Coping with the reduction in used-car supply

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Bill Xinaris
Inventory Management Columnist

As I speak to dealers across the country, the most important concern they voice for their used car operations is the supply of used vehicles over the next few years. This concern is justified, as 2013 and 2014 look to be years when the scarcity of these vehicles will be at its worst.

The cause can be attributed to three key new car factors:  
•    The declining return of one to five-year old leased vehicles
•    The extended terms for financing (72 to 84 months including negative equity from past vehicles owned)
•    The increase in the quality of these vehicles (customers are holding on to these for longer)  

So how do dealers maintain or build success during these times? By focusing on inventory management. There are three key components – Sourcing, Appraising and Managing – to inventory management, and hence these are also the keys to continued and overall success during more trying times.

Sourcing – Buying Optimization
Sourcing is the first key. In the past, dealers have focused on external sources (marketplace based sources) for the majority of their used car inventory – auctions, off-lease vehicles from the manufacturer, etc.
Moving forward, especially in 2013 and 2014, dealers will need to concentrate on more internal sources (customer-based sources) for their inventory – service department, finance portfolios, etc.
This is a significant shift as it places more emphasis on establishing, building and nurturing stronger internal processes to capture and execute on these opportunities.
 
Appraising – Trade In Optimization

When most managers think of appraising, they look at this as a means to win a deal and move another car over the curb. While this is true, the importance of winning appraisals needs to play a much larger role.

As internal sources become more important in the buying optimization scheme, a more effective appraisal process becomes a must.

This process needs to be trust building, customer facing and customer friendly. It needs to employ the sources that customers use and trust like the Internet and all the tools and sites available there. Here perception is reality. It is no longer good enough just to produce a value for the trade, the process needs to be built around being professional, different and trustworthy. Employing a better appraisal process will help win more deals and help buy more inventory through the internal sources.

Internal Sources                           External Sources
Customer Based                            Marketplace Based
Appraisals – New/Missed              Auctions – Physical/On-line
Sister stores (Group)                     Internet Listings
Service Drive/Dept.                       Wholesalers/Dealers
Leasing Division                            Leasing Division (Manufacturer or Rental Car Company)

Managing – Inventory Optimization
This is the third component, and it is also the most encompassing one.

The definition of true inventory management is having a plan for every vehicle purchased to maximize profit or minimize loss whether that vehicle is sold retail or wholesale from acquisition to disposition. The key here is sticking to the plan, and the plan does not and should not exclude the wholesale side of the business.  

First step is to understand and confirm what works well for each dealership, and this is where technology becomes very important. Technology can be used to minimize and eliminate decisions based on guessing or gut feel, and using true, factual transactional data it can be used to determine what is purchased for the lot, and most importantly, why.

Identifying proven winners mathematically and statistically and identifying potential market performers is critical.  

The next step is to put a plan in place to move these vehicles on and off the used-car lot efficiently and effectively. This is achieved by using Internet listing information and developing, implementing and enforcing a marketing and pricing strategy around the proven winners and market performers.

The strategy should minimize turn time while pricing to the market effectively – not too high so you lose sales, but not too low so you lose profit. It should also differentiate between proven winners and market performers, being more aggressive with the latter.  

With every good process, the key to execution is measuring performance. Reports need to be robust and they need to cover all areas of inventory management including aging, personnel performance, retail performance, wholesale performance, appraisal performance and market performance. Knowledge is power, and the more information available, the better the decisions that can be made, and the stronger the execution in the long run.

As sourcing inventory becomes more difficult, it’s important to use a sound inventory management philosophy and the associated technology to:

•    Assess what to put on the lot and why - identify the dealership’s ideal inventory mix
•    Use all the external and internal sources to locate and buy those vehicles  
•    Execute on a plan to market and price those vehicles effectively and efficiently
•    Continuously monitor, assess and improve your used-car operations

Growth and success is not about selling more cars for less, from a bigger inventory. It’s about having the right cars to sell in your inventory, and building strong, sustainable ROI through better, smarter decisions.

Bill Xinaris is the national sales director, inventory management for DealerTrack Canada.  For more information contact him at 416-949-2537 or visit www.dealertrack.ca .