Dealing with Aged New Vehicle Inventory

Deloitte Motor Industry Services | 26 February 2014

In the current Australian Motor Vehicle landscape, high levels of new vehicle stock in the national dealer network is a defining characteristic. New vehicle stock levels have grown from approximately 65 days for the September quarter 2012, to 76 days at the end of November 2013, with a substantial amount of stock over 90 days supply. Whilst stock levels have gone up, the actual working stock has reduced due to the percentage of aged inventory.

It is not unusual to see dealers with more than 50% of their stock holding over 90 days ageing. Effectively, the average dealer currently has 2 and a half months supply of new vehicles, with 50% of that over 90 days in stock.

In such an environment how can a business reduce stock holdings to manageable levels and improve ageing profile, whilst also minimising the negative impact upon gross profit? And what processes should be put in place to help minimise the effect in the future? Whilst ordering stock to future sales is never an exact science, what can be done to optimise the process?

There are a range of best practices in the industry that individual dealerships or groups can do to assist in rectifying the current industry stock issues. We have listed out below a number of these best practices that can be used independently or together.

Stocking matrix

A good stocking matrix does not solve an aged or over stocked issue, but can help prevent the highest peaks and lowest roughs being reached. Stocking matrices provide a balanced view of current and anticipated future stock levels, against orders and expected sales.

Many dealerships with lower levels of stockholding days use a form of stock matrix. It takes the emotion out of the vehicle ordering process by helping the dealership order what it expects to sell. Most stock matrices highlight the anticipated sales each month in the period, the dealership’s current stock levels, what is currently on order, and what needs to be ordered to meet expected sales results. By reviewing it each month, dealers can react monthly with their ordering requirements on each brand and model.

When using a stock matrix, the dealership should do it by model in the brand, and even consider going down to levels of transmission, model variant and colour where relevant. Other factors that you may consider are ROI and F&I by model as well as average stock days when sold. We have seen many dealers change their expected stock order after using a stock matrix to analyse previous demand and stock already on hand or ordered.

In all retail businesses, not just the car industry, having the stock the customers want is critical to maximising sales levels and gross profit. Are we giving this process enough time and discussion in our businesses?

Stock Controller

In times of high inventory and ageing, it is important that your stock controller is clear on the business objectives they are expected to be working towards. Stock Control is an important function in the dealership, and the way this function is operated will have an impact on your stocking levels. Make sure the stock controller is aware of what vehicles you are happy to do a one-way swap on; or knows the vehicles the dealership is trying to offload when sourcing other vehicles. Regularly we see that where a model variant is a problem for one dealer, there is another dealer in that network who could sell it. By working together effectively, stock controllers in the dealer networks help to keep the stock wheels turning.

Commission Structures

We would not normally recommend dealerships provide incentives to sales managers and staff for selling old stock, but in an environment such as we are currently in, doing so can assist to resolve the issue. Effectively, you are providing incentives to the sales staff to help the dealership to overcome its stocking issues. By putting the issue at the front of their minds you are increasing the chance of selling the old stock units.
This can be done in a number of ways by changing the commission structure, or adding an additional short term incentive. Effective measures that have been used in commission structures include -

Incentivise staff to sell from stock, rather than to sell a vehicle that needs to be ordered.
Provide incentives for the sales of the oldest stock units
Increase the salesperson’s commission by the number of days the vehicle has been in stock (e.g., if the vehicle has been in stock 180 days, the commission for the salesperson increase by $180)
Consider paying commissions weekly or fortnightly so that sales staff see the benefits regularly of selling old stock.

Overall, do not think of a vehicle as a vehicle, think of it as the asset that it is – an asset that effectively depreciates the longer that you own it.

Awareness

There is an old saying – Out of sight, Out of Mind.

To reduce aged stock, there needs to be a continual focus on it – not just at the dealer principal or general manager level. Sales managers, sales people and stock controllers need to be continually aware of it.

The best dealerships at managing aged stock do so by making staff continually aware of the current situation. They print off aged stock lists numerous times each month and make sure all the sales staff have a list, and potentially receive an added bonus for disposal of old stock, whether as a sale or even as a swap to another dealership. Aged vehicles should be discussed at every new vehicle department meeting – has there been any movement in terms of leads, and what can be done, such as putting it in the service lane with a special purchase price for the dealership’s service customers.

Also consider adding a column for floorplan charges to the stock report to ensure that everyone is aware of the growing cost of retaining the vehicle. (The figure can be either an exact cost or daily/weekly estimate based on the value of the car and interest rate.)

On Display

Is the aged stock on the yard or in a storage yard? Remember, Out of sight, out of mind. Have it on display so that sales staff can see it, as well as customers coming into the dealership.

Deliver Sold vehicles

Stock vehicles sold but not delivered continue to cost dealers money, as they remain on floorplan and contribute to the dealership’s stock profile. Processes and/or commissions should be in place to minimise this dead time and cost. Reducing the effective Sale to Delivery Period assists dealerships to minimise costs.

Dealership Sales Team – optimise sales

Ultimately there is no replacement to having excellent sales practices in the new vehicle department, and well trained, capable sales staff. This includes actively marketing to existing customers that previously purchased vehicles from the dealership. Maximising the leads received and the conversion ratio will assist in improving inventory levels and ageing profiles in the new vehicle department. So, the question to ask in your dealership is “Are we operating effectively as a sales department and team?” If the answer is anything other than yes, the next question is “What do we need to do to improve?” and implement an action plan to do so.

The current new vehicle stock issues in the industry may resolve themselves over time, but are best dealt with by every dealership having processes in place designed to maximise lead conversion and stock optimisation.

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