Successful Inventory Management: Avoiding Problem Vehicles-Part I

July 2007, Auto Dealer Today - WebXclusive

by Ryan Linnehan - Also by this author

At a recent NABD Dealer Academy, we presented the inventory portion of the conference with the following subtitle: “Maximizing one of your two largest assets.” It’s probably safe to say that for most Buy Here Pay Here (BHPH) dealers, the amount invested in inventory is second only to what is invested in their finance contracts receivable, yet most of those same dealers spend definitively more time tweaking, analyzing and stressing over those receivables than they do on their inventory.

Before we discuss some tips on how to manage our inventory, it seems the logical place to begin is acquiring quality inventory. And the key word in that sentence is “quality.” To borrow from the classic tagline, this is not your father’s BHPH. The market has evolved drastically over the past decade or two. There is a ton of competition in the marketplace today, and no longer is the name of the game to find the lowest ACV cars that will require the lowest down payments.

One tool many successful dealers utilize in their efforts to maximize the quality of their inventory is a “Do NOT Buy List.” This is simply putting in writing exactly what vehicles you DO NOT want in your inventory. In most cases, these will be vehicles that have created consistent repair issues. The goal is to be as specific as possible, so you don’t eliminate vehicles that are acceptable. For example, a particular model may be a problem vehicle up to a certain year, but, after that year, the problem was addressed by the manufacturer and the later model units are fine (i.e. post-2000 Neons). Another example would be within a particular model, a specific engine type might be a nightmare, but a different engine type may last forever. Remember the old 3.8L Ford engines? Yikes!

If anyone is interested in seeing our Do NOT Buy List, just drop me an e-mail, and I will send it to you as a starting point, keeping in mind that every dealer’s list will vary based on actual experiences—and maybe some justifiably biased predispositions. We have actually gone a step further with our list by also including vehicles that have caused us problems becoming over-aged historically. Of course, the running joke is that we would use a lot less ink and paper if we printed a Do Buy List, instead of a Do NOT Buy List, as there doesn’t appear to be many vehicles left to buy that aren’t on the list!

One final thing to consider on the topic of Do NOT Buy Lists is that some dealers find it helpful to further break the list down into a NEVER buy section and a BUY WITH CAUTION section. The former category is, just as the name states, a listing of cars that you just don’t want, no matter the circumstances. On the other hand, you might consider buying a buy-with-caution vehicle but ONLY if the price is right! The “right” price in this case is either a low enough ACV that you can either fix the issue by spending extra money for reconditioning or you can get enough spread when you retail it that you can afford to help repair the vehicle when the inevitable problems occur. If you choose this approach, just be sure to watch these vehicles closely, as oftentimes after a few gambles, you may realize that the vehicle probably belonged on the NEVER Buy List in the first place.

Coming up in the next issue, we will look at some specific steps to take when actually purchasing vehicles for inventory and what the best vehicles are to look for, as well as some good sources from which to acquire them. We will also address inventory turnover, and what role it plays for BHPH Dealers. Finally, if anyone is looking for a good deal on a stripped-out 1985 Yugo, let me know. I’ll even include the pinstriping at no extra charge!

Vol 4, Issue 6

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