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. 

$50,000.

Over the past three years, the average dealer has generated about $50,000 in annual net income from their new vehicle operations including F&I, based on 2015 NADA Data. This amount roughly equals the average starting salary for an undergraduate accounting major.

Now, to be fair, the $50,000 reported in the financial statement does not tell the entire story.  

Dealers at many brands earn significant “below the line” aka stair-step money directly from their OEM for achieving aggressive sales targets. These programs place all of the risk on the dealer and create hyper competitive markets where dealers essentially fight to see who will lose the most money per sale. 

A General Manager at a Boston area dealership recently told me that he hasn’t stepped foot in a casino in more than eight years, but chasing the factory money feels just like his old gambling days.  “I can give away $40,000 and maybe make $80,000 or maybe lose all $40,000.”

Stair step programs, coupled with pricing transparency websites like True Car and Kbb.com, make  it tougher than ever for dealers to make gross in new cars.  A very well-known luxury name plate is currently averaging only $15 per new vehicle retailed! (That is not a typo) 

AutoNation CEO Mike Jackson recently bemoaned: “Growth Market + stair steps= tolerable, Plateau Market + stair steps = nightmare, Downturn Market + stair steps = catastrophe.”  

While Jackson has never been a big fan of stair step programs, he makes a relevant point. The record-breaking sales volumes over  the past few years have allowed new car dealers to get by on razor-thin margins. But what happens when sales slowdown, a scenario many analysts say is already underway?  

Dealers need to start looking inward at their operations and make these 3 key adjustments to lessen their financial reliance on factory money:

1. Increase New Car Sales and Margins with better SERVICE – Dealers who win customers over in their service departments with friendly employees, technology driven communication, and a healthy respect for their customer’s time set the stage for increasing new car sales.   Harvesting new car buyers from the service lane not only yields better trade-ins with lower acquisition costs, but also provides better front end margins because the dealer is not competing for the sale.  There are a number of good equity mining tools designed to identify customers who are great position to trade keys.  Smart Dealers are mastering this process and being rewarded for their effort.

2. Overhaul sales consultant pay plans:  Thin margins make it nearly impossible for a sales consultants to earn more than $150 minis.  I believe such “old school” pay plans have a lot to do with the persistently high rate of sales consultant turnover.  The 2016 NADA workforce study revealed that Dealers with the highest rates of employee retention significantly outperformed the average in terms of productivity and profitability.  The average sales consultant annual turnover is now at 67%.   Progressive dealers are monitoring turn over and adjusting pay plans to provide greater income stability, while still allowing for upside potential based on performance   

3. Recalibrate Marketing Efforts - Today’s new vehicle shopper only visits 1.6 stores before purchase—a reality that tells me the new car game is being won and lost online.  Last year, the average dealer spent about 25% of their marketing budget on digital marketing.  With shoppers spending 12-15 hours researching vehicles online and conventional media (TV, newspaper, and radio) more fragmented than ever, doesn’t it make sense to reallocate more dollars to digital?  Not only will dealers increase their odds of capturing customer eyeballs, but digital also provides real data to evaluate and fine tune marketing investments.  Margins are way too thin to be depending on traditional tactics by crossing fingers that a big radio buy and a Gorilla on the roof is going to drive traffic!!

Looking ahead, the path forward is clear – smart dealers will rely on their own operational efficiency and excellence to drive new vehicle sales and not be overly reliant on factory money.  The level of volume pressure at many brands has led to many unnatural activities, such as ridiculous levels of discounting, huge service loaner & rental car fleets and in some cases, reporting vehicles that have not really been sold. 

Unfortunately, many dealers are so reliant on the factory money that monitoring these activities has become more important than focusing on the true levers of their success: providing an excellent service experience, retaining their people and optimizing their marketing investments.  

I continue to be amazed that in today’s hyper competitive new car market, Dealers are not paying closer attention to their new vehicle inventories.   Businesses from virtually every industry are increasingly leveraging data insights to make smarter stocking and pricing decisions to improve their inventory turnover ratio.  Nordstrom, for example, has distinguished itself by maintaining a best-in-class inventory turn, nearly 75% higher than many of their peers.  These great results are achieved by constantly evaluating consumer demand and sales data. Nordstrom uses these data insights to make optimal stocking and pricing decisions.

Although Dealers do not have a staff of data analysts like Nordstrom, there are some simple tactics that can be applied to increasing new vehicle inventory turn.

3 Keys to Improving New Vehicle Inventory Turnover Performance:  Stocking, Pricing, and Dealer Trades. 

Many New Car Dealers rely on recent sales history, simple OEM reports or gut feel to inform their monthly stocking decisions.  What Dealers really should be looking at is the sales velocity associated with each unique orderable combination and place less focus on the actual sales volume.  It’s true that if you stock 75% of your cars as silver, you’re going to sell a lot of silver.  What’s most important is how quickly the silver sells compared to other colors.

Second, Dealers typically think of price as a tool to drive promotion or to help close a deal.  Dealers should begin thinking of price more as a tool for managing inventory. Pricing should be based on the supply and demand of each unique combination vs. a one size fits all approach – such as $1500 discount on every Malibu in stock. 

Lastly, Dealer Trades are generally considered a daily “cost of doing business.” Dealers often do not realize this “cost of doing business” is actually costing them business.  In fact, 15-20% of aged inventory in Dealer’s stock is the result of trading out sold cars for aged or slow turning cars in return.  This lack of attention to detail creates more aged inventory and slows down inventory turn.

Much like the car business, Nordstrom is also facing downward pressure on margins as more and more consumers cross-shop online.  This reality only amplifies the necessity for increased focus on inventory turn by stocking and pricing more efficiently.  Most auto industry forecasts are calling for a downturn in new vehicle sales in the years ahead and continued margin compression.  Dealers who invest the extra effort managing their inventories will be in the best position to weather whatever storms lie ahead.