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Don’t Wreck Your Recon: Pre-Approval is Key

Written By: Michael Larkum
Posted on August 30, 2018

Few activities affect every department in a dealership quite like the reconditioning of vehicles. While it may seem like each department operates independently of one another, reconditioning is one process that touches everyone in your store. For example, New Vehicles must incorporate recon costs into their appraisals, potentially making or breaking a sale. Used Vehicles often think (sometimes correctly) that nothing holds them back more than the cost and time of reconditioning. And Fixed Ops either recognizes recon as their most consistent and profitable business, or their biggest headache (and sometimes both). Despite the importance of this process to everyone in the dealership, it is rarely seen as efficient, much less pleasant.

There are plenty of things you could do to improve this process, like speed it up or evaluate trends to maximize your profitability. However, one of the most effective practices I’ve seen is when a store implements a specific method of pre-approval among decision makers.

How to set up a pre-approval system

There are different levels of commitment that you can take to set up a pre-approval solution. Each level is more potent in its results but comes with a greater time and effort investment to set up and monitor.

Level 1: Set a limit

First, set a limit that your Service department can spend on any vehicle without the approval of a Sales Manager. $500, $800, $1200—this limit can be whatever you are comfortable with and will differ depending on each store’s performance. You will still want to monitor repair orders for strange trends or anomalies (i.e. if every RO is $799, there’s a problem). This should cover around 30% of the vehicles that only need basic maintenance, and it will dramatically speed up your recon process.

Level 2: Classify your vehicles

Next, have the UV manager classify each vehicle that they appraise (i.e. A, B, C, D) according to how much they are willing to spend or if they have a special plan for it. Each class of vehicle has different limits that the Service department can work within. The UV managers usually know if a vehicle is going to auction, needs extensive mechanical repairs, or only needs an oil change. They can communicate this right away to give the Service department more guidance.

Level 3: Utilize a bucket system

Finally, go all in and implement what is, in my opinion, the best system I have ever seen. This requires a lot more prep work, and initially more maintenance, but it pays off big time if done properly. The first step is to segment your inventory into buckets (i.e. car, truck, SUV, premium, $0-25K, $25-60K, $60-100K, $100K+, etc.). Then, gather three years’ worth of reconditioning data and calculate the average cost for each segment.

Next, charge units an average cost based on the bucket into which each vehicle falls. Your Service department does whatever is necessary to get each vehicle retail-ready, and they are responsible for any comebacks. This ensures that any shortcuts they end up taking will come right back and become their headache after the sale. Both departments will win some and lose some, but the goal here is to break even.

There are numerous benefits of the Level 3 setup:

  • Appraisers know what they will have to put into a vehicle during the appraisal, to the penny.
  • Service can dramatically cut down on turn-around time because they can fix a vehicle immediately after inspecting it.
  • Sales managers don’t have to pretend they have mechanical knowledge on par with Fixed managers, and the disruptive bickering between your managers will cease overnight.

It should be said that there will be extenuating circumstances (i.e. vehicles with body damage can be excluded from the program). There will be some issues with the pricing after you start this system, and you will probably need to adjust. There will also likely be some squabbling between employees as the program gets going, but in the end, everyone wins. Your Sales department knows what they’re paying and they’re receiving fresher inventory faster, while Service can appreciate recon for the profit center that it is.

Learn more from Michael and the other NCM automotive consultants by joining a 20 Group, scheduling dealership consulting, or registering for automotive training in the NCM Institute. You'll be glad you did!

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