Leading Indicators of Profitability
Balram Dabhade | 17 May 2017
Why Use Leading Indicators?
Leading indicators are designed to flag potential problems early, so that preventive action can be taken. It also helps to identify your areas of improvement, where you can focus resources in time to prevent undesirable business outcomes.
In this series, we will publish during the course of the next month key KPIs that provide a predictive sense of profitability, equipping your dealership to be agile and change course timeously.
This study was conducted across data from over 1000 dealerships across three years (2013- 2015) within Australia using the Deloitte proprietary database eProfitFocus.
New Vehicle Inventory
The first leading indicator we intend to explore is New Vehicle Stock Holding and its effect on profitability.
We studied over 1000 vehicle dealerships from our eProfitFocus database, selling different brands, from different segments across Australia over three years and observed that irrespective of your location, size and turnover, how you manage your new vehicle inventory, has a direct effect on your profitability.
New vehicle stock is tricky to manage, as it involves multi-faceted pulls and pushes from different stakeholders (Customers, Franchises, Finance companies etc). Some would argue that you should hold just-in-time inventory, which may be desirable in a perfect world.
However we observed that new vehicle inventory ageing is a controllable KPI, and if managed correctly, can often lead to better results.
We segmented the industry into
- Top30% dealers by NP%S,
- Average dealers and
- Loss making dealers
to study their new inventory holding pattern and also studied the inventory holding pattern to predict if the dealership would be a profitable dealership or otherwise.
This study found a dependency of dealership profitability on new vehicle stock management.
We observed that the profitable dealers engaged in an “Accelerated stock depletion” model, where they held 5% - 6% more inventory than the loss making dealers in the 0-60 days’ time period. They also sold this inventory at a faster rate than the loss making dealers in this time frame.
We noted that 90 days was the point of inflection; this was the time frame after which the differentiation of profitable dealer’s versus the loss making dealers was clearly visible.
The profitable dealers do not let more than 30% of their total stock pass the 90 days ageing barrier, as opposed to the loss making dealers, who were seen to often hold aged stock greater than 90 Days.
Actions that the Profitable dealers take:
- Manage optimum stock throughput
- Demand planning for 1 month, 3 months and 6 months
- Accelerated stock depletion
- Effective use of people and monetary resources to prevent stock ageing
As this leading Indicator series continues, we plan to dive deeper into the data, to understand the factors that affect the profitability of vehicle dealerships across Australia further.
Stay tuned for more on the other Leading Indicators in our next publications.
If you wish to know more about our benchmarking and analytical processes and how you can gain from these, we would be pleased to discuss this with you.
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