Three Pointers To Right-Size Your Springtime Inventory

Earlier this morning, I heard a robin singing outside our house.

I listened a bit and smiled. The robin’s basically making his play for the summer. Hopefully, his song will attract a suitable mate. They’ll start a family and we’ll have a few more birds around here.

But it also occurred to me that the robin’s efforts to woo a mate are similar to a temptation dealers face as spring approaches: Should I beef up my used vehicle inventory to set the stage for a strong selling season?

In fact, I received an e-mail the other day from a used vehicle manager who’d just started at a Buick/Cadillac/GMC dealer in the Midwest. He wanted my advice on how best to increase his inventory from 80 to 110 units to help drive his sales volume in the coming months.

I offered three pointers that I believe are relevant for all dealers as their instincts urge them to stock up inventory for the spring:

1.  Examine your current turn. I asked the manager for the department’s current inventory turn, which runs about seven times per year. I then stressed that adding more units to this level of inventory velocity would only exacerbate an existing problem: He has too many aged vehicles on the ground today. Adding more inventory would only make it more difficult to get rid of these aged units and might, in fact, increase their number.

I told the manager that he would need to endure some short-term pain (and heat from the dealer) as he cleaned up the mess left behind by the prior manager. This clean-up effort, I advised, would expose retail and wholesale losses that, while painful, are necessary as a first step toward achieving the 12-times inventory turn benchmark.

“I understand, Dale,” he says. “My inventory must be clean before I can run lean and mean.”

2.  Know your true capacity. A decision to increase used vehicle inventory, and maintain a minimum 12-times annual inventory turn, means more work across the dealership. More cars to acquire. More cars to recondition. More cars to photograph and merchandise online. More cars to price and promote. More cars to efficiently retail with customers. More deals in F&I.

Furthermore, all of the additional work must be done in a timely fashion—or you risk turning the additional inventory into your first wave of aged units.

For all of these reasons, I advise dealers to build inventory levels based on an honest assessment of what your dealership can efficiently manage. In most cases, this assessment translates to decisions to add inventory in three-, five- or seven-car increments, and adding more only as the dealership’s capacity remains consistent.

3.  Prepare to stay the course. More cars in your inventory means more risk from setbacks—whether they come from internal factors (as noted above) or external factors, like a decline in consumer demand and sales due to weather, an economic change, etc. It’s often tempting for dealers to use such setbacks, particularly if they involve pressure from the dealer to increase front-end gross profits, as excuses to slow their inventory turn.

When these situations occur, I advise managers to do their best to maintain the minimum 12-times/year inventory turn benchmark. A slower pace may satisfy a dealer’s desire for increased front-end gross profits, but it will cause the number of aged units to grow—possibly setting the stage for another painful inventory clean-up effort.

In addition, a slower pace of inventory velocity diminishes any efficiency gains you might achieve across all dealership departments, and saps the “total gross” opportunity the added inventory is supposed to create for everyone.

Ultimately, dealers and used vehicle managers should recognize that the decisions they make about inventory today, as spring approaches, will have the same impact as the decision the robin outside my window makes about its mate: If you get it wrong, it’s going to be a difficult and potentially painful spring and summer.