By William Hinsdale, Eide Bailly
Everyone who has worked in or around a dealership knows the business sinks or swims on proper inventory management. But “management” implies proactive action toward an objective. Decisions are only as good as the information that drive them. Are you just relying on a floor plan audit to know things are good?
No dealer wants a customer to walk out after waiting an hour for a salesman to locate the unit the website showed in stock. No dealer enjoys a lot bloated with slow moving product. No dealer wants to discover fraud in the parts department. Strong inventory control procedures should be the first priority in identifying and eliminating these inventory issues.
The strongest inventory controls revolve around a physical inventory count and reconciliation with a few key components to be effective: segregation of duties, a “blind” count, and frequency.
Segregate Count Duties
Segregation of duties means assigned count individuals should be independent from anyone who has physical access to inventories, such as a salesman or lot porter with access to keys. This avoids a “fox in the henhouse” situation where the person stealing or loaning out inventory is the one relied on to ensure things are present and accounted for. The count person should also be separate from the one reconciling that count to accounting records. This may avoid someone fudging a count or glossing over a difference because they want to avoid further work. The reconciliation should also be separately reviewed and approved, perhaps by a business manager or controller.
Don’t Use a List
Physical counts should be performed “blind,” meaning the individual makes a list of what is present from scratch, rather than working backwards from what the list shows is present. Therefore, a blind count represents exactly what is on hand at that time. When working from a list, the list tends to lead the count and discrepancies are overlooked, even if the observer has no incentive to hide errors. This may be laziness or human error but can also be a “Where’s Waldo” effect, wherein the observer gets too focused on finding the items that are supposed to be present, never stopping to notice the other issues in front of their face. After completing a proper blind count, the count sheet or record should be delivered to be reconciled.
The reconciling individual should then pull the listing and investigate any discrepancy from the count record. Hopefully, missing units are unprocessed sales that just occurred. Likely, there are units out for service by third parties. This may even help identify vendors habitually slow to turn work around. But, you may just discover that a manager or porter is using inventory as a personal vehicle or loaning out to friends. Perhaps there are mystery consignment vehicles on your lot that a salesperson is selling on the side. Or maybe you have parts sitting on the shelves from unknown sources. Were unsold parts incorrectly charged to an RO or deleted off the parts pad? Is it scrap inventory taken off trade-ins? This could identify a paperwork problem, fraudulent activity, or maybe an opportunity to sell off or recycle scrap inventory.
Frequency Is Key
Whatever you do, make it frequent. Depending on your size, the scope may differ between daily, weekly, monthly, quarterly, or annual procedures. You may even benefit from an unscheduled count, so fraudsters have no time to cover their tracks. This is where the “management” comes into play. The frequency and depth of procedures should be a well-thought-out and intentional decision. But at a minimum, get in the habit of a regular procedure incorporating the elements above.
In our experience it is often smaller dealerships that don’t have standardized procedures as described. But large operations could probably stand a review to make sure their procedures cover all the bases described.
In today’s tech world, there is no reason that an effective procedure can’t be quick and efficient. Please, don’t send someone out with a pencil and clipboard. We have spoken with dealers and vendors that use a variety of technologies to make counts easy, from scan guns that easily assemble a count list with a point and click to applications that use a phone’s camera. We have seen home-brew applications as well as sleek vendor software. Have you thought about Radio Frequency ID tags (RFID) or GPS trackers? How would you like your salespeople to have access on an electronic device to see the real-time physical lot location of any vehicle in inventory? I have even seen a vendor that will sell you a drone that can ping every sensor on your entire lot in an instant, once you send it up.
Most dealers in operation today have survived and thrived based on their expertise in picking and pricing the right inventory. But maybe it is time to double check that the listing or dashboard you rely on to make those decisions is feeding you accurate information.
William Hinsdale is Eide Bailly Audit Manager. He can be reached at firstname.lastname@example.org or 1-801-456-521.