The Meter Is Running

With the approaching new vehicle roll-out announcements, all of the 2008 models are being phased into the manufacturing cycle. The meter has started running for the factories. Each manufacturer expects dealers to start ordering new products to integrate into their dealership inventories. With this expectation, each dealer must determine how many vehicles will be the correct number for his or her store(s). Ordering too many vehicles, or too few, can be a costly mistake. Unfortunately, few stores actually apply true science to this crucial decision-making process.

The impact on your bottom line for making a few wrong decisions at the wrong time can be brutal. Floor plan interest expense is a fact of life for the vast majority of new vehicle dealerships today. The “Floor Plan Monster” will eat you alive if you do not do something proactive to tame it.

I recently completed an exhaustive study of all of the ramifications inventory decisions can, and do, have on the new vehicle dealership’s bottom line. Many things were clearly revealed and confirmed by the data as a result of the study and the following list is not intended to be a revelation, nor is it all inclusive.

  • Quicker turning vehicles gross more per unit on both the front and back end.

  • There is a direct correlation between age and gross.
  • Gross almost always goes up as availability goes down and the opposite is also true.
  • Sales compensation in real dollars and as a percentage of gross goes up in direct proportion to vehicle age.
  • Specific model numbers, colors, equipment and engine combinations sell faster than others.
  • Increased inventory does not mean more deliveries.
  • Salespeople tend to lead prospects to the “freshest” inventory.
  • Dealers advertising dollars are largely spent on slow moving inventory.
  • Seasonality, special events and incentive programs are here to stay.
  • Forecasting sales is very unpredictable and is usually optimistic and inaccurate.

By far, the most revealing fact that emerged from this study is how much money it costs the dealership for each day’s supply of inventory. In fact, I re-ran the numbers five times to be sure that the calculations were accurate. Here is what I found.

The following numbers were used to calculate the bottom line impact floor plan expenses have on a typical new vehicle dealership:

 Average monthly new unit retail sales 50 
 # of new units in inventory on average month 165 
 Average cost per unit $28,000 

The interest rate was calculated at prime +1.

Doing the math with these variables, this store has a 99-day supply of vehicles on an average month and the annualized floor plan expense for this store calculates to $427,350.

If this store reduced its supply to 90-day, it calculates to $388,500, which is a net savings of $38,850 from its current 99-day supply.

If this store reduced its supply to 75-day, it calculates to $323,750, which is a net savings of $103,600 from its current 99-day supply.

If this store reduced its supply to 60-day, it calculates to $259,000, which is a net savings of $168,350 from its current 99-day supply.

For each day supply reduction, a net annual savings of $4,316.00 is earned for the store.

I realize your numbers may be different, but regardless, your bottom line will be impacted. You may also notice that I did not pay any attention to the so called “free floor plan programs” you may or may not have available to you because the straight truth is that you are paying for these programs some way or another.

This floor plan interest savings is over and above ramifications of the 10 bullet point items listed in the opening of this article. The direct impact to your bottom line will undoubtedly be far greater than simply the floor plan interest savings and is impossible to reliably calculate exactly how much. All I know is that precise vehicle inventory management can significantly impact your bottom line in a positive way. Get involved in precise vehicle inventory management on a daily basis. You will be glad you did.

Vol 5, Issue 9

About the author

Scott Dreisbach

Contributing Author

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