By Lance Fromwalt | Posted in Best Practices – Rural Lifestyle Dealer
Despite persistent supply chain challenges impacting equipment availability, the equipment industry has generally performed well in the last few years, leading to positive results for most in the industry. But with high interest rates impacting demand and, in certain situations, excess inventory availability, you need to be aware of some of the unexpected risks that are more likely to pop up in your relationships with suppliers during a potential downturn.
One category of risk that is often overlooked relates to the inventory you obtain from suppliers experiencing financial difficulties. These situations typically arise with smaller or under-capitalized suppliers that may include short line suppliers, producers of specialty equipment, or international suppliers seeking to establish a presence in a new market. While many of these suppliers are very well run and have been great partners with dealers, we see more risk in these relationships for three primary reasons:
- a limited product line can make a supplier more susceptible in a downturn
- equipment is often sold to dealers using a third party floor plan program, creating an independent financial obligation to another party
- it is more difficult for you to determine the financial strength (or weakness) of a smaller, privately-owned supplier.
The following is a list of some of inventory-related risks that we see for dealers:
- Prepaying for Inventory. Some manufacturers require dealers to pay cash for inventory before it is produced. Dealers often elect to do this in exchange for discounts in the price. However, you should proceed with caution when taking this approach because your prepayment is the equivalent of an unsecured loan. This means that if a manufacturer goes under before you receive your order, there is very little chance of being repaid.
- Storing Inventory on Your Lot. Suppliers will ask dealers to temporarily put inventory on the dealer’s lot. This often occurs when another dealer is selling or closing out. If you accept the inventory with the understanding that you are not taking ownership, you need to monitor your floor plan statement very carefully to make sure that the inventory does not appear. If it does appear on your statement, your floor plan lender will often have a legal claim against you for this amount, regardless of the deal that you think you have with the supplier. This situation can occur because agreements in supplier-sponsored floor plans often say that inventory can be placed on your statement through a communication from the supplier. To help limit your risk in these situations, be sure to document in writing with the supplier that you are not taking ownership of the inventory and that the supplier is not authorized to put it on your floor plan. You should also immediately send a written notice to your floor plan provider informing it of the improper charge.
- Transfers from Other Dealers.