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How Efficient Has GM Been Managing Its Inventory?

General Motors Baltimore operations plant tour. Source: Flickr Image

The inventory is one of the most tracked assets especially for companies where the inventories represent a significant portion of the assets.

For General Motors (NYSE:GM), the company carries a significant number of inventories in its balance sheet.

As of 2Q 2020, GM has more than $10 billion of inventories, representing roughly 11% of the company’s current asset or about 4% of total assets.

As an investor myself, I will always pay attention to a company’s inventory.

Particularly, the inventory turnover ratio and days sales in inventory are some of the ratios that are helpful in analyzing a company’s inventory management.

In this article, we will explore General Motors’ inventory levels and the respective inventory components over multiple quarters.

Additionally, we will also explore the inventory with respect to sales and current assets to find out how the ratio has changed over time.

Without further ado, let’s move on!

What Makes Up General Motors’ Inventories

GM’s inventories consist of the following components:

  • 1. Productive materials (raw materials), supplies and work in process
  • 2. Finished products (inclusive of service parts)

Productive materials or raw materials primarily consist of steel, aluminum, resins, copper, lead and platinum group metals.

The company stated that it does not carry substantial inventories of such raw materials in excess of levels reasonably required to meet its production requirement.

Finished products are new vehicles in transit for deliveries and used vehicles returned from daily rental car companies and vehicles utilized by GM’s employees.

For GM, the inventories are stated at the lower of cost or net realizable value and are reviewed periodically to determine if inventory quantities are in excess of expected usage or if they have become obsolete.

If there is a write-down in inventory, the charges will be reflected in operating expenses in the income statements.

Chart of GM’s Quarterly Inventory

GM total inventory 2Q 2020

GM total inventory 2Q 2020

We first look at GM’s total inventory and find out what the long-term trend is for the inventory.

The chart above tracks GM’s quarterly inventory levels from 2015 to 2020.

As shown, GM’s inventory increased slightly throughout 2016 but started to decline significantly in 2017 after GM sold off its GM Europe subsidiary.

As of Q2 2020, GM’s inventory reached the lowest level at only $10.3 billion, representing a year over year decline of 10%.

On a long-term basis, GM’s inventory levels have been on a declining trend.

The declining inventory may have been caused by deteriorating sales and declining wholesale deliveries over the years according to these articles: GM’s automotive sales and GM’s vehicle wholesale deliveries.

Additionally, the declining inventory could also be caused by the downsizing of GM’s operations over the years in view of the challenging automotive industry.

The fact is that General Motors has been restructuring its global operations and one of which was the sale of its European subsidiary back in 2017.

Whatever the reasons are, GM has been trying to operate on a smaller inventory level to reduce costs.

Chart of GM’s Inventory YoY Growth

GM inventory YoY growth rates

GM inventory YoY growth rates

The chart above represents GM’s quarterly inventory year over year growth rates between 2015 and 2020.

As seen from the chart, GM’s inventory declined the most in 2017 when the growth rates decreased more the 20% throughout all quarters in 2017.

General Motors saw its inventory growth rates turned slightly positive in 2019.

However, the inventory year-on-year growth rates turned negative again in 2020, with 2Q 2020 being the worst when the reported growth rate stood at -10.2%.

Chart of GM’s Inventory Components

GM inventory components

GM inventory components

Other than the total inventory, let’s take a look at GM’s inventory components which are shown in the chart above.

As mentioned, GM’s total inventories are broken down into 2 components and they are (1) finished products and (2) productive materials (inclusive of work in progress).

For the finished product inventory, other than new and used vehicles, they are also made up of service parts such as vehicle replacement parts.

Between 2015 and 2017, GM’s finished product inventory seemed to be dominating over the raw material inventory.

However, the finished product inventory has been declining since 2017 and reached less than $6 billion as of 2020 Q2.

On the other hand, GM’s raw material inventory has slightly increased in recent quarters and reached the same level as the finished product inventory in 2020 Q2.

In other words, both inventories were at the same level at $5 billion as of 2020 Q2.

As such, GM’s total inventory has been quite balanced when it consists of the same number of finished products and raw materials.

Over the years, we do not see a scenario where the proportion of one inventory component dominated entirely over the other.

Ratio of GM’s Finished Products to Total Inventory

GM finished products to total inventory ratio

GM finished products to total inventory ratio

The chart above measures the proportion of GM’s finished product inventory to total inventory.

Between 2015 and 2018, GM’s total inventories consisted of slightly more finished products than raw materials, as reflected by the ratio of around 60% for finished product inventory.

The ratio dropped steadily to 55% in 2019 and reached the lowest at 50% in Q2 2020, indicating that GM’s total inventories were equally divided between raw materials and finished products.

Again, this proportion of inventory makes more sense as the inventory consists of neither too much nor too little of finished products and raw materials considering that GM’s global sales has been sort of flat or even deteriorating in recent years.

Ratio of GM’s Inventory to Current Assets

GM total inventory to current assets ratio

GM total inventory to current assets ratio

The chart above represents GM’s total inventory as a percentage of current assets. The purpose I created this chart is to show how much inventory represents as a percentage of current assets or working capital.

We all know that current asset equals working capital for a company as the current assets are liquid assets that are near cash or cash forms that can be converted to cash in a year.

For this reason, we do not want to see too much inventory is tied up in the current assets.

In general, a ratio that is less than 30% is considered safe. Anything above 30% should warrant a detailed investigation into the company’s inventory management.

In General Motors’ case, the company seems to be doing fine with total inventories making up less than 20% of current assets from 2015 to 2020.

The ratio declined modestly to 15% throughout 2019 and dropped further to nearly 10% as of 2Q 2020.

In short, GM’s moderately low inventory to current assets ratio shows that the company should not have any liquidity issue should sales deteriorate in the near term.

General Motors has plenty of other liquid assets such as cash and cash equivalents to cover its short-term working capital requirements.

Ratio of GM’s Inventory to Automotive Revenue

GM total inventory to revenue ratio

GM total inventory to revenue ratio

The chart above shows the plot of GM’s inventory as a percentage of trailing 12-months (TTM) automotive sales or revenue.

The purpose of this chart is to track if there is an excess of total inventory with respect to revenue. The ratio is a good indicator of GM’s inventory management efficiency.

For example, when sales are slow, we should not see a continuous inventory build-up and the ratio should rise.

The opposite is true when sales are good. In this case, the ratio should decline but not too low.

In either case, GM management should take appropriate actions when it anticipates that sales are going to be affected, for good or for bad.

Based on the chart, GM inventory management has been quite efficient, as seen from the steady ratio that has been hovering between 8% and 10%.

From 2019 to 2020, GM’s inventory with respect to TTM automotive revenue has been ticking higher and reached slightly above 10% in 2Q 2020.

The increasing ratio was sort of expected due primarily to the COVID-19 disruption which has badly affected GM’s sales, particularly in 2020.

Chart of GM’s Inventory Turnover Ratio

GM inventory turnover ratio

GM inventory turnover ratio

The inventory turnover ratio is an important metric that measures a company’s efficiency in inventory management.

The chart above shows GM’s inventory turnover ratio over the past 5 years from 2015 to 2020 on a quarterly basis.

The formula shown as below is used to calculate GM’s inventory turnover ratio:

Inventory Turnover Ratio = Cost of Automotive Sales / Closing Inventory

Based on the chart, GM’s inventory turnover ratio has been steadily rising from 2015 to 2018.

However, the ratio started to drop in 2019 and dived severely throughout 2020.

As of 2Q 2020, GM’s inventory turnover ratio plunged below 1.5, indicating how badly affected the company’s inventory has been due primarily to the COVID-19 pandemic.

At a ratio of 1.5, GM managed to turn its inventory over at 1.5 times in a quarter or 3 months.

In other words, GM managed to turn the inventory from raw materials to finished products and finally to sales as many as 1.5 times per quarter.

Chart of GM’s Days Sales In Inventory

GM days of sales in inventory

GM days of sales in inventory

The days of sales in inventory chart above is similar to the inventory turnover ratio plot except that it is in numbers of days.

Based on the chart, GM’s inventory days on hand were around 40 days from 2015 to 2019.

The ratio crept up considerably to 70 days in 2Q20, illustrating the longer inventory holding period in 2020.

Chart of GM’s Finished Product Inventory Days

GM finished product inventory days

GM finished product inventory days

An industry standard that has been used by most automotive companies including Tesla in measuring inventory turnover is the inventory days on hand for finished products.

For your information, the finished product inventory refers to new and used vehicle inventories as well as service parts for General Motors.

For GM, the respective finished product inventory days are shown in the chart above over a 5-year period between 2015 and 2020.

The formula to calculate the inventory days is shown as below:

Days of sales for finished products = (new car inventory / trailing deliveries ) X 261 working days

(Source: automotive news)

For a quarterly calculation, I have slightly modified the above equation.

Instead of 261 working days, I have used 65 days. I have also modified the new car inventory to finished products which include not only new vehicles but also used vehicles as well as service parts.

Based on the chart above, GM’s inventory days for finished products were around 20 days in 2Q 2020.

The ratio has crept up considerably in 2020, due largely to the deteriorating sales disrupted by the COVID-19 outbreak in the same year.

Why is there such a big difference in inventory days between the total inventory and finished product inventory?

The reason can be explained by the different types of inventory used.

For example, the inventory days for finished products use only finished product inventory while excluding raw materials.

On the other hand, the inventory days for total inventory includes everything from raw materials to finished products and thus the longer inventory holding period.

For GM, the company inventory days have been decreasing from 2015 to 2019.

However, the ratio ticked significantly higher during 2020, with 2Q 2020 being the worst affected quarter when GM’s inventory days for finished products went up to 20 days.

Conclusion

To recap, GM inventory has shrunk from about $14 billion in 1Q 2015 to only $10 billion in 2Q20 in the last 5 year, due primarily to the restructuring initiatives which included the sale of its European subsidiary in 2017.

Moreover, GM’s deteriorating revenue over the last 5 years has also partially contributed to a smaller inventory over the years.

Despite a shrinking inventory, GM has been managing its inventory quite effectively as seen from the balanced proportion between raw materials and finished product inventory over the last 5 years.

Besides, GM has also been improving its sales channels, bringing down the inventory days for finished products and total inventory to a record low by the end of 2019.

Unfortunately, GM’s inventory days ticked significantly higher for both finished products and total inventory during 2020, illustrating the challenging business environment caused mainly by the COVID-19 disruption.

References and Credits

1. All information such as financial figures in this article were obtained and referenced from annual and quarterly financial statements available in GM Shareholder Information.

2. Featured images in this article are used under creative commons license and sourced from the following websites: BiERLOS and Maryland GovPics.

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