Stocking the right merchandise is always a challenge for anyone in retail.
But it can be even tougher for car dealers, who have to contend with expensive inventory, annual model changes, and customer demand that can switch rapidly with such factors as fuel price fluctuations.
“Dealers make their orders based on their knowledge of their markets, what they know and anticipate their customers are going to want,” says Michael Hatch, chief economist for the Canadian Automobile Dealers Association.
“Inventory management is the fine art of being an experienced car dealer.”
Auto manufacturers may talk about their “customers,” but the vast majority of them never sell a vehicle directly to the public. Instead, they sell their cars and trucks to independently-owned authorized dealerships, which in turn sell them to consumers.
“Dealers pay for their cars up front,” Hatch says.
“Their inventory (can be) worth tens of millions of dollars, so they finance through a bank or financing partners.”
Those vehicles are racking up interest charges as they sit on the lot, which is why you can often negotiate a better deal on one that’s been in the inventory for a while.
The dealer wants to sell it, pay off the bank lien and stop the clock ticking on the cost of carrying it.
Some people order their vehicles, specifying the model, colour and options they want, and then wait for it to be built and delivered.
But dealers must also carry an inventory that allows customers to browse or cross-shop, and to take delivery right away if they find the car they want. Ideally, a dealer would order enough to satisfy customer demand, while having none remaining when the next year’s models come out.
“It’s difficult to sell 100 per cent of your inventory in a given year,” Hatch says, but adds that having a good inventory management system will ensure that almost all are sold in time.
“There will be one or two left over. They can’t send them back (to the manufacturer) so they’ll sit there until they’re finally sold, or they can be sold on the secondary market, such as to a rental car company, fleet managers, or auctions.”
Knowing what options to order is important as well.
Many vehicles now come with option packages, rather than all stand-alone choices, because “there is a limit to the degree to which you can customize every detail of mass-produced vehicles,” Hatch says.