It's been a while since I focused our ACG "Smart Parts" topic on the "State Of Our Industry" as I normally do at the end and beginning of each year. Even though it's only our September issue, so much has and is happening that I just couldn't wait until the end of the year.
Another reason for not waiting to the end of the year is, in my opinion, things are happening so fast in 2021, especially if we compare what's happening now versus just over 18 months ago when this whole Pandemic started.
But!...it's not just the Pandemic that's causing what we are seeing today versus just a year and a half ago, even though it may have just been the "catalyst" of what we are seeing now and more importantly, what's to come.
Who would have ever thought that dealers would be making more "Front & Back" Gross Profit on New and Used Vehicles than ever before? Especially when we have the microchip shortage that has impacted dealers new vehicle inventory, which we will also cover further down in this article.
Who would have also thought that the Dealers Fixed Operations would rebound from Covid-19 at record levels in many dealerships? How could all this happen after such a serious health crisis that we are still dealing with even today with the Delta Variant?
The answer to these and many other questions that we will be exploring in this issue of ACG "Smart Parts" has to do with much more than the average person might think. Even though the "cause and affect" on these topics we discuss are not unfamiliar, it's the immensity of these topics that has had such a huge impact.
We have all heard the terms of Global Domestic Product, (GDP), The Economy, Covid-19, Global Issues, Unemployment Rates, Inflation, Industry Guidelines and Results, and most familiar and right down to earth for us "Smart Parts" Manager...Back Orders!
That being said, and if we have all heard these terminologies before...then why are they impacting us so much more than ever before in our history?...and not just in our industry as all retail markets are being affected right down to going to the grocery store and filling up our tanks.
"Could This Be The Perfect Storm, or...Could It Perhaps Be The New Normal?"
Let's Read On To Find Out!...
As mentioned, we will be exploring all of these "cause and affect" areas that are impacting what we are seeing and experiencing today. Each category will have a detailed correlation to our Parts Industry and our whole Auto Industry in general.
We will also include industry information through the first half of this year from NADA and their Chief Economic Advisor, Patrick Manzi. This information from the first two quarters of 2021 will lead us into all the other "cause and affect" areas that shape where we are today.
The following information provided by NADA and Patrick Manzi and readily available in full detail at:
nada.org/nada-Q2-2021-auto-sales-analysis
Time to Kick Things Off with our September Issue of ACG "Smart Parts"!...
Breaking News: The Current State Of Our Industry
NADA Auto Sales Analysis - June 2021:
As mentioned , we will start with some statistics from our friends at NADA and Patrick Manzi, Chief Economics Advisor. Also keep in mind as we review these results that the current and on-going concern on the microchip shortage continues to play a role in the current new vehicle inventories in our dealerships today.
We won't get into the global and/or political aspects of this microchip shortage, rather we will look at the overall impact and the "trickle down" affect on how this has impacted our Parts Department Operations today.
Through June of 2021, 76.9% of New Vehicle Sales came from Light Truck, SUV's and Crossover Vehicles which is not a surprise. Of which, 17.6% of that percentage came from Light Truck, which is down from 20.0% from 2020.
This is pretty much due to "Lost Production" according to Auto Forecast Solutions from the drop in microchip inventories. As of June 2021, new vehicle production was down 4.6 million units from 2020, of which, new light truck production was down 1.5 million, with projections to be down to 1.8 million by the end of this year.
This all equates to a very common term for "Smart Parts" Managers which is overall Days Supply. As in the Parts Department, a 45 Days Supply of parts in dollar value is the current NADA Guideline. The same goes for new vehicle inventory, but with this microchip shortage, new vehicle inventories have dropped down to just 25 Days Supply.
Actually, the normal new vehicle inventory Days Supply would be approximately 60 Days Supply at 2.6 million in new Lt. Truck Inventory, but with projections going down to approximately 1.4 million in new Lt. Truck Inventory, the Days Supply will drop even lower than a 25 Days Supply.
New vehicle production is expected to rise in 2022, but even with this rise back to somewhat normal, fleet inventories such as rentals, commercial and government vehicle production orders will be filled before dealer inventories get filled.
High demand and low dealer inventories have also caused the average price of a new vehicle to rise to a record average of $40,206.00. This has also raised the new vehicle average monthly payment from $576.00 per month to $598.00 per month as more and more new vehicles are being sold at MSRP or higher.
With higher trade in allowances and lower, sustained interest rates, or at least until a projected 2023 timeframe, demand keeps pushing the price upwards, for both new and used vehicles. Even though manufacturer incentives are declining, dealers are realizing that less on the lot is actually more when it comes down to profit.
Could this be the "New Norm" going forward for dealers?...especially with the Floor Plan Expense Savings that dealers are experiencing now?....Only time will tell!...
The Economy:
The economy always has an affect on our industry, but in my opinion, not as much as it has to this point in 2021. Again, putting politics and world economics aside, the rise in inflation has been the highest in a such a short period of time than I have experienced in my lifetime.
Let's look at the month to month inflation rate since December 2020, which had us at an inflation rate of 1.6%. All percentages below provided by www.usinflationcalculator.com...
- January 2021: 1.6%
- February 2021: 1.7%
- March 2021: 2.6%
- April 2021: 4.2% (biggest jump!)
- May 2021: 5.0%
- June 2021: 5.4%
- July 2021: 5.4%
With these numbers on the rise, it's not a surprise to see the new vehicle sales numbers as they are, especially with higher demand and less inventory as people are driving again. More people driving again also means a higher demand on parts and service.
Dealership Service and Parts Departments are bouncing back like never before and setting new records. This is especially ironic with the health crisis that we are still going through for the last 18 months. Demand on parts has never been higher and at a time when supply chains are being stressed more than ever.
We will explore more on those last couple of comments even further in this issue!...
Employment: "Let's Get Back To Work!"
This is a big issue as everyone one of us have felt the blow of trying to hire the right people, or even in some cases, a "body" to fill the void of the overstressed and higher demand work environment. It's never really been easy to find the right person for the right job, but it's never been more difficult than it is now.
Unemployment numbers and percentages are falling, but still to this day, 14.7 Million Americans continue to receive some form of unemployment and/or pandemic compensation. The good news is that this number is down 54% from a year ago. Currently, 70% of the jobs in our industry lost due to Covid-19 are back and have been filled on a national level.
On the dealer level, employment has improved to nearly 1.1 million, but it's still hard to find the right individuals to fill this growing demand, especially in the area of Fixed Operations. On top of that, even if we do find the right individuals, the compensation expense for our employees is rising at an astronomical rate.
Global Economy & Events:
On a global scale, the United States still remains strong as the number one leader in Global Domestic Product, (GDP), even though long term projections having the United States dropping in their percentage share of the GDP market.
As of mid-year 2021, here are the Top 5 GDP countries around the globe with GDP listed as well in the trillions...
- United States: 25.3 Trillion
- China: 20.6 Trillion
- Japan: 5.6 Trillion
- Germany: 4.9 Trillion
- India: 4.9 Trillion
As you can see, there is quite a gap after the number two GDP country which is China, which is our biggest competition and unfortunately, holds much of our debt. This global economy is going to go more and more "global" in the years to come as we already see with the current microchip situation.
So, how does all the above affect the Parts Department?...
Supply Chains - Vendors:
I saved the best for last as after all...ACG "Smart Parts" is supposed to be about Parts! The overall affect of what we have drilled down above boils down to parts shortages. Shortages that have never been experienced before in our country since the Depression.
So, what's causing all this in the first place?...
First of all, the microchip issue is different from the overall issue of parts shortages with almost all the manufacturers across the country. The parts shortages go much further than the microchip shortage that's affecting new vehicle inventories and sales.
The parts shortages are due to a wide variety of issues and reasons that started with the pandemic, with the exception of General Motors who suffered through a strike right before the pandemic hit in early 2020. The result for General Motors was a "double whammy" with the strike and then the pandemic.
We often mention the phrase "trickle down" in our issues and none is more true than the "trickle down" we have experienced with parts shortages. The parts shortage overall is impacting automotive dealers as well as the parts aftermarket as many vendors provide parts for both markets and are just branded with different logos.
The first thing we have to determine on the "cause and affect" of this parts shortage is..."Who's making these parts and where do they come from?"...
This is our first clue as you may have noticed that most of these parts shortages have mostly affected the domestic branded vehicles such as GM, Ford and FCA, (Chrysler, Dodge, Jeep & Ram) with minimal affects on imports from a replacement parts manufacturing standpoint.
Of course with the pandemic, there were warehousing and distribution issues with any commodity or product getting to it's final destination, right down to toilet paper, but we are looking into this even further.
Many of the replacement parts for domestic vehicles come from not only the United States, but other countries such as Mexico, Taiwan, Canada and others that have to deal with plant shutdowns, reductions in employees and even transportation issues as the result of the on going affects of Covid-19.
We also have to look at what these replacement parts are made of, which for the most part are petroleum based. For example, we are still feeling the affects of the winter/spring ice storm that hit Texas and shut down plants for months.
Petroleum products in these factories that were shut down in Texas include plastics, foam for car seats, modules, trim, filters and many other replacement parts that include petroleum as a main byproduct were affected by the storm shutdown.
Replacement parts manufactured in Mexico and other countries also had to deal with and are still dealing with Covid-19 restrictions for travel and commodities crossing borders which includes many other products including appliances, clothing, food, etc.
Along with truck driver shortages, cost of fuel rising, and lack of workers in the work force, it's no wonder that we are feeling the blow in the Parts Department with trying to provide, in some cases, normal stocking parts such as oil filters.
Adapting to change has never been more critical than now for "Smart Parts" Managers. Relying on the manufacturer to replenish our shelves with the simplest of parts such as filters, oil and other fast moving parts on their Vendor Managed Inventories, (V.M.I.) and overnight dedicated deliveries can not be trusted.
Now is the time to stock up and add a few more Days Supply, or "safety stock" to avoid future back orders and "out of stock" situations. We need to rely more on our own D.M.S., (Dealer Management Systems) with the right set ups to track our own demand on the most common parts which will in turn be the difference maker.
We also need to look at our current Pricing Policies and start thinking about modifications in that area as well. As mentioned earlier, prices are going up in every aspect of our economy, so why don't we do the same? Have we made the same adjustments or modifications to our parts prices, especially our price matrix to keep up with higher costs and inflation?
In my opinion, everything is going up in cost as illustrated due to higher demand and lower inventory levels which leads to new opportunities and new challenges. We have to meet these challenges head on in order to adapt to change and move to the next level.
"The State Of Our Industry remains strong, but the next "Breaking News" is just around the corner and we have to do what we always do....and that is...whatever we have to do be successful "Smart Parts" Managers!"
If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...
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