Quick Guide: Reducing Inventory Costs

While new vehicle inventory levels continue to normalize, dealerships face mounting challenges in inventory management amid persistent high vehicle prices, stubborn inflation, and higher interest rates.

Industry analysis from S&P Global Mobility reports ongoing constraints in used vehicle availability, shifting consumer preferences for EVs, and potential trade policy impacts are also adding complexity to inventory decisions.

Yet for dealerships operating on traditionally thin margins, strategic inventory management is more crucial than ever for maintaining profitability.

This guide offers strategies to help dealerships manage inventory costs, adapt to shifting consumer preferences, and stay competitive in today’s unpredictable automotive market.

Implement Data-Driven Inventory Management

Modern inventory management systems help dealerships reduce costs while optimizing their vehicle stock through cloud-based solutions that eliminate operational complexity.

Even better, integration with an existing DMS system provides a seamless platform for comprehensive inventory cost management.

Key advantages include:

Smarter Stock Management

• Optimize inventory levels to reduce carrying costs.
• Identify underperforming vehicles quickly.
• Predict market trends to avoid costly overstocking.

Lower Operational Costs

• Eliminate IT overhead and hardware maintenance expenses.
• Streamline processes with barcode scanners and RFID tags.
• Reduce manual tracking errors and associated costs.
• Minimize staff time spent on inventory tasks.

Improved Purchasing & Pricing

• Make data-driven purchasing decisions.
• Monitor inventory turnover rates in real time.
• Adjust pricing strategies based on market analysis.

By leveraging these capabilities, dealerships can create a more cost-efficient inventory operation while maintaining competitiveness.

Utilize Lean Inventory Systems Where Possible

A lean inventory system minimizes waste by stocking only what is needed, when and where it’s required.

While practices such as just-in-time (JIT) ordering are effective in many industries, they are largely unrealistic for dealerships managing vehicle inventory due to:

• Production and supply chain complexities
• Varying consumer preferences
• Market unpredictability
• Logistical challenges

However, the JIT approach can be successfully implemented for service parts, niche vehicles, or made-to-order models, where demand and delivery can be more precisely predicted, helping to streamline inventory processes in these areas.

Segment Inventory by Demand

Smart inventory segmentation can effectively reduce carrying costs and protect your dealership’s bottom line.

By analyzing sales performance and market demand patterns, you can minimize investments in slow-moving stock while optimizing inventory dollars for high-demand vehicles.

To help maximize cost savings:

Focus on Customer Preferences

• Track customer feedback to identify emerging preferences and inform stocking decisions.
• Deploy targeted post-purchase and service visit surveys to understand which vehicle features and options drive sales.
• Monitor local market conversations to stay ahead of emerging trends.

Monitor Vehicle Performance

• Cut carrying costs by reducing slow-moving inventory.
• Reallocate funds to models with proven turn rates.
• Minimize floor plan expenses through targeted stocking.

Leverage Manufacturer Programs

• Reduce inventory costs through factory incentive programs.
• Align purchasing with production schedules to avoid overstock.
• Take advantage of manufacturer support for aging inventory.

By balancing high-demand vehicles with strategic management of slower-moving units and coordinating with manufacturer incentives, you can significantly reduce inventory carrying costs while maintaining a strong market presence.

Improve Inventory Turnover

Maximizing inventory turnover is essential for controlling carrying costs.

This is calculated as the number of times a dealership completely sells and replaces its inventory within a specific period, usually a year.

Target a turnover of 12 (30-day stock rotation) by implementing strategic pricing and sales approaches, such as:

• Monitor aging inventory closely and adjust pricing dynamically based on time-on-lot metrics, also known as a time-to-sell approach.
• Leverage sales team insights on popular features and configurations to inform stocking decisions.
• Use targeted advertising to accelerate the movement of aging vehicles.

This data-driven approach keeps your inventory fresh and competitive while minimizing the financial impact of aging stock on your bottom line.

Optimize Dealership Layout & Storage

While often overlooked, physical inventory organization directly impacts your bottom line through operational efficiency and reduced carrying costs.

A well-organized dealership layout reduces time spent locating vehicles or parts, minimizes potential damage from overcrowding, and maximizes available space utilization.

One proven approach is the 5S methodology, pioneered as part of the Toyota Production System, which provides a systematic framework for organization:

• Sort (Seiri): Remove unnecessary items to free up valuable space.
• Set in Order (Seiton): Organize inventory for maximum accessibility.
• Shine (Seisõ): Maintain clean, inspection-ready vehicles.
• Standardize (Seiketsu): Create consistent storage protocols.
• Sustain (Shitsuke): Regular review of organization systems.

This systematic approach reduces labor costs associated with vehicle location and movement, prevents costly damage from cramped conditions, and ensures efficient use of your dealership’s storage capacity一all contributing to lower overall inventory expenses.

Train Staff Effectively

Well-trained staff are crucial to controlling inventory costs and maximizing inventory turnover.

Invest in comprehensive training programs that ensure your team can master your inventory tools and interpret performance data.

When staff understand key performance metrics and turnover targets, they make more informed stocking decisions and can quickly identify opportunities to reduce carrying costs through strategic inventory management.

Master Your Inventory Costs

Strategic inventory management is essential in today’s challenging automotive market.

By implementing these data-driven approaches, optimizing turnover, and developing your team’s capabilities, you can significantly reduce carrying costs while maintaining competitive strength.

Start with the strategies that best address your immediate needs, then expand your cost-reduction initiatives as you see results.

To learn more about how RevUpX can help you reduce your dealership costs, reach out to our team today.