While you may employ the best inventory management, selection and sourcing tools you can afford in your used car strategy, it is crucial to realize that their promises of profitability hinge first on the speed and efficiency of your reconditioning department.
As crucial as modern inventory practice is, optimal sale grosses depend on these tools’ collaboration with time-to-line (T2L), the real motivator of used car profitability.
Ask yourself this: What is your used-car priority? Is it selling what you already have to capture profit or is it provisioning more inventory? The answer should be that you have to sell the inventory you have — and, hopefully, profitably — to fuel your provisioning activities.
Get Motivated
You’ve heard the maxim, “Nothing happens until someone sells something,” a meaningful observation credited to various individuals, ranging from management consultant Peter Drucker to IBM’s Thomas Watson to Arthur “Red” Motley, the former publisher of Parade magazine, to Henry Ford.
Regardless of the source, the idea is that sales drive a business — but what it does not tell you is that those sales must be profitable. A more honest rendering is, “Nothing happens until someone sells something from which the cost of the sale has been managed so the margin can increase.”
For used car sales, the sale price is meaningless unless someone has first managed the vehicle’s:
1. Acquisition price
2. Reconditioning
3. Holding cost depreciation
4. Retail-ready status
T2L motivates used car profitability. Intelligent inventory mix, pricing, market demand and sourcing options, as valuable as they are in today’s highly competitive used car market, are capable only when these four factors are part of the dealership’s used car strategy.
Profit Mechanics
A significant imbalance exists within this force called “profit.” Too many dealers spend thousands of dollars month after month to buy high-potential inventory for their lots but then run them through slow, everyday recon and hope for the best.
Sometimes, platinum cars — the most hopeful purchases — hold gross, and sometimes they don’t. Once you own those units (or any unit), the depreciation clock starts. If you are not getting them through recon and to sale-ready status in at least 21 days, they’re already aged when they hit the lot. If that car doesn’t find a buyer within its prime selling window, you have to drop prices until it sells. How much gross do you really make on aged cars?
Inventory management, pricing and sourcing tools work because the force of metrics is built into what they do — they measure and manage market data to recommend optimal stock, price and source options. Likewise, recon T2L software provides time-to-line measurement, workflow management, process accountability and communications to reduce typical recon cycles from weeks to three to five days.
The main points to take away from all this:
1. Use stocking and auction tools to acquire the right vehicles at the right costs for your dealership, market and goals.
2. Use automated workflow software for recon structure, discipline, accountability, measurement, reporting and vehicle tracking metrics to reduce T2L — most dealers not using T2L best practices will, when measured, have a costly 10-to-21-day cycle.
3. Reduce holding cost erosion. NCM Associates has determined that each day a car flows from acquisition to sale-ready status accumulates a $40 deprecation charge against sale gross. A 10-day recon cycle erodes gross by $400 — even before the car hits the lot!
4. Every 2.5 days of recon time eliminated from the current cycle creates one additional inventory turn.
5. Get cars marketed online before the recon is complete to get eyes on those vehicles faster — and get all cars through recon and to sale-ready status within five days.
For a free copy of RECON T2L – The Starting Line for Reversing Margin Compression, email me at the address above.
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