Dealer Consolidation Creates Headaches for Out-of-Stock Purchases
The downsized dealer network has made it increasingly difficult to locate out-of-stock fleet vehicles. Distances to search for fleet-appropriate vehicles have increased. Also, reduced dealer inventories have driven up transaction prices.
The downsized dealer network for the Detroit 3 has caused searches for out-of-stock replacement vehicles to widen and become more time-consuming. In addition, dealer inventories have been substantially reduced as a result of "production right-sizing" as OEMs build-to-order versus build-to-capacity.
"The events of the past year - the economic downturn, lack of consumer confidence, OEM bankruptcies, dealer terminations, plant closings, and consolidations, etc. - have led manufacturers to reduce production to match demand, effectively reducing dealer inventories. These actions were critical for manufacturers to return to profitability," said Rick Shick, vice president - vehicle acquisition/truck services for Donlen Corp.
Last year's crisis in the automotive industry impacted the entire automotive supply chain. "The economy and financial difficulties of the manufacturers created a strain on the supply chain management process. Manufacturers were forced to cut back production and close or consolidate dealers. As a result, vehicle inventories are at dramatically reduced levels," said Chris Foster, manager, vehicle acquisition services for Automotive Resources International (ARI).
The end result is that out-of-stock purchases are more challenging, with new-vehicle supply at a historic low.
"Projections are that dealer inventory is off by 3-4 million vehicles. Reduced inventories have driven up pricing and impacted the willingness of many stores to offer the aggressive discounts that the fleet industry would normally enjoy," said Greg Carson, director of fleet operations for Union Leasing.
Despite the constrained dealer inventory, the volume of out-of-stock orders by fleets is increasing.
"This year, we have seen a dramatic increase in vehicle replacement orders. The increase is attributed to several factors. The improved economy has provided the confidence for many to obtain new vehicles. Companies also extended vehicle lifecycles 18-24 months ago and now have aging fleets that need replacement. Many replacements are needed sooner rather than later, so the client preference is a stock purchase they can have in days rather than the factory order that takes many weeks," Carson said.
Many fleets are having a difficult time adjusting to this new reality.
"Two years ago, dealers had inventory they couldn't move. Fleet customers were accustomed to getting exactly what they wanted out of dealer stock. Today, the variety of dealer inventory is limited due to production and model cutbacks," said Foster of ARI.
Due to the reduced dealer inventory, the limited availability of domestic car and truck product has made it difficult to locate and acquire emergency out-of-stock purchases.
"A diminishing dealer network has caused vehicle searches to be widened. Fleet-friendly dealerships face increasing challenges when trading for vehicles. Some dealerships refuse to trade, while others demand a premium unit in exchange for an entry-level vehicle," said Ray Hernandez, stock buyer for Emkay Inc.
The limited inventory is also causing transportation fees to increase since more replacement vehicles are located at farther distances from drivers.
"While the first place we attempt to purchase an out-of-stock vehicle is always in close proximity to the driver, fleet management companies are being challenged to locate and purchase stock vehicles farther away from the driver's geographic location due to inventory issues," said Elizabeth Kelly, manager, vehicle acquisition for LeasePlan USA. "This has led to an increased distance to the driver by approximately 300-500 miles. As a result, transportation costs for clients have risen, and excess driver downtime spent waiting for the vehicle to be delivered has impacted driver productivity."
In addition, fleets are increasingly competing with retail buyers when acquiring out-of-stock units.
"Dealer inventory has been substantially reduced as a result of the production right-sizing by manufacturers, specifically Chrysler, Ford, GM, and Toyota," said Linda Tiberi, manager, motor company relations for PHH Arval. "As a result, when we attempt to purchase an out-of-stock vehicle for our clients, we are competing with retail customers. In many cases, we hear from dealers saying they aren't interested in selling vehicles to fleet due to the impact to their future allocation, and fleet customers are looking to purchase the vehicles at a discount or very close to the factory invoice price."
Since dealers are hesitant to sell to fleets because the sale does not count toward retail allocation, this works against fleets with manufacturer volume incentives. In some cases, fleets are not only denied volume incentive money, but some high-demand vehicles offer no retail rebates, which further increases a fleet's acquisition costs.
The limited dealer inventory is causing an increase in dealer trades, which has additional cost consequences.
"The increase in dealer trades results in an increase in dealer mark-ups and an increased transportation cost," said Janice Salzman, manager, acquisition services, out-of-stock/pool administration for Wheels Inc.
Also, dealers are hesitant to publicize their availability of models in high retail demand. "Some dealers may not post their entire inventory, especially on popular models where the supply is limited to reduce dealer trade requests. This creates a challenge for us when searching dealer inventory," added Salzman.
Other issues impacting out-of-stock purchases are more complex rules and regulations imposed by manufacturers. "Dealerships face challenges when trying to increase inventory levels. If a dealership orders a vehicle as a fleet order, some manufacturers will hold that order against their retail allocation if the unit is not sold within 30 days," said Hernandez of Emkay. "Manufacturers are also slowing the stock process by requiring more paperwork from both leasing companies and dealerships."