J.D. Power & Associates’ Motorcycle Competitive Information Study, published in the 2007 Powersports Business Market Data Book, determined the No.1 reason customers purchased from a particular dealership. While many would think it’s because that dealership gave them the best deal, this is simply not the case.
In fact, the No. 1 reason is the dealership had what the customer wanted in stock. This same study also was performed in 2006 and came to the same conclusion. This information is enlightening but adds to the challenge of maintaining good inventory levels without soaking up all of a dealer’s profits in floorplan interest.
Floorplan interest is the amount it costs to finance new major unit inventory. Floorplanning is great for cash flow because a dealer doesn’t have to come up with out-of-pocket money to pay for major unit inventory. Many OEMs offer free flooring for a limited amount of time. However, if inventory levels aren’t properly managed, flooring expenses can exceed 5 percent of total sales. This would mean that a $7 million dealership could spend in excess of $350,000 just on inventory flooring.
According to a recent RPM Group Composite Report, the national average for a dealership’s flooring expense was less than 1 percent of total sales. Compared to the numbers mentioned above, that’s a savings of more than $315,000 of net profit!
The first step to improving your flooring expense is to begin measuring and tracking it on a rolling 12-month basis. New units are released on a timeline, and measuring on a rolling 12-month basis allows you to see a more accurate picture. Once you have gathered accurate data, it’s now time to develop a two-part plan. The first part of the plan is to reduce aging inventory and stop the bleeding. Here are a few tips:
The second part of the plan is well thought out, detailed ordering. This will insure your flooring expenses remain under that 1 percent of total sales benchmark. It can be a great idea to take advantage of OEM specials in order to receive extended free flooring terms, just make sure it’s the right thing to do for the dealership’s current inventory condition.
A properly managed inventory is a journey and not a destination.
The No. 1 reason costumers buy is because the dealership has what they want in stock, but too much inventory will soak up all of your profit. This balancing act takes a lot of time and hard work, but the end result is a much more profitable dealership.
Tory Hornsby, general manager of Dealership University, was drawn to the powersports industry more than 10 years ago when he turned his passion for motorcycles into a career. Hornsby worked in nearly every position in the dealership before becoming a general manager. He welcomes your e-mail: firstname.lastname@example.org.