In almost every 20 Group, one of the dealers in the room announces to the group that they have installed a hard and fast turn policy on the used car inventory. In some cases, there is a penalty imposed on management if a vehicle exceeds the maximum number of days the policy states.
Here is a common example: They have installed a hard turn policy of 60 days, and if the vehicle is still in inventory at day 61, the entire cost of the vehicle is written off to the departmental gross where the manager is paid from. The goal of this policy is to force the managers to pay attention to aging used inventory and drive proper management of the investment.
Fast forward to a future meeting, and many times the same dealer states that the difference between what he owns the inventory for and the actual cash value has grown, and they have noticed they are selling fewer used cars for lower grosses. Essentially, the inventory is worth less than what the dealer owns it for, but all the inventory is under 60 days old. Mission accomplished. Right?
To me this is another example of trying to force a result rather than installing and managing effective processes that will produce the desired result. In some cases, this type of enforcement has even produced some bad behaviors that will need to be reversed. For example, when does your manager pay attention to aging units, and what action are they taking? On day 58 do they panic? They know if the car goes to auction it may lose money, so they may put a big flat commission on it. This may or may not move the car, but what happens to your expense structure? To avoid a loss, they might also call up another dealer and offer to trade old units with them book for book. If this is the action they are taking, did they get back in the trade a unit that fits your inventory model? Or are you now just stocking everyone else’s old inventory? There may be a good reason why it did not sell down the street, and now it’s your turn to try and move it.
Ask Yourself: Why Are You Stocking The Unit?
When I speak with dealers about their hard turn policies, I challenge them to think about what they are doing to achieve inventory turn regardless of the number of days. It starts on day one and the first question is why are you stocking the unit? Do you have a history of selling the unit based on make, model, miles, and cost? If you acquired the unit at auction, why did you buy it? Is it the right car for your dealership or are you just filling up spaces on the lot? Perhaps you want to try something that does not fit your normal inventory and has no data to support stocking how aggressive should you be on your initial pricing. Is there a commonality to units that seem to age? Were the aged units mostly auction purchases or high cost vehicles? Do you have a daily process to look at the inventory as it ages, and not when it ages or crosses a milestone?
Have a Turn Policy in Place
The better dealers I see achieve consistent turns closer to 40 days, and not 60 or 90. How do they do this? They achieve the 40-day mark by instilling common best practices into the workflow of all their team members. First, they all have a turn policy in place, but they are focused more on the daily management processes that will produce the desired result rather than the total days. As much as possible, they will make stocking and pricing decisions based on data as opposed to guessing. This does not mean they will not take a chance on stocking something they have no data on, but their daily process prevents it from becoming a liability. They examine the inventory daily checking for market changes, recon issues, and aging. Then they take whatever action is needed. This could mean changing prices, repositioning on the lot, doing additional recon, or wholesaling the vehicle. All these actions can be taken along with effective sales and marketing habits.
Focus on Net Return on Investment
The other common thing I see from the better dealers out there is their net return on investment. These dealers realize a 4 to 6% net return monthly on the inventory investment after all expenses from the used car department (including fixed). In other words, if they have a million dollars on average in used cars they realize a net 4-6% return monthly and an annualized return that’s better than 48%. Where else can you get that kind of return?
Think about this: Your initial probability of sale on a unit in the first 30 days is somewhere around 65-70%. Once that vehicle ages past 30 days, the probability of sale goes down to 25%. Once it ages into the 60 to 90-day mark, your probability of sale drops to 10%. If you draw a line down the middle, you are at 45 days. Which side of that line do you want your investment to reside? If 80 percent of your investment is past 45 days, it is costing you sales! Pure and simple.
Don’t just put up a number, instead you should install and focus on the daily processes that will get you to your desired turn policy.
The automotive experts at NCM Associates have been working and running dealerships for decades, and we are ready to put this experience to work for you! If you want to have a deeper discussion on the aging of your used vehicle inventory, we have openings in our industry leading 20 Groups! Additionally, we are currently enrolling students in our Used Vehicle Management Program at the NCM institute.
NCM Associates is capable of scheduling in-dealership consulting, hosting industry-leading automotive training, and providing dealers with a suite of benchmark and software solutions to help your team perform at their best.