How do you track inventory to make smarter business decisions?
Dealers have now reset for the new year — new goals, new plans and new objectives.
Most expect this year to be one of “normalization” with inventory flows going back to pre-pandemic levels, interest rates settling after a year of dramatic increases and new customer expectations being defined throughout the automotive ecosystem.
Now, dealers must focus on putting systems in place to optimize performance and maximize profitability.
The key to this, at least in the retail automotive industry, is managing inventory — both in terms of units and carrying costs.
It’s vital because it allows businesses to understand how much inventory they have on hand and place orders correctly to meet the needs of their customers.
Also, with the average cost of vehicle inventory in Canada hovering at approximately $65,000, it is fundamentally important that you track the speed at which it moves through your organization to minimize the risk of unexpected losses.
You should use a robust inventory management system that offers real-time updates on stock levels, sales trends, and supplier data.
Implement barcode scanning for accuracy and set up automated alerts for slow moving pieces. Regularly analyze reports to optimize stock levels, reduce carrying costs and identify popular products.
Effective systems encompass purchasing, inventory management, warehousing, sales orders, order fulfillment, distribution and customer service management.
Sadly, this industry is still largely being managed by inefficient and outdated systems. They lack coordination and sharing of data points between OEMs, Retailers and 3rd party market research companies.
It honestly feels like we are trying to light a fire by rubbing sticks together when everyone else is using a lighter — it’s almost unfair. Why is this industry so far behind?
Think of how much better you can run your company using real-time data to make predictive decisions. Using flexible and accurate metrics such as inventory turns, average day’s supply and holding cost percentages, you can dramatically impact your organization’s bottom line.
You can calculate inventory turns by taking the cost of sales and dividing it by the average inventory value for the same period. It is a measure of units sold compared to those you have on hand, or, how well the company is managing inventory and generating sales from that inventory.
This measure is specifically important for retailers as reduced holding periods will lead to significant cost savings and thus improved profitability.
Ideally, you want to turn your inventory once per month (or 12 times per year) but the Canadian retail automotive industry is generally slower than that. Recent supply shortages have helped bring this figure down from its historic level of six (or once every two months). Let’s hope this trend continues as it has been a true blessing for dealers’ financial health.
Day’s supply shows the average time it takes between purchasing units and finally selling them to customers. It’s a measure of time and efficiency. It is calculated by dividing average inventory by cost of goods sold per day.
You use this metric to determine how long it will take before you run out of inventory given your current sales rate. Most analysts suggest that dealers would run at optimal levels if they carry 30 days supply in order to balance meeting customer demand and minimize carrying costs.
While this is somewhat subjective, the truth remains that you must reduce the amount of days and focus on optimizing your purchasing and go-to-market strategy.
If you are taking too long to get used car photos posted online or too long to PDI new units, this will all be shown in your average day’s supply.
You should also be considering holding costs, or how much does it cost you per unit to carry inventory. To do this, you should add up all costs associated with space, security, interest, depreciation, administrative and handling costs and dividing by total value of inventory.
This ratio will tell you how much it costs you to hold inventory, expressed as a percentage.
In general, holding costs usually make up about 15 per cent-20 per cent of the total cost of inventory. Your goal is to reduce this as much as possible by managing your inventory better.
Work smarter this year, not harder. Focus on managing the things that make the most impact. Managing your inventory is key to your success. Build tracking tools to help you along the way and review metrics like inventory turns, day’s supply and holding costs to help you keep things under control.
Good luck.
