January 2009, Auto Dealer Today - WebXclusive
Take a minute and think about the most successful retailers across the country, operators such as Wal-Mart, Home Depot or Best Buy. One thing they have in common is they don’t leave much to chance; they use technology and tools (not instinct and yellow pads) to help turn their inventory rapidly and boost profits.
Using your instincts to make decisions regarding your inventory may have served you well over the years, but with the degree of price volatility and rapid mix changes in the market, it’s time to develop a more systematic approach to your inventory decisions, supported by technology.
To jump-start growth and ensure your inventory is working for you to drive more deals and more profit, you must have concrete inventory strategies and processes in place; this means much more than just stocking the correct quantity of vehicles. An inventory strategy is the foundation you need to consistently operate profitably in bad times as well as good.
When General Motors recently announced they were slashing $10 billion in costs and shifting their focus from trucks and SUVs to more fuel-efficient cars, the industry entered a new era. For months we’d been waiting to see how dealers would fare in the face of an increasingly challenging economic environment. First, we experienced the mortgage crisis, with many consumers losing their homes and millions more worried that they could be next. Then, gas prices started to shoot upward, and as food and the costs of other basic necessities followed suit, stock prices continued to slip in the opposite direction. Before we knew it, reports of consumers desperately trying to unload their gas-guzzling SUVs and Toyota dealerships unable to meet the demand for Priuses were splashed across every industry publication and local paper.
Yet, this is truly a time of opportunity for your dealership. With used car sales accounting for almost 30 percent of the typical dealer’s operating profits, having the right combination of pre-owned and new vehicles in stock is vital. It has never been more important to stock the right cars, turn inventory quickly and make more profit faster.
A comprehensive inventory strategy to boost profitability should include four interlocking components: inventory analysis, proactive strategy, inventory sourcing and inventory management systems. Inventory management is fundamentally about having a plan in place to analyze each vehicle on your lot, analyze every potential trade-in and systematically dispose of vehicles that do not sell in a reasonable amount of time.
In today’s competitive environment, inventory management can literally be the difference between success and failure for your dealership. However, even if you’re doing relatively well, inventory management should be an ongoing process that can help enhance your growth and profitability. Let’s take a closer look at the pieces of a cutting-edge inventory strategy.
Inventory analysis consists of assessing every vehicle on your lot, including those you are accepting in trade and those you plan to wholesale. With thorough analysis, you can identify and maintain the right mix of core and non-core inventory, determine the optimal turn cycle to minimize inventory aging and carrying costs, determine the optimal times to buy and sell inventory, and establish pricing parameters that work for your market.
Once you have a handle on your inventory, you need to create a proactive strategy for actively managing, marketing and selling your vehicles. You need to implement plans for buying and selling vehicles that include managing gross profit, ROI, days to turn, average cost of sale and seasonality. Evaluating and appraising trades realistically, establishing a concrete aging plan, and setting a pricing structure that fits your market and region should all be integral parts of your strategy.
How you source your vehicles is another key part of inventory management. Your sourcing strategy includes determining how often you purchase wholesale vehicles and how you make trade-in decisions. When assessing a trade, many dealers focus on the condition of the vehicle and forget to evaluate the need for the vehicle. A sound remarketing strategy takes into account a particular model’s past sales performance and aging history, as well as the current market demand and residual value.
Inventory Management Systems
Inventory management systems are software solutions designed to help dealerships implement, maintain and fine-tune their inventory plans. These systems can make a significant contribution to your inventory management efforts, as dealers who use this type of technology often realize quicker vehicle turns and higher ROIs compared with dealerships that do not.
Dealerships of all sizes can benefit tremendously from a comprehensive inventory strategy, gaining a competitive edge that can be so critical in driving growth and profitability in today’s difficult market.
Vol 5, Issue 11