The used vehicle department in a dealership can be described as a paradox. Although it can be a major source of gross profit, it can also pose the greatest financial risk to the dealership. Why is this so and what are the major drivers of this success or failure? Most commonly a combination of problems occur produce a mediocre result when combined. The sale of used cars has seen a dramatic change over the last 10-15 years with the double barrelled affect of GST and the advent of online car sales but the fundamentals of good stock management have remained unchanged.
At a time like this, with overall depression in sales, precise vehicle stock management is desperately needed. It might well be that vehicle stock management can determine whether we operate profitably.
Now, although it may seem obvious, good stock management will mean stocking more of what you are selling. The dealership must determine its new-to-used ratio but the industry averages in Australia for motor vehicles is “one-to-one”. One used car sold (excluding wholesale) for every new vehicle. This will vary depending on region, new vehicle product mix, franchise and dealership skill set. This, however, is a good point to start from. So what are the fundamentals of high-quality used vehicle stock management?
Work out what you are selling
Dealerships now have very sophisticated software programmes either with DMS or CRM systems. A matrix of requirements should dominate used vehicles stock purchases. These requirements should be a combination of previous sales and potential sales opportunities. Unfortunately, many dealers are too reliant on trade-ins and factory programmes for their mix and quality of stock rather than using previous sales as the driver for managing stock.
Determine level of stock to be held by segment & location
The perennial question in used vehicle stock management is how much stock should you hold? Industry standards suggest the optional level is 45 days’ stock. This level may be a moving target with peak & troughs in sales; too little stock limits customer choice and too many increases both cost and risk for the dealership. A word of warning when creating segments in the used vehicle lot.
The quality of vehicles has improved so much that a 10 year old car today with 150,000 kilometres on it is a far different proposition to a 10 year old car 10 years ago.
If we have set our stock holding levels and determined our model mix what are the important policy points to review?
Trade & buy to your budgeted stock levels and mix.
Make trading decisions on planned levels of stock. The most important principle to follow is to buy stock to plan, and not because it is available.
What do we keep? What do we wholesale?
Prompt decisions regarding which to keep and to dispose of will keep your cashflow moving.
Ensure the valuation is realistic in the current market.
Over valuing trades to close a deal is a necessary part of the sales negotiating process but from an internal perspective a traded vehicle must be valued at the realistic market value. Under allowance has the dual consequence of over valuing stock and increasing your GST liability. Used vehicle departments should not prop up new vehicle department profitability
Have the Service Department quote on reconditioning costs.
The service department should treat the used vehicle department as a trade customer, and provide a firm quote for all reconditioning jobs. The used car sales manager should also check the quotes against standard occasionally.
Ensure vehicles are lot prepared exceptionally well.
It is a consideration not to “over recondition” a vehicle but generally a higher reconditioning spend generates a higher gross profit. Also consider paying a bonus
to the detailer for every used vehicle retailed. However, apply a penalty for every vehicle found to have a defect that affects a potential sale, for example, flat battery.
Prepare all stock for the lot promptly.
All passenger trades should be lot ready within 3 working days, all commercial trades should be lot ready within a week. Consider using a night shift/overtime arrangement in the service department if there is a lack of capacity. The first 30 days of a vehicle’s life on the lot are its best chance of selling.
Keep enquiry logs on all vehicles.
Monitor all inquiry and walk-ins both online and at the dealership. Track the inquiry by vehicle. This will be useful in appraising the stock mix and in decision making at each vehicle’s monthly review.
Salespeople MUST know the stock on the lot.
Ensure that all sales staff know all the stock. When a new vehicle is traded have all sales staff familiarise themselves with the vehicle.
Loan vehicle policy.
Keep an accurate record (loan book) for all vehicles on loan to staff or customers. Review this regularly to ensure that hot stock is not being lent out, specific vehicles are not always on loan and therefore not lot ready.
Ensure that stock is well displayed at all times.
Change the yard display regularly. Know the hot selling spots and use them to maximum advantage. Ensure that the yard has colour and movement, and looks inviting to the potential buyer.
Track the effectiveness of your advertising dollar.
Use the enquiry log to determine where customers heard about your dealership, and the vehicle they are buying. Use after hours silent salespeople and ensure good after hours access to the lot.
|15-20 Days||All Stock||What enquiry have we had?
Is the price realistic?
Has the car been reconditioned properly?
Is it properly detailed and lot
|Independent stock review|
|30-40 Days||All Stock||Test drive to ensure there are no mechanical problems
Consider discounting to sell quickly
Consider wholesaling the vehicle now.
|45-60 Days||All Stock||If no apparent problems with
|This vehicle is about to begin to cost you money. Can we sell or should we cut our losses
|60-90 Days||All Stock||How should we dispose of the
|Processes must be in place to ensure integrity of objectives|
Promote extended warranties.
Use extended warranty to maximise income in the used vehicle department and in the service department by tying the customer back to the dealership for service.
What do we do and when to ensure we do not have an aged stock problem? Many dealerships have a strict 90 day policy. This means we wholesale all vehicles after they reach 90 days. But how did they reach 90 days and what did we do to avoid this potential loss?
It should be noted, however, that we should exert sufficient control on the process to wrest control on the wholesaling process back from the Wholesalers. Do not wholesale retainable units. This may seem a contradiction but good processes significantly reduce retail quality vehicles from being wholesaled.
What is Return on Investment (ROI)?
Merely put the greatest Return on Investment (ROI) and highest gross profit occurs when used car stock is turned over quickly.The following graph, although using simple yet realistic assumptions, is indicative of a typical dealership.
It shows that even if opportunity costs are ignored and only traditional direct costs such as advertising and floor plan are included, the profit per unit falls until the breakeven point is reached at 40 days. After 40 days an increasingly larger loss will be incurred.
It is interesting that even if the day 1 full gross is achieved at 70 days the accumulated holding costs will have already consumed the potential gross. Since then a loss will be made in spite of achieving a “full gross”.
The key point is that it is desirable to create a mindset in your used vehicle department that it is velocity of sales that generate the best departmental gross profit.
A key element of success
The more current the stock the greater the gross. Why?
- Newer stock produces greater gross profit per unit
- If you need to ‘quit stock’ quitting early reduces wholesale losses
- Carry better stock as you can carry what is currently in demand
- Do not suffer “tear ups” from aged stock