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Do you have Dead Wood in your vehicle inventory?
If so, it’s costing you!
By Jim Eagan
Auto Dealer Alert, 2008 Volume 2
You know those units you have in your vehicle inventories that, for whatever reason, customers just don’t want? Those units are collectively known as “dead wood.”
In one classic example, an auto manufacturer produced a new, “hot” model. About six months after the launch, the manufacturer launched the cousin of this model under one of their other branded divisions. Although built on the same platform and at the same assembly plant, the cousin looked very different from its relative—one of those, “You either like it or you don’t” models.
One dealer, who typically retailed 100–150 new vehicles per month, ordered 50 of these new cousins when they were first made available. The dealer was counting on the fact that this new product would be as hot as the first model that his peers at the other division were selling successfully. Unfortunately, in his market area, the new product was a non-seller. His initial selling rate was 0–2 per month and, as it turned out, only a small niche of customers nationally found the appearance of the vehicle attractive. To make matters worse, since the initial model was still on fire and since it was produced by the manufacturer off the same assembly line, the manufacturer was not inclined to put much of an incentive load on either model. They could almost sell out the plant capacity just on the orders coming in for the “hot” model.
The dealer now had a “dead wood” business decision to make. His dilemma was this: Do you hold out and hope you can eventually retail your way profitably out of the problem unit(s), or do you cut your losses, take the hit with a combination of extra advertising and sales staff expenses, and sell the unit below your costs? The dealer decided to hold out and wait for the second model to eventually catch on and/or for the manufacturer to increase marketing incentives to get the model rolling in his region. Unfortunately, the second model never caught on, and the marketing funds never appeared. After nine months, the dealer had sold approximately 15 of the original 50 units and had incurred about $70,000 in floorplan interest expense on the 35 units he hadn’t sold.
After deducting floorplan assistance funds, the dealer had incurred approximately $1,800 per unit ($200 per month) in floorplan interest expense for the units held. With these costs already incurred, the dealer then decided that he’d had enough and aggressively worked his way out of the units, but at substantial losses. In hindsight, the dealer had many regrets for not pulling the plug sooner.
Unfortunately, this is a fairly common mistake for dealers, as avoiding “dead wood” is not easy.
Like anything difficult, it’s important to work smarter, harder, and more creatively to achieve your goal. We recommend the following strategies:
- Implement effective vehicle inventory acquisition controls regarding what ends up on your new or used vehicle lots. Define explicitly who is authorized to order inventory and who must approve these orders. Assuming responsible staff are assigned these duties, this control step will minimize the opportunities for inventory acquisition mistakes.
- Staff responsible for acquiring new and used vehicles should be held accountable in their pay plans for inventory ordering mistakes. This allows your managers to bear a part of the financial pain if mistakes happen and rewards them if mistakes are avoided. Hopefully, the resulting motivation for your managers will be caution when acquiring vehicle inventories.
- Lastly, we recommend that senior management be made aware of the per-unit carrying costs of specific old age vehicles through custom-designed management reports. This should be done on a monthly basis. The report should (a) list all units that remain unsold after 75 days, (b) capture an estimate of the per-month floorplan costs for each specific “old age” unit, and (c) define the cumulative floorplan costs for each unit since it first appeared on the lot. This step provides senior management with critical information to make the right business decisions regarding whether the dealership should unload now or hold out.
Facing old age vehicle decisions may not be pleasant but it’s important to take action quickly, as delays are often expensive. For more information, or if you’d like assistance in evaluating “dead wood,” please contact Jim Eagan at 800.544.0203, extension 3257, or e-mail jim.eagan@plantemoran.com.
Next Month: Our next Auto Dealer Alert will focus on assessing the level and costs of frozen capital in your parts and accessories inventories.
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