Inventory Turn: the Key to Profitability in Your Used Car Department
By Steve Hall
Many times we look at used car departments that are selling a large volume of cars and think what a great job they are doing. Most used car managers tend to focus on volume and gross profit as opposed to inventory turn. If not properly managed, aging inventory can eat up your gross profits.
The average vehicle depreciates at the rate of $12 per day. This is in addition to the average reconditioning fee of $398, transportation fees to and from the auction of $80 each way, and auction fees of $140 every time you buy and sell a car. Thus if you wholesaled a car that was 60 days old at an auction you would suffer a loss of $1,418. With the average gross profit of $1,956, by the time you pay out your sales commissions ($383 average-19.5%), sales management ($156-8%), and advertising ($178 per vehicle), you're left with a net gross profit of $1,239. Therefore, for every car you wholesale after 60 days, you wipe out more than your entire net gross profit on a retail deal. This is why it is crucial that management focus not just on volume but making sure it is turning inventory while achieving volume goals.
The key to achieving a 30 to 45 day inventory turn is to have a game plan from the first day a car is purchased.
For example:
- Day 1-3 = vehicle is put through a reconditioning process.
- Day 4-6 = vehicle is advertised and you accept only a high gross.
- Day 7-10 = vehicle is advertised, and only a good gross profit is accepted.
- Day 11-14 = vehicle is recleaned, and advertised at a lower price.
- Day 15-18 = vehicle is test driven by manager to see if further reconditioning needs to be done, and a "spiff" is put on the car.
- Day 19-25 = continue to place a "spiff" and consider wholesale offers while excepting an average retail gross profit.
- Day 26-30 = move back to front line, reclean and accept low gross.
- Day 31-40 = reinspect with fresh sticker, accept minimum gross, keep on front line.
- Day 40-45 = wholesale and take your losses!
The most important factor is that you must have a game plan from day one. Most managers will develop a game plan after the vehicle reaches 45 to 60 days. If you spiff cars at 15 days, sales people may move them quicker because the vehicle is still fresh and gross profits can still be made. Salespeople do not like trying to sell "60-day-old units" because holding gross on them is tough.
You also need to test drive vehicles every 15 to 20 days to see if there is a reason why this car is not receiving any activity or interest. Sometimes you will find a funny noise or a bad odor that is turning away customers that can easily be fixed.
Another important factor is to make sure all your cars are put through a solid reconditioning process. Many times I have seen a manager over-appraise a car or pay too much for a car at auction and not want to put any more money into it. You have a much greater chance of selling a vehicle that is properly reconditioned than you do trying to apologize for the quality. If you are not willing to spend the money reconditioning, you are better off wholesaling the car from day one and taking your losses then. Otherwise if it reaches 60 days old, you stand to lose a great deal more.
Special finance departments are one of the best resources to help you unload old-age units. Usually special finance customers are more flexible on vehicles and are looking primarily for reliable transportation. Special finance managers should be included in your spiff programs because they probably stand the best chance of helping you unload your aged inventory.
You may want to consider structuring a bonus plan that pays the special finance manager and salespeople a higher percentage of gross on vehicles over 20 days old and an even higher percentage on vehicles over 30 days. The key is to spiff them at 20 to 30 days, not waiting until they are 60 days old. Remember, for every vehicle you avoid wholesaling at auction 60 days later you will save you an average of $1,418. This can have a dramatic impact on the profitability in your used car department.
Steve Hall is CEO of PriceDrive.com, the leading provider of B2B Web-based applications which help automobile dealers manage and turn their used vehicle inventory more efficiently. shall@dealeronline.com
