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The Seventh Profit Center: Your Vehicle Inventories

It has long been known that one of the keys to success in the retail automobile business has been to maximize the opportunities in every profit centers. In the typical new vehicle dealership, there are six widely-recognized profit centers. They include the new vehicle department, used vehicle department, finance and insurance department, service department, parts department, and the body shop.

The list of things that we have tried in order to improve the performance of these department includes everything from one-price selling, tires for life, 10,000 miles of free gas, matrix pricing, variable labor rates, labor production teams, standards-for-excellence programs, customer improvement teams, and a whole host of other attempts to improve the bottom line of the various dealership profit centers.

It is no secret that we are in an economic period that dictates a need to examine every facet of our business. Dealerships across the country are full of creative, resilient and resourceful people, many of which are now taking the time to examine, develop and maximize what I refer to as the seventh profit center—your vehicle inventories.

The vehicle inventories you’ve invested in are no different than any other type of investment portfolio. Some investments clearly perform better than others. You have made these investments expecting a return on investment (ROI). It is only natural that when a specific portion of your investment portfolio is producing a significant return, you would want to expand it. Conversely, when other portions of your investment portfolio are underperforming, you would want to scale them back. The secret to growing your ROI and maximizing this profit center is to know exactly what each individual investment has done in the past, what it is doing now and how the investment needs to be re-structured to grow the ROI in the future. 

The following is an example of the financial impact to your bottom line that you can achieve with your new vehicle inventories: 

 # New units sold during an average month  65 
 # New units inventoried for an average month    200 
 Average cost per new unit       $29,655
 Current Floor Plan Interest Rate      6.25%

When you crunch these simple numbers, this is what you will find:

Your current-day supply of inventory is 95. If you can get your inventory down to a 90-day supply, you will release frozen capital of $148,275 and have a direct savings of $9,267 per year. If you reduce your days supply to 75, you would release $1,112,062, resulting in a direct savings of $69,500. Better yet, by operating on a 60-day supply of new vehicles you would free up $2,075,850, earning you an interest savings alone of $129,740.

This is not a pipe dream. Many dealerships are lessening their current-days inventory supply to save money. This does not include the additional gross you will capture by having a quicker-turning inventory or the direct expense savings you will realize by the reduction in policy and delivery expenses. Similar savings can be experienced in the used vehicle department by achieving the target-days supply of 37.

To fully develop the potential of this profit center, you need to have several key pieces of information for every one of your investments. This information does exist in your DMS, regardless of brand. The hard part is to assemble this information, update it every day, develop and implement action plans and monitor the results. In other words, you need an automated vehicle inventory management system. Any good vehicle inventory management system is designed to:

  • quickly give information to management that will generate direct results
  • help management continually phase in units you need and phase out what you don’t need based on facts
  • be easy to read, use and understand
  • allow management to make decisions based on actual data, not “gut feel”

I can send you a revenue impact calculator file to plug your own numbers into so you can see your potential savings, if you send me an e-mail.

The bottom line is that your inventory is your seventh profit center, and with a little work, you can significantly add to your current bottom line by decreasing your current-days supply with the help of an inventory management system.

Vol 5, Issue 6

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