Floor Plan Expense Reductions
- NPDA Staff
- Dec 21, 2023
- 3 min read
A matter of significant concern exists within the powersports industry, The National Powersports Dealer Association (NPDA) and our members would like to pursue a collaborative approach to address the challenges faced by dealerships and Original Equipment Manufacturers (OEMs) alike.
In the wake of the recent pandemic, dealers nationwide are grappling with the repercussions of not documenting critical statements made by vendor representatives during 2021 and 2022, such as future commitments to more efficient inventory management practices and reduced inventory levels/increased turn ratios, once COVID was in the rear view mirror. These would have proven invaluable as we navigate the return to pre-pandemic business norms. Presently, dealers find themselves in a competitive landscape where vendors vie for market share, and manufacturer sales representatives intensify their efforts to secure wholesale orders for vehicles that dealerships don’t need.
Reflecting on the period before the 2008 recession, manufacturers maintained substantial inventories in warehouses. The great recession prompted a transformative "de-risking" process, wherein OEMs shifted the burden of inventory management to dealerships. While this approach offered benefits, including reduced overheads for manufacturers and quicker recognition of profits for vendors (wholesale transactions to an OE are the same as retail transactions for dealers), it also placed increased pressure on dealerships to sell vehicles at reduced margins.
The landscape changed significantly in 2023 with the Federal Reserve's target rate adjustments and subsequent increases in flooring costs. The combination of rising interest rates and dealerships' less meticulous inventory management (most dealers weren’t very good at this pre-pandemic, and the remaining skills atrophied during the last couple of years) led to a challenging situation. Dealers, facing increased costs across various expense categories, now find themselves in a precarious financial position. Many dealers are now seeing monthly floor plan invoices that are 4 times (or more) what they were prior to the pandemic.
In some instances, dealership warehouse space is at capacity, and dealers are having to purchase additional capacity or contract with third parties for additional storage space. Metro dealers are often landlocked and/or additional space is not financially viable. Expanding to off-site storage is not only costly, but it’s also inefficient.
The National Powersports Dealers Association (NPDA) advocates for a collaborative approach, suggesting the adoption of the 3-4-5 Inventory Management Philosophy:
New Inventory – 3 Turns / 120-day supply
Parts Inventory – 4 Turns / 90-day supply
Used Inventory – 5 Turns / 73-day supply
Implementing this approach offers multiple advantages, including reduced flooring costs for dealers, decreased rebate and program costs for OEMs, and lower insurance premiums and policy-related expenses for dealerships.
Recognizing the current market challenges, the NPDA recommends the following measures for a more equitable distribution of risk:
Negotiate retail forecasts based on regionalized market data and sales targets. National market share targets are an obsolete concept.
Accept monthly orders adjusted on each dealer's in-sight inventory, retail forecasts, and market conditions.
Review and potentially reduce interest rates for inventory that is off free-flooring, considering the minimal risk associated lenders incur due to OE repurchase agreements.
Replace free flooring programs with cash discounts on purchases of select inventory.
Where capacity is available and shipping has not been committed, provide dealers with opportunities to exchange in-channel inventory for alternate colors/models.
Enhance OEM programs for accepting orders on pre-sold products and distribute legitimately pre-sold vehicles to dealers on a first-in, first-out basis.
Provide dealers with options to cancel a percentage of open orders, without incurring financial penalties.
To address these issues, the NPDA firmly believes that collaboration between dealers and OEMs is imperative. Our shared efforts can ensure the sustainability and prosperity of the powersports industry in the long run.
For those OEs who choose to act in partnership with your dealers, we thank you for your time and consideration.
The NPDA and our members look forward to engaging in productive discussions to find mutually beneficial solutions.
