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."
As a result of low inventory, dealers are pricing closer to MSRP than invoice for high-demand vehicles, such as the Fusion, Equinox, etc.
"Fewer dealers reduces the competitive environment," said Shick of Donlen.
In addition, fleet management companies encounter resistance among dealers who do not wish to trade vehicles.
"Dealers are unwilling to trade with other dealers due to cost or no-return vehicle," said Marnie Korlath, manufacturer & dealer relations manager for GE Capital Fleet Services.
Many dealers prefer to make a retail sale versus a fleet sale, as they do not receive new manufacturer allocation if a vehicle is sold as a fleet sale.
"Incentive reporting through the dealer and getting the dealer to put it through the fleet process, which may be tied to allocation, is difficult," said Korlath. "Some dealers will agree to a fleet sale, but not report it to the OEM as fleet."
All fleet management companies report similar difficulties in getting dealers to sell out-of-stock to fleets.
"Some dealers are unwilling to report sales as fleet due to issues and concerns with allocation, particularly on new or high-demand models," said Salzman of Wheels. "When this occurs, we may need to get the manufacturer involved, which causes delays in completing a transaction."
In fact, some out-of-stock fleet orders have been cancelled by a dealer so the unit can be sold to a retail customer.
"If we have 'spoken for' a vehicle and a retail deal comes in, the vehicle may be sold to the retail purchaser due to pricing, thus causing us to start the search process over," Korlath said.
Fleets are not only competing with retail buyers, but also other fleet management companies trying to buy out-of-stock for their clients.
"Sometimes units are sold to another leasing company while we are awaiting client approval, which results in re-work and a restart of the search," said Salzman of Wheels.
However, the key issue is that dealers are looking to maximize transaction prices since demand exceeds supply.
"Pricing is always an issue. The client wants to pay as little as possible and the dealer wants to sell units for as close to retail as possible," said Carson of Union Leasing. "With inventory being limited, the price is high. It is basic supply and demand."
Unfortunately, the prognosis is for tight dealer inventories to continue in the foreseeable future.
"Dealer inventories are at historic lows and are not expected to ever reach the levels seen prior to the events of the past year," said Shick of Donlen Corp. "Dealers are less likely to trade with another dealer since the trading dealer may not have a comparable vehicle to trade. Dealers are reluctant to pass up a potential retail sale for a less profitable fleet sale. Dealers are less likely to report a fleet sale, which jeopardizes incentives available to fleet customers since dealer incentives and allocation are based primarily on retail sales."
Difficulty Locating Fleet-Appropriate Models
Reduced dealer inventory is causing searches to expand in order to locate fleet-appropriate models.
"Since dealer supply generally caters to the retail market, fleet specifications are not met as easily or may be exceeded with 'over-contented' vehicles," said Tiberi of PHH Arval. "A client's policy will dictate how far the search for an appropriate vehicle can be expanded. The greater the distance, the more transportation costs can increase."
Not only are distances increased, but so are costs.
"We have seen an increase in delivery charges as vehicles now need to be purchased further away," said Korlath of GE Capital Fleet Services. "We are paying more for vehicles than previously."
In a limited inventory environment, available vehicles tend to be equipped with a retail buyer in mind.
"The availability of domestic product, both passenger cars and trucks, has made it difficult to locate and acquire emergency out-of-stock purchases. Dealer inventory is limited. Additionally, it's challenging to locate dealerships that have models available with fleet option packaging. Many models are over-equipped, which creates re-work in our locating process," said Kelly of LeasePlan USA.
"There is difficulty finding vehicles that are fleet-equipped, pressuring us to find the closest vehicle matching the customer-requested specs with what is available in dealer inventory. These vehicles are usually more retail-equipped with features such as sunroofs, Bluetooth, upgraded radios, and more," Korlath said.
The growing challenge is locating out-of-stock vehicles with fleet-appropriate content.
"The issue we continue to see in regard to trim level is finding fleet trim levels available on a retail vehicle, which is what the dealers have in stock," said Kelly of LeasePlan USA.
This sentiment is echoed by Tiberi of PHH Arval. "Tighter dealer inventory places greater constraints on the availability of particular colors, trim levels, and other specifications requested by our clients," Tiberi said.
Although the abundance of retail-equipped vehicles complicates sourcing, the silver lining is the additional content will help enhance residuals for that unit.
"In many cases, the reserved vehicles are equipped for the retail customer so they include options the fleet consumer would normally not select. The client needs to decide if they want to introduce a vehicle with added options to the field, which could have future implications with other fleet drivers. Added equipment also drives up the purchase price so the client loses twice," said Carson of Union Leasing. "On the positive side, additional equipment can help at lease-end, adding market value and appeal. This can reduce overall lifecycle cost and does, in many cases, reduce the time it takes to remarket the vehicle."
Sourcing is especially an issue with fleets that have strict color and equipment guidelines for company vehicles.
"Low inventory levels cause leasing companies to look in areas farther from the driver, even if vehicles are transported from another state," said John Elizaga, stock buyer for Emkay. "The current inventory levels lessen the likelihood a vehicle with the requested color and equipment combination will be located. Clients with strict color and equipment guidelines are finding the out-of-stock process to be much longer."
When a vehicle needs to be acquired from a dealer in another state, it creates additional difficulties and costs.
"The initial registration and titling is a compounded problem for units purchased from another state. This requires leasing companies to use more resources to ensure vehicles are properly registered and titled. Clients also face transportation fees and possible unwanted mileage," said Elizaga. "The risk of damage always exists for units that are transported, and the driver also experiences a longer wait to take delivery of the vehicle."
Fleet versus Retail Allocation
One reason dealers shy away from out-of-stock orders is because vehicles reported as a fleet sale will not earn a dealership another retail allocation.
"This is a conflict of interest since dealerships are in the business to sell cars," said Elizaga of Emkay. "This also works against clients that have manufacturer volume incentives. Clients with volume incentives pay a premium when dealerships refuse to report vehicles as a fleet sale. In some instances, clients are not only denied their volume incentive money, but some vehicles offer no retail rebates, costing companies potentially thousands of dollars. A diminishing dealer network leads to less dealerships willing to supply vehicles to leasing companies."
This situation requires fleet managers provide prompt approval when an out-of-stock unit is located.
"When fleet managers delay approvals, it lessens the likelihood a unit will be available to purchase. This will cause more delays and could possibly cause a company to spend more than originally expected," said Elizaga of Emkay.
Often, fleet managers are required to make adjustments to their original request to find an appropriate vehicle.
What Can Fleet Managers Do?
There are various actions fleet managers can take to expedite the out-of-stock purchasing process.
"Understanding that a stock request is entirely different than a factory order is important. Factory orders can be custom built. Stock requests are subject to availability and regional equipment. Fleet managers could be more flexible on equipment, color, and keep open the possibility of another comparable make and model. Political equipment demands should be eased. If a driver is not eligible to receive a moonroof based on employment level, it is more cost-effective to purchase a unit with a moonroof than transport a unit from another state," said Hernandez of Emkay. "Fleet managers can help greatly by approving purchases quickly."
The other important action fleet managers can take is to educate drivers about the current situation.
"The key to expediting the out-of-stock purchasing process is educating drivers about retail packages versus fleet packages. In addition, it's important for both the driver and the client to be open to having the driver pay for some of the extra options that might be available to them. Offsetting the cost of purchasing the vehicle and any additional options with the cost of keeping the driver in a rental vehicle should also be taken into consideration as the availability of vehicles becomes slimmer.
Requesting the driver to provide more color choices up-front and making them aware of possible longer transportation times can also help accelerate the process and set realistic expectations," said Steven Stoff, supervisor, stock group for LeasePlan USA.
Fleet managers must also be flexible.
"When out-of-stock purchases can't be avoided, such as an accident replacement or a new hire, fleet managers can help expedite the process by being flexible in terms of equipment, distance to dealer/potential transportation expense, and of course, color," said Tiberi of PHH Arval.
Union Leasing provides similar advice to its fleet clients.
"Give approval to purchase ASAP. Waiting (sometimes even for only a day) for an answer on a vehicle purchase can cost you the car," Carson said.
Providing as much advance notice as possible is another key consideration.
"Review alternatives to stock purchases with your vehicle provider. Work on a forecast with your vehicle provider based on historical data where available. As an example, pools may be a viable option to stock purchases. Help manage and educate your end-users. Promote flexibility to the end-users," said Shick of Donlen.
Fleet managers can also utilize electronic funding for faster turnaround.
"Fleet managers can expedite out-of-stock purchases by being flexible - not limiting their selection to a specific model or trim level. Also, committing to provide approvals as expediently as possible will help fleet management companies nail down the purchases. One last tip is to utilize electronic funding for quicker turnaround," said Foster of ARI.
Another way to expedite out-of-stock orders is to obtain internal approval in advance, before initiating an out-of-stock search. "This will expedite the process and reduce risk of a located unit being sold during approval process," said Salzman of Wheels. "It is helpful for fleet managers to provide details on options they can live without and what are 'must haves.' It is also helpful to have a list of alternate colors in case the requested color is unavailable. Lastly, fleet managers should set driver expectations by letting them know they may not get exactly what they requested."
How Long Will This Situation Continue?
Will the current situation with out-of-stock purchases subside or is it the new reality?
"What we are experiencing is a new reality. Manufacturers are offering less incentives and rebates. Some units don't have any retail rebates. Dealerships are being consolidated, and retail sales are not as high as they were three to four years ago. Economic principles can explain the situation: Instead of selling more units with less profitably, manufacturers are selling fewer units with more profitability. Also, manufacturers cannot simply increase production because suppliers planned on a certain production level themselves," said Elizaga of Emkay.
LeasePlan USA, likewise, views the current situation with out-of-stock purchases as the new reality.
"We believe this is the new reality, at least for the near future. The manufacturers are starting to turn the corner to show profit. Along with this comes employee, dealer, and inventory downsizing. Dealers don't want to keep more than about 30 days of inventory on the lot, which cuts into the availability and willingness for them to sell to fleet management companies," said Kelly of LeasePlan USA.
Higher transaction prices at dealerships are helping dealers accept current inventory levels.
"ARI feels this is the new reality. The benefit is that dealership management will now be forced to manage profitability rather than production," Foster said.
A key determinant will be whether OEMs continue to build to demand or slowly revert to past practices.
"Unless economic factors decrease retail demand, or manufacturers increase production volumes, this will be the new reality," said Tiberi of PHH Arval.
GE Capital Fleet Services concurs. "In our conversations with the OEMs, we expect these conditions to continue into the future. OEMs are predicting the lack of inventory will persist as they realign their businesses," Korlath said.
A similar perspective was shared by Donlen. "Dealer inventories are at historic lows. We do not expect inventories to ever reach the levels seen prior to the events of the past year," Shick said.
Others believe that fleets will re-focus on factory orders and seek to minimize out-of-stock acquisitions.
"ARI recognizes the necessity of stock purchases for fleet customers; however, the recent changes and slowing of the process further support factory orders as a means of best practices for vehicle acquisition. The factory order method ensures proper vehicle cycling, is more cost-efficient than stock purchases, and lends itself to more effective overall supply chain management. While stock purchases will remain as a reality, they should be limited," Foster said.