Inventories — How to Control Your Largest Operating Assets
By Jim Eagan
Auto Dealer Alert, 2008 Volume 1

The largest operating assets of virtually any dealership are its inventories. Inventories can be one of the most challenging areas for a dealer to manage. Too much or too little. Right parts versus wrong parts. Obsolescence concerns. Turning inventory quickly enough. Protecting your dealership from self-dealing, fraud, or IRS vulnerability. It’s a lot to juggle.

Let’s face it—mistakes cost money, and when a dealer makes a mistake in inventory, those costs can be significant and painful. Below, we’ve provided a variety of questions designed to assist you in evaluating your current inventory management practices. We encourage you to consider the beneficial merits of these procedures, which have been part of “best practices” for years.

Observation of Inventories

• Are physical inventories of new and used vehicles taken each month?
• Are the observation sheets reconciled to the general ledger? (This is a crucial step in detecting fraud, if it exists. Too often, dealers observe inventory and take counts but inexplicably fail to reconcile it to the general ledger.)
• Is the individual recording the inventory observation independent of that department?
• Do you periodically take specific part bin counts and compare your results to the perpetual inventory system?
• Are miscellaneous inventories of gas, oil, grease, etc. taken each month, and are the books adjusted to the observed quantities?
• Are work-in-process inventories maintained for open repair orders at month end?

New & Used Vehicle Inventories

• What are the quantities (units and dollars) of new and used vehicles on your lot that are more than 60 days old?
• Is the frequency, quality, or reliability of vehicle aging information supplied to you or your managers appropriate?
• Do you follow a policy of liquidating used vehicles more than 60-90 days old?
• When vehicle inventories are taken, are units frequently missing?
• Are your procedures adequate to prevent thefts or swaps of equipment, parts, etc. from inventories?
• Have you established dealership policies with regard to using wholesalers?
• Do you review used vehicle wholesaler and auction activity on a regular basis?
• Do you approve the list of which wholesalers may be used?
• Are you comfortable with the amount of policy work/free service done in the vehicle department?
• Are responsible individuals assigned the duties of ordering the quantity and type of inventories?
• What's the batting average of avoiding mistakes for those individuals ordering inventories?

Demonstrator Inventories

• Are you aware of the IRS positions in these areas?
• Are you aware that the IRS will hold the dealership responsible for all unpaid taxes in the event they deem the dealership noncompliant with their rules?
• Are you aware of and comfortable with the manner in which your dealership is complying with the IRS rules in regards to demonstrators?
• Has the dealership analyzed all costs associated with providing demonstrators to individuals? This includes:
  • Floorplan interest expense
  • Insurance
  • Administrative expense
  • Demonstrator depreciation
  • Possible IRS exposure
  • Other financial exposure
• Do you charge employees for all or a portion of these costs?
• Is your demonstrator policy competitive? Is it necessary?
• Are you aware that many dealers are doing away with demonstrator units?

We’ve had many conversations with dealers over the years who’ve struggled with inventory management mistakes and recurring problems. When dealers face such matters, it’s critical that they drill into the process that caused the problem to occur in the first place and fix it. Otherwise, the process will likely allow future mistakes and more dealer frustration.

In most cases, such an examination will reveal a departure or failure to institute basic tried and true procedures like the ones suggested above. It does take some time, but it’s worth it, as the most successful dealers employ these practices and monitor their effectiveness regularly.

Next Month: Do you have dead wood in your inventory? If so, what’s it costing you?