PDF Bump Up Your Bottom Line with an Aged Inventory Action Plan

Bump Up Your Bottom Line with an

Aged Inventory Action Plan

Aged inventory is an age-old problem but it's no joke. The ugly truth of the matter is if you've got a problem with aged inventory, you're tying up cash and hurting profitability because you're sitting on a depreciating asset. Yet, this is an entirely manageable situation, and with today's tools and technology, aged inventory should be a mere blip on your balance sheet. So let's take a look at what you can do to get on the right track and eliminate the issue of aged inventory in the future.

Instincts Plus Insights Create a Solid Exit Strategy

Dealers have been buying and selling cars using their well-honed instincts quite successfully for generations. Today, though, you have the ability to combine your institutional knowledge of the car business with technology and tools that you can use to devise a process and an exit strategy for every vehicle you acquire.

Processes, which are purposely devised to be objective, are important because they compel you to treat every vehicle that you take in the same. Processes help you manage risk and ensure a predictable, efficient and cost-effective procedure. It's the same approach that, for example, every successful professional sports team, golfer, NASCAR driver, farmer and homebuilder uses. All of them, in some way, blend their experience with data and processes that help inform their strategic and tactical decisions.

One of the most critical components of a sound process is an exit strategy that minimizes losses. Regardless of how you acquire a vehicle, whether it's from a trade-in, auction or direct from a consumer, you need to have an exit strategy that defines what you're going to do with that vehicle if it reaches 15-, 30-, 45- and 60 days.

Tips for Moving Aged Inventory

? Analyze your inventory. The first thing you should do is take stock of where, how and what you paid for every used car on your lot and percentage of units by days in stock. In all likelihood, this inventory analysis will reveal your buying pattern. It will also lay the groundwork for retooling your approach to acquiring future inventory.

? Organize your inventory by its aged status. While accepted industry practice is 60 days, you're freezing capital. Thus, your process should include tactics that address cars at 15-, 30- and 45 days and beyond, which should include weekly monitoring of your aging inventory on the Search Results Page (SRP) and Vehicle Details Page (VDP) on your website as well as third-party sites.

? Start moving your vehicles. ? Get your cars front-line ready as soon as possible. Use a tool such as vAuto to see how long it will take you to get the vehicle to your website and third-party sites, fully merchandised from the time you purchased it. Coming out of the gate quickly helps drive down days in inventory as well as turn rate for your store.

? For cars at 30, detail a selection of your aged vehicles and move them to another location on your lot. Reevaluate your pricing. If you're in a group, call other dealers to see if they will take any of your cars.

? At 45 days: ? Detail the cars again and move them to the front line of your lot ? Go online to see what they are retailing for and check out their wholesale price; adjust prices down accordingly ? Use 's TIM tool to get offers/bids for a car. Reevaluate whether you want to keep the car or dispose it through TIM.

? Look at SRPs/VDPs and dealership traffic through your CRM tool to see what kind of activity you're getting. Determine if there's a problem or the vehicle simply isn't a good unit for your store.

? At 55 days, retail remaining aged inventory at above wholesale anticipated gross profit or loss.

? Spiff your salespeople. Traditionally, sales personnel get paid on gross profit per vehicle so there's not much of an incentive to sell a car that's been discounted. Instead, incent them with a cash credit representing the actual number of days the car was in your inventory.

? At 60 days, turn a negative into a positive. According to the NADA, the cost of keeping a used car in inventory is $28/day. Although this varies by market, you've likely sunk well over $1,600 per unit for every car that's been on your lot for 60 days, so it's time to cut your losses. Your options: ? Wholesale every car that's over 60 ? Go to 's Trade-In Marketplace (TIM) for offers ? Call your auction house

Moving Forward

Cleaning up aged inventory can be a painful lesson, so it's important to learn from your experience. Here are some tips to assist you in building a process for managing used inventory in the future.

1. Perform a whole-lot inventory analysis. Assess the value of every vehicle on your lot so you can determine the right mix of core and non-core inventory. Use this information to determine optimal turn cycles as well as the right time to buy and sell inventory. It can also help you price competitively for your market.

2. Have an exit strategy for every car that you acquire. Source vehicles so you can retail them; don't let their wholesale price determine your pricing strategy. Instead, take into consideration whether that vehicle is appropriate for your market -- does it have the right equipment, features and options? If you live in the mountains and you're looking at a convertible, can you really turn it in 60 days or less?

3. Reset the way you look at used cars. Unlike good wine, used cars on your lot don't get any better with age. Approach every used car acquisition with an eye to move it quickly.

4. Develop a proactive strategy for managing, marketing, buying and selling your vehicles. The strategy should take into account gross profit, return on investment (ROI), days to turn, average cost of sale, seasonality, realistic guidelines for evaluating and appraising trades, and an explicit aging plan.

5. Get a state-of-the-art pricing tool -- and use it. Pricing tools can be all show and no go. Get the best you can possibly afford; the investment will pay off because you'll use the tool to price your vehicles to sell at a profit in the shortest amount of time.

6. Redefine your sourcing strategy. Instead of looking at the vehicle's condition, use factors like a model's past performance and aging history, current market demand and residual value.

7. Invest in an inventory management system. Software packages like vAuto can help you do the monitoring. They can be set up to scan the market in various assigned radiuses for similar vehicles and their price differential to your vehicles. These tools will also help you competitively price your vehicles so they're more likely to sell.

8. Retrain your sales personnel. You can safely assume that every person who walks into your dealership has done some research online. It's important that your salespeople understand this new shopping behavior and are prepared to work with consumers that are armed with competitive pricing. Your personnel should know how a car's pricing is derived and be able to explain it in a transparent manner to a shopper.

For more information, refer to NADA's Used-Vehicle Turn Schedule and NIADA's Daily Inventory Cost Per Day Calculator.

Daily Inventory Cost Per Day Calculator

Use this calculator to help determine the appropriate daily carrying costs of your inventory. Write your dealership's numbers in the empty column (sample data is provided as a guide) to see how much you could save per day by selling cars faster.

(I) Average number of cars on your lot Average cost per car (T) Total investment (R) How much do you want to make per car (%) (O) Opportunity cost of capital (D) Daily target rate of return per vehicle (P) Average gross profit (V) Average days to sell (M) Inventory turnover (S) Annual gross profit per space (A) Daily opportunity cost per space COST OF INVENTORY PER DAY

Sample Dealer

30

$6,000 $180,000

10%

$18,000

$1.65

$1,500 45

8.111 $12,167 $33.33 $34.98

Your Dealership

Formula

Cars on lot x avg. cost per vehicle Place your percentage rate here TxR (O/365)/I How much do you profit per vehicle? What is your average inventory turn? 365/V PxM S/365 A+D

Source: 2010 NIADA Used Car Industry Report

Day 1?3 4?20

21

22?42 42

43?55 55?60

Used-Vehicle Turn Schedule

Activity

Frontline ready

Vehicle marketed at top dollar

Reevaluate, correct as needed: ? Correct a reconditioning issue ? Correct a pricing/market-value issue ? Correct advertising/merchandising issue ? Forecast outcome for the next 39 days ? Make necessary corrections ? Wholesale unit now if appropriate

Average gross accepted

Wholesale now or keep until 60 days

Retail at above anticipated wholesale gross profit or loss

Out -- absolutely!

Source: NADA 20 Group's Lifeline to Profits, 2012

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download