We have all heard the cliche “if you can’t measure it you can’t manage it”. This saying has different meanings to different people but the bottom line is that in the absence of feedback, any behavior becomes acceptable. Measuring devices and systems that produce data are forms of providing feedback. What we do with that feedback is solely our own responsibility.
The same “measure it, manage it” credo holds true for growing and developing different segments of our business, particularly the Used Vehicle Department. Most all of us routinely look at unit sales, gross per unit, total gross profit, wholesale pain or gain, inventory aging, total dollars invested and perhaps a few other indicators. These financial management indicators tell us a lot of things but not everything we really need to know. When we individually get to the point of having had enough of “getting what we are getting” and are not happy, we usually end up changing managers and then wait and see what happens. The new manager often times will say something about the inventory and how he or she is going to attain better results after they clean out the “dead wood”. We usually see a lot of “posturing” and hear a lot of “projections” from the newly hired manager but as time moves along, significant changes in measurable results rarely occur. We repeat this process over and over and not much ever really changes. This becomes frustrating and eventually, many of us simply accept the results as normal or, determine, “it is what it is” and our attention gets focused on some other “more pressing” issue. Not many of us really truly analyze the available “feedback” that lies in the data within our used vehicle operation.
The entire thrust of this article is to lay out some areas of opportunity that exist in developing alternative forms of “feedback” which will help you grow your Used Vehicle Departments total gross profit month after month. As we have discussed in previous articles, it is all about turnover and increasing turnover is almost always about the inventory. Managing your Used Vehicle inventory is definitely a science, not an art. The data to construct an effective, scientific, inventory management system awaits you in your DMS.
One of the best inventory management indicators that will help you increase gross profit is simply measuring the cost of sales of the units we are delivering versus the remaining inventory by sales segment and individual model year within each segment. I like to use the following eleven sales categories and the 8 most recent model years within each category. The categories are: Small Car, Sporty Car, Mid Size Car, Full Size Car, Small Truck, Small Sport Utility, Large Truck, Large Sport Utility, Mini van and Van. When you clearly know what the cost of sales of the vehicles are that are “burning gas” is and couple that with how quickly they turned, you will have an exact idea of what you need to stock. As an example, if your number one gross revenue producing sales segment is mid size cars and your best performing model year and quickest turner is 2004 within that segment and the average cost of sales is $8,200, then it stands to reason that your inventory of vehicles in that segment and model year needs to be as close to $8,200 (lot ready) per unit as possible. The closer your inventory is to the cost of sales of the vehicles that you are selling, the more active that inventory becomes. Conversely, the further away from the $8,200 target your inventory is, the less active it becomes. If, for example, you happen to be offered a trade that is a 2004 mid size car but is worth around $14,000, get a buy figure on the unit that is good for at least 10 days, trade for the vehicle, try it out on the lot for those 10 days and if it isn’t gone, cash it. This will allow you the opportunity to try other vehicles without the risk of wholesale pain. Ultimately, you will find the ideal inventory in both the number of units you need, as well as the cost, for each sales category and model year. I strongly suggest aiming for a target of a 45 days supply of units and a 45 days supply of dollars in each sales category and model year. (the unit days and dollar days calculations were covered in a prior article and I will be happy to send it to you upon request) It will become evident that there are some sales categories and model years that just doesn’t make sense to participate in with an inventory investment. You will also find that by maintaining 45 days worth of units and dollars, there will be categories and model years that sales grow rapidly in. And finally, you will also be able to find the point of diminishing returns in each sales category where more, does not necessarily mean better.
The “feedback” that this type of simplified inventory management system will provide you will become invaluable. Part of the reason Wal-Mart has become the retailing Giant that it is, is due to strict adherence to the basic principles of inventory management. Monitor demand, measure movement. You will rarely find any of their shelves empty or overstocked. If it is a good producing, quick turner, gradually increase stock until you find that point of diminishing returns. If you have tried it and it doesn’t work, forget it and move on. If you will take the time to implement this type of system, (or any of the available vehicle inventory management systems, mine included) you will increase your total Used Vehicle Department’s gross profit more than you might imagine. The bottom line is that when customers leave our individual Used Vehicle car lots without purchasing, it is almost always because they did not see what they truly were looking for. (Sometimes they will not even get out of their vehicle and just do a “drive by”.) Remember, you cannot be all things to all people and it is impossible to stock everything. When your Used Car lot has more on the ground, of what your customers are looking for, what do you think will happen?