Why are Inventory-Sales Ratios at U.S. Auto Dealerships so High?

38 Pages Posted: 31 May 2016 Last revised: 21 Sep 2016

See all articles by Wendy E. Dunn

Wendy E. Dunn

Board of Governors of the Federal Reserve System

Daniel J. Vine

Board of Governors of the Federal Reserve System

Date Written: May, 2016

Abstract

Motor vehicle dealerships in the United States tend to hold inventories equivalent to around 65 days? worth of sales, a relatively high level that has been nearly unchanged for 50 years. Despite playing a prominent role in the volatility of U.S. business cycles, very little is known about why the auto industry targets inventory stocks at such a high level. We use a panel of inventory and sales data from 41 vehicle brands over 30 years and the solutions to two well-known inventory planning problems to show that vehicle inventories appear to be related to (1) the size of dealership franchise networks, which tend to be large; (2) product variety, which tends to be high; and (3) the volatility of new vehicle sales, which also tends to be high. We show that differences across brands in these variables explain a good bit of the cross-section dispersion in brand inventory-sales ratios. Offsetting changes in these factors over time also help explain why the industry?s overall inventory-sales ratio has been quite flat for many decades. More recently, the net increase observed in the inventory-sales ratio in the past couple of years is in contrast to fit of the model, which might suggest that some of that increase could reverse in the coming years.

JEL Classification: E22, E32

Suggested Citation

Dunn, Wendy E. and Vine, Daniel J., Why are Inventory-Sales Ratios at U.S. Auto Dealerships so High? (May, 2016). FEDS Working Paper No. 2016-47, Available at SSRN: https://ssrn.com/abstract=2786051 or http://dx.doi.org/10.17016/FEDS.2016.047

Wendy E. Dunn (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Daniel J. Vine

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Mail Stop 82
Washington, DC 20551
United States

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