Article

Strengths and Weaknesses of Inventory Management Processes

October 2012, Auto Dealer Today - WebXclusive

by Kimberly Long - Also by this author

Much like other areas of the dealership, inventory management has evolved over the years into something that must be managed much more precisely if a dealer hopes to be successful. Much of the failures dealerships experience (aged inventory or low grosses) stem from simply not having a plan in place to source, merchandise and sell one’s inventory. Having a plan in place gives a dealer at least a chance of success with their inventory. What kind of plan, however, will vary from dealer to dealer; what works for one might not work so well for another.

Auto Dealer Monthly looked at the experiences of two dealers who are working on differing approaches to their inventory management processes and examined some of the strengths and weaknesses of each approach thus far. One of the dealers felt it was imperative to enlist the aid of a technology tool – in this case, vAuto – to help him begin tackling his approach to inventory management processes, while the other dealership has begun the initial overhaul to its inventory management processes without the aid of any particular piece of software or inventory management tool.

Using Technology to Tackle Inventory Management
The problem at Don Wood Automotive in Athens and Logan, Ohio, was not the absence of an inventory management plan but rather a lack of success with the plan that was in place, according to Jeff Wood, the dealership’s president. “I had hired somebody who was is charge of [managing inventory], and the biggest problem was … my four sales managers [were] dictating pricing to this person … The sales managers didn’t respect his opinion and would challenge him and change the price,” he explained. “This person didn’t feel empowered to lose money on vehicles or do what was necessary to sell cars at the market price, so we languished.” He decided to start making changes to his inventory management processes in January of this year.

Authority and Empowerment
Wood said the fault with his previous inventory management setup did not lay with the person who oversaw the inventory. “I wouldn’t say the person that I had in charge of it did a poor job; I would say that I didn’t empower him. I didn’t give him the right tools in order to make sure that my sales managers respected his opinion … It was just poorly designed on my part. Now they know if they change a price on a car, they’re in deep trouble,” he said.

Wood has since taken over the task of inventory management himself, which he acknowledged, “is probably not the most efficient method for businesspeople, but I find that I make more money by worrying about my used car inventory than any activity in the dealership.”

He decided to enlist the aid of inventory management technology from vAuto to help him get a handle on inventory management at his stores and said the tool has empowered him to take charge of numerous aspects of the process. “I have accountability for what my sales managers are putting in their trades, how long we’ve had them, what price we’re putting them at, how long did recon take, how long does it take to get pictures, where are the bottlenecks—vAuto has empowered me to do all those things,” he said.

Measuring and Monitoring
Arguably, one of the biggest reasons for utilizing a piece of technology or software to assist in inventory management is the ability to more easily monitor the process and measure the results. Wood reviews all trades every morning and adjusts prices on used cars at designated intervals, and is also alerted to any issues such as photos not yet being online for a vehicle or too much being given for a trade.

“If they put too much money in the trade, day one when I go to put the description in and determine the market price for this vehicle, I know they’ve put too much money in it,” he said. He can then address the issue with the appropriate individual. “Anytime there’s a car that’s not appraised correctly, they’ll definitely get a call from me that morning.”

Being able to monitor numerous aspects of his inventory management across multiple rooftops also saves Wood some time when it comes to handling inventory matters at different stores. “I can see their appraisals … I see if they’re under-appraising cars based on how many trades to appraisals they get. I just see the health of their inventory, I see their inventory mix; if they need something, I see all that from vAuto and I don’t really have to have the one-on-one [conversations].”

However, while conversations about some issues are unnecessary thanks to the information available to him through the program, Wood must still make certain to regularly communicate with his sales managers. “We talk about what they’ve sold, because sometimes the feedback on what they’ve sold doesn’t come back to me quickly enough. It may take a few days for it to pull out of vAuto when they sell something.” Wood  is able to observe what is in inventory, days supply and how competitively each vehicle is priced by category in relation to what’s in his market area, allowing him to adjust his pricing strategy on each vehicle as needed.

Once he sets a price on a vehicle, it stays at that price for its first 20 days on the lot; after the twentieth day he’ll make the first price reduction on it. “From there, I’ll reduce the prices based on market days supply and how competitive we are,” he said, and added that the vAuto tool will remind him daily of any vehicles that haven’t been adjusted in the last seven days.

Effect on Days Supply and Inventory Acquisition
Having a tool that allows him to monitor market inventory trends and more easily adjust pricing has allowed Wood to make better decisions on what to carry in inventory and to move that inventory more quickly. “I want to maintain a 45-day supply in almost all categories unless it’s something we don’t do well in,” he said. He said vAuto’s strategy tool allows him to see what vehicles he has sold in which categories over the past 45 days and observe trends. “I watch that strategy [tool] all the time; it’s telling me where I need to back off and [where to] be aggressive.”

As a result, Wood has been able to get rid of much of his aging used inventory and is able to adjust his inventory buying model as needed in relation to market trends in his area. Recent industry issues with used vehicle supply have had some effect on how he evaluates trade-ins and buys at auction, but he has found that the vAuto tool helps with this. “I’m more aggressive on trades than I am auction purchases, and I have a default buying model in vAuto that, when my sales managers go in, it allows for reconditioning [costs] and the margin that we’d like to make [from] day one,” he said. “I adjust that default based on the supply and demand. And then on the wholesale side when I’m buying at auction, that number tends to be a little lower margin because of the competition on the wholesale side.”

Effect on Gross
One thing Wood admitted he has not been entirely fond of since changing his inventory management process is a lower gross per unit. Periodically and regularly reducing the prices on aging inventory has been necessary in order to move the units, but of course this often means accepting a “significantly” lower gross per unit. However, he added that this has started to shift a little for him as he’s acquired fresh inventory. Since he is paying closer attention to which cars move the best in his market, he is able to focus on acquiring the correct inventory to achieve a quicker sale; the more quickly a car sells, the fewer price reductions it undergoes and the closer Wood stays to the initial margin he set for the vehicle.

Even in the cases of vehicles that have undergone price reductions in order to sell, he said the perceived negative of lower grosses was far outweighed by other benefits. “What I do like is the fact that we’re turning a lot more inventory and we’re making a lot more in finance and insurance,” he said. “I, as a company, am more profitable with that method than I was with higher grosses and less volume … [We have] more business in fixed [and] we’re focused more on our F&I processes.”

Lessons Learned
One thing Wood has learned since the beginning of the year is that accountability is important, and an inventory management tool is only as useful as a dealer makes it.

“I don’t know how many people have told me that vAuto doesn’t work or vAuto does work. I’ve heard it on both sides,” he said, and added that he thinks of it like a hammer. One person could use a hammer correctly and have no problems at all, while another person could be using it improperly yet conclude that the nail isn’t driving in very well because the hammer itself is somehow defective. “It’s whether or not you embrace and use the tool,” he said. In his case, effectively implementing the tool means he is “pricing cars consistently … [and] repricing them every seven days, keeping it market-competitive and not trying to hold out for a big gross when it isn’t there … I’m not selling any cars at auction. I’m retailing every car at wholesale prices after 60 days and getting F&I profits from that, and trades.”

Working Without an Inventory Management Tool
At McKaig Chevrolet Buick in Gladewater, Texas, the situation was one that is likely pretty common amongst dealers when it comes to inventory management process—they simply didn’t have a set plan in place. “I think it’s pretty accurate to say we didn’t have a formalized process and it was just being done on the fly,” said Mark Abernathy, president and partner at McKaig. Further complicating matters was the fact that the store also needed to focus on having the right inventory for special finance.

Inventory Turn
The initial emphasis at McKaig, Abernathy said, has been on improving inventory turn. “I come from a manufacturing background, so turnover or days in inventory has always been a key to me and we had kind of let that go,” he said. Adding to the problem was the fact that the dealership was “keeping everything [that was traded in] and thinking we could retail it without really taking into consideration the carrying cost of inventory.”

An important first step in the inventory management process was the decision to set a goal of having their inventory turn in at least 45 days. “I think ours had gone well over 60,” he recalled. “Our ultimate goal is to turn our used car inventory every 30 days. I’d like to get 12 turns a year.” He said they have hit the 45-day turn goal a few times so far, “but it’s more about consistency than hitting it once or twice … and while we’ve made a lot of progress, we still don’t have that month-to-month consistency.” He said once they’ve established a consistent pattern of turning vehicles within 45 days, they will focus on the next goal of a 30-day turn.

Segmenting Inventory
To tackle their inventory turn goals, Abernathy said they have begun segmenting their inventory in the hopes that it will allow them to discern inventory trends and make better decisions on what vehicles to carry. “We’re trying to break our inventory back out into classes or segments so we can track turnover among individual segments or classes as well as overall,” he said. “We’re further along with that process in our new inventory than we are used. We developed some spreadsheets that show our inventory, what’s on the ground, and not only by Chevy cars, Chevy trucks and Buicks, but we’ve also developed a cross-section so that we look at the different competitive segments like subcompacts, compacts, small cars, that type of thing,” he explained. “Now we’re looking at our turns by segment and not just what our overall average is.”

When Do You Need an Inventory Management Tool?
Abernathy said that as soon as they iron out the process of looking at their new inventory by segment, they will work on applying it to their used vehicle inventory. However, he believed that to effectively apply the same process to their used inventory, something more would be required. “We’re going to need an additional software tool to do that, probably, so we’ve got all the information,” he said.

He commented that the dealership has in the past used some technology tools such as vAuto and AAX to help with inventory management but had “kind of gotten away from that.” The problem was not with the tools themselves, which he believes are able to provide a great deal of useful information, but rather with utilization of the tools. “We weren’t utilizing them and so the ROI wasn’t there. I don’t think it was the technology; I think it was our utilization and not fully optimizing.”

This seems to be part of the reason that Abernathy is focused on revising their processes before adding any technology to the mix. “We’re going back to the basics,” he said. “You’ve got to have a written plan or a process that’s formalized. There has to be someone accountable for the execution of that process, and you have to measure the results and then act on those results to improve the process and/or the execution of the process, and we didn’t really … have any of that in place, or if it was in place, it broke down.”

For now, he said dealership management is evaluating a number of different technology tools to see which might best meet their needs. “[We are] looking at the NADA mobile application. I think we’re looking at Red Bumper. We’re looking at Bidzpin, which looks particularly appealing to me because of the focus on the special finance units and how much information you can get very quickly through that tool.”

Accountability
As Abernathy pointed out, appointing someone to oversee those efforts who can be held accountable for the results is just as important as having set processes in place for managing inventory. Abernathy has been working with his brother Kent, the dealer-operator for McKaig, to get inventory management on track and said they will decide together on the best people to oversee processes and hold accountable for the results. He said, “[My role] is probably more putting processes in place, and he and I agree on who we’re going to hold accountable for the processes.”
 
As it stands now, he said they have a special finance manager at McKaig who is becoming more and more involved with the inventory. “Then our general sales manager is … more responsible for what we would call our regular inventory business, prime [and] near-prime,” he stated. “After we measure the results, we’ll go over them with the manager  … to see how we can improve the results. What do we need to do? Do we need to further improve the process, or is it merely an execution problem?”

Changing the Approach to Sourcing
As a result of their efforts to classify their inventory according to certain segments, Abernathy said they are able to look at trade-ins with a more critical eye and are trying to broaden their sources for acquiring inventory. “We historically have always gotten the lion’s share, I’d say 90-plus percent, of our used cars through trades,” he said. “We are starting to look [more] at auctions. We’re starting to look at car rentals.”

Part of the problem, he said, was that the dealership was simply keeping too many trade-ins. “We weren’t really doing a market analysis. And so the first step in our process was making a determination whether to go ahead and … take certain units to the auction to cut our overall [trade inventory] down,” he stated, and added that they will have to continually re-evaluate their trade parameters. “It really kind of depends on what segment that vehicle’s going to be in and how much spread you need to make your gross profit.” The process is not easy, however, and will take continued discipline and oversight. “That’s hard to get people to change because they’re used to taking in certain vehicles no matter what. That’s what they tend to continue to want to do.”

He said they are tackling that difficulty by trying to get salespeople and sales managers to focus on specifics instead of generalizing. “If they say, ‘Oh, this is good merchandise,’ we’re starting to say, ‘Why is it good merchandise? How many are selling in our market? How many do we have? How long do you think it’s going to take you to sell it? What’s the pricing plan and strategy for the unit?’” he explained.

“Experience and instincts are still very important, but what we’re trying to do now is lead with the data, the results. Let’s get the objective data and facts, and then let’s apply the subjectiveness or experience or instincts to that instead of just completely generalizing and completely relying on instincts, because as most of us know … markets are constantly changing.”

A Better Approach for Special Finance?
Although Abernathy said McKaig is “just in the beginning stages on setting up our inventory plan,” the practice of segmenting their used car inventory into categories seems to be making it a little easier to determine which kinds of vehicles tend to work well for subprime deals. “We’re really just going back to the basics and separating out what we think are prime or near-prime merchandise and having kind of a separate inventory for special finance,” he said. “We’re doing things like keeping up with our credit apps and tiering them so that we know the different categories and what percent comes in [that fits] the different categories so that we can then match up our inventory.”

“It’s really just bringing the focus back to turns … [and] reminding everyone that the return on investment is not just how many units, but it’s a combination of units and gross, and your ROI is determined by how much investment it takes to get those unit sales and gross,” said Abernathy.

The idea of accepting lower grosses in favor of moving more units seemed to be something he could entertain temporarily but not as a long-term strategy. “At this time we’re probably wanting the sales,” he said. “As far as high-volume, low gross, I don’t know that we really have approached that philosophically. We would like to obviously maximize grosses and we feel like that there are some high grosses that are going to average out lower-gross sales.” However, he added, “We’re going to be evolving over time because we want to grow out volume and our gross.”

Vol. 9, Issue 8

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