Can Inventory Management Increase Sales?
Imagine three convenient stores located 1 block away from each other. Each of these stores sells the same basic products. Looking at the sales of inventory of these stores we may find that collectively they sell twice as much of Product A as they do Product B. Based on this then certainly all three stores should stock more Product A. Right? Not necessarily.
Maybe one or two of the three stores just sell so much of Product A that regionally it is a higher quantity seller than Product B. What if a single one of the stores sells almost no Product A and sells a lot more Product B?
If that store follows the market than that store will likely run out of Product B and have too much Product A on the shelves. But with Inventory Management the sales and inventory data of that single store are analyzed and finds that it needs to stock less Product A and more Product B. This increases the sales of that store, increasing profit while decreasing waste.
We know we cannot sell from an empty wagon. But the changing used car economics means we need to stay close to a 30 day supply, not the 60 day supply we’ve traditional run the department using. Having the right stuff on the shelf, but not stocking more than we can sell in a month will drive PROFITABILITY (not units) in the used car department. Otherwise, the prices change too quickly in a month to sell car profitability. We cannot manage used car inventory like we do our new cars.
We have changed to grocery store economics. Quick turnover, high volume, and very low margins. Keep this image in mind, treat your used car inventory just as a grocery store produce manager does. Think about the other green – lettuce. You cannot take a week to get lettuce on the shelf or it will already start to wilt. Once it goes on the shelf if it ages you will have spoilage. You also need to sell it at a discount before it rots. If you are only making a 6-8% margin on lettuce and throwing out 30% of your cost from spoilage, profitability will not be a pretty thing. The grocery store will find someone else to manage the department who understands high turn and strong inventory management to maximize margins and to avoid spoilage.
We cannot drive the used car market. Neither can the other 18,000 new car dealers and many more used car dealers in our industry. All we can do is react to the cards we are dealt with to maximize profitability and reduce our losses. We have done a great job of increasing the sales of used cars. Congratulations! Step #1 can be checked off.
Step #2 is to make more money on that volume. To do that, we need to maintain that turn, get inventory in and out of reconditioning quickly, and maintain the sales volume with fewer units in inventory to maximize margins and to minimize spoilage. You need to manage using the facts. You cannot drive this market. You can only manage your business to react to the changes in the market. In order to be successful in achieving step #2, great used car managers need to be able to get new products on the shelf sooner than we have ever done before in the industry while maintaining the 1-to-1 used to new car ratio and while having fewer used cars on the shelf than we have ever had before. Quality of inventory, not quantity, will drive how well we sell used cars.
This is our challenge moving forward is to achieve step #2. We cannot run a profitable used car department doing things as we have done in the past. The old way will not work, even selling more units. This goal cannot be achieved overnight, but we need a plan to do better every month with a 6-month goal of SIGNIFICANTLY decreasing the amount of inventory we carry on the shelf without negatively impacting volume as we find this balance.
Inventory Management Solutions Using MRP
While there are many websites and pieces of software that use the phrase inventory management, you must find one that actually can answer the three questions that MRP can answer. Your solution must be able to tell you:
- What Inventory is needed
- How much Inventory is needed
- When inventory is needed
About the Authors
Scott has over 25 years specializing in new &used vehicle inventory management, and 15 years as a dealer operator. Richard has over 20 years experience in data enineering and speciliazes in reporting and analytics.