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December 3, 2007: Get creative to improve your all-important inventory handling

December 3, 2007
Filed under Columns

J.D. Power & Associates’ Motorcycle Competitive Information Study, published in the 2007 Powersports Business Market Data Book, determined the No.1 reason customers purchased from a particular dealership. While many would think it’s because that dealership gave them the best deal, this is simply not the case.
In fact, the No. 1 reason is the dealership had what the customer wanted in stock. This same study also was performed in 2006 and came to the same conclusion. This information is enlightening but adds to the challenge of maintaining good inventory levels without soaking up all of a dealer’s profits in floorplan interest.
Floorplan interest is the amount it costs to finance new major unit inventory. Floorplanning is great for cash flow because a dealer doesn’t have to come up with out-of-pocket money to pay for major unit inventory. Many OEMs offer free flooring for a limited amount of time. However, if inventory levels aren’t properly managed, flooring expenses can exceed 5 percent of total sales. This would mean that a $7 million dealership could spend in excess of $350,000 just on inventory flooring.
According to a recent RPM Group Composite Report, the national average for a dealership’s flooring expense was less than 1 percent of total sales. Compared to the numbers mentioned above, that’s a savings of more than $315,000 of net profit!
The first step to improving your flooring expense is to begin measuring and tracking it on a rolling 12-month basis. New units are released on a timeline, and measuring on a rolling 12-month basis allows you to see a more accurate picture. Once you have gathered accurate data, it’s now time to develop a two-part plan. The first part of the plan is to reduce aging inventory and stop the bleeding. Here are a few tips:

  • Sales managers and finance managers typically decide which unit goes home. Be sure they are educated on the importance of reducing aging inventory.
  • Make sure each model built on the showroom floor is the oldest unit in your inventory. Don’t let the shop porter talk you in to building the unit that just came in because the stock number you requested to be built is buried in the back.
  • Develop a policy that ensures when you make a sale the oldest unit in your inventory goes home. This means the paperwork for the oldest unit needs to be pulled as well.
  • Take advantage of the seasons. Don’t develop a plan to reduce your PWC inventory in September… it will be too late. Start early. For instance, if you have a nine-month supply of ATVs, develop your plan before the fall season comes.
  • Get creative with sales incentives. You could pay double commission on units that are more than 250 days old or split the profit on any unit over one-year old. You’ll be amazed by how fast your aging inventory is depleted.
  • Have contests. Contests allow salespeople to win things, and as the recent eBay commercials say, “It’s better to win it!” One of the most creative contests I’ve seen to reduce aging inventory was based on a points system. Each unit a salesperson sold earned them points, which increased as the age of the unit increased. The salesperson with the most points at the end of the contest won an all-expenses paid vacation for two.
  • Place an emphasis on reducing aging inventory through all of your advertising, whether it’s special promotions or savings. I’m not one to encourage unit discounting, but you can’t stop the bleeding if you still have ’05 models.
  • Merchandise your dealership in a manner that promotes the sale of aging units. Consider a feature display that draws customer attention and change it regularly.
  • The second part of the plan is well thought out, detailed ordering. This will insure your flooring expenses remain under that 1 percent of total sales benchmark. It can be a great idea to take advantage of OEM specials in order to receive extended free flooring terms, just make sure it’s the right thing to do for the dealership’s current inventory condition.
    A properly managed inventory is a journey and not a destination.
    The No. 1 reason costumers buy is because the dealership has what they want in stock, but too much inventory will soak up all of your profit. This balancing act takes a lot of time and hard work, but the end result is a much more profitable dealership.

    Tory Hornsby, general manager of Dealership University, was drawn to the powersports industry more than 10 years ago when he turned his passion for motorcycles into a career. Hornsby worked in nearly every position in the dealership before becoming a general manager. He welcomes your e-mail: thornsby@dealershipuniversity.com.

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