Dealers are typically expense-conscious.

They’ll often sign every check, and pressure-test monthly bills: How many leads did we get from that third party website? Is that F&I Manager really worth $12,000 per month? Couldn’t we find a less expensive supplier for tires?  

But here’s the check they effectively sign every month that rarely gets any scrutiny—the $2 million spent on new vehicle inventory orders.

Each month, managers order new vehicles from the factory, and there’s little, if any, accountability for these decisions. The wrong cars are ordered. Inventory piles up. The cycle repeats.

No doubt, manufacturers will occasionally encourage or even beg dealers to take less desirable inventory. But this pressure cannot explain the entire glut of aged units in new vehicle inventories.

I conducted an informal test. I examined the inventories of different dealers with the same brand. The results were striking: Some dealers had less than 10 percent of their new cars older than 180 days, while many others had over 60 percent.

The same manufacturer. The same ordering constraints. The same everything.

What’s the difference? The answer is the focus and attention the dealer, and their managers, pay to inventory management.

With new car gross margins near $0 for many brands, the importance of efficiency-minded inventory management has never been more important. Dealers stand to make significant money by increasing inventory turns, which drives more downstream profit opportunities in their F&I, parts, service and used vehicle departments.

Similarly, improved inventory management can turn floorplan expense into a consistent money maker. Witness the $65 million in floorplan income AutoNation booked in 2015.

There are two simple things dealers can do today to improve their new vehicle inventory management:

1). Take advantage of technology. Nearly 90 percent of dealers rely on an inventory management solution to help them become more profitable used vehicle retailers. In new vehicles, I’d estimate fewer than 15 percent of dealers use an inventory management system to make market based pricing and stocking decisions.

I’ve come to understand dealers sometimes believe these tools are unnecessary for the new vehicle department. The OEM system works just fine. The problem? OEM systems can fail to highlight current in-market opportunities—where the Days’ Supply of a particular configuration is too high or you own a particular configuration that you should absolutely not trade to another dealer.

Over the course of a year, these daily insights can produce a dramatic impact on a dealer’s profitability.

2). Tie sales manager pay plans to inventory turns, monthly floor plan income, or a combination of both. In used vehicles, managers often must meet inventory age/turn benchmarks to optimize their compensation. In new vehicles, you’d be surprised to see how quickly the number of new cars older than 365 days will quickly vanish once a portion of the sales manager’s income requires efficient inventory management. 

The outlook for 2017 is calling for continued high levels of new vehicle inventory, which is all the more reason for Dealers to start paying closer attention to their inventory management practices.  If the average customer is spending 12-17 hours researching a $30,000 auto investment, shouldn’t Dealers be spending more than 2-3 hours analyzing their $2,000,000 monthly investment?  Dealers who embrace technology to gain better insight into the market and adjust pay plans to align with inventory performance metrics will be well positioned to prosper in what promises to be another very competitive year in the new car business.