Inventory Management – A Short History
In the early days, as dealers, we were taught that all vehicles in inventory should be stocked, bucketed, spiffed and priced, and when it hits the ripe old age of 60 or 90 days old, the vehicle should be sent to auction or sold cheap only to have the same process repeated over and over again.
The problem? We took wholesale losses and didn’t grow our volume quickly enough in our fast moving high probability sales, as we were weighted down with the “wrong stuff” or unsellable vehicles.
Some industry experts would tell you that you should price your vehicles in “the bottom three,” creating a “race to the bottom.” But this simplistic approach leaves three critical questions unanswered:
1. How do you create the opportunities to take advantage of high-profit situation or scenarios?
2. Does every vehicle have a reasonable probability of sale on every lot, for every dealer?
3. If the probability of a vehicle sale does vary from lot to lot, shouldn’t the vehicle pricing reflect the probability of a sale?
It’s 2014, and those of us who lived through the Used Car Crash of 2008 know what happens when we have the “wrong stuff” in our inventory. We were educated that having the right amount of the “right stuff” leads to profitability and growth in our dealership while, at the same time, we also learned that regardless of how “cheap” you price, not every vehicle will sell on every lot.
The Best Dealers have a Plan
I have had the honor and privilege to work with some of the most profitable and highest volume dealers in the country. From Domestic to Import to Luxury, they all have something in common. These A+ dealers create an “out” strategy for each vehicle that they stock at the time. They limit their risk, price their vehicles uniquely according to probability of sale, and don’t get emotionally attached to their inventory. How do we GROW sales and profit while reducing risk? The answer is IVP.
The “Individualized Vehicle Plan” or IVP looks at your inventory differently. With an IVP, you categorize each vehicle in your inventory in one of five distinct categories.
In Brand – Commodity / Off Rental
In Brand – Unique / High Content
Off Brand – Commodity
Off Brand – Unique / High Content
High ROI – Cash Car
Each category behaves differently on a dealer’s lot and each should be priced differently. In addition, inventory within these categories should be held for different periods of time.
For example, Category 1 (In Brand – Commodity / Off Rental) vehicles in today’s 2014 marketplace are plentiful. These cars and trucks can typically be bought at volume at a LOWER price today than you paid yesterday. With this in mind, price Category 1 vehicles towards the bottom end of the curve, carry a lower days supply, and turn…turn…turn.
Now, let’s look at a Category 2 (In Brand – Unique) vehicles, such as a Ford F150 Lariat 4×4 with navigation and low miles. If you are going to take risk, this is a great vehicle to do it on. This vehicle is a “money-maker” and should be priced accordingly. Not only does this type of vehicle have a high probability of sale, but it also a high probability of above average profit.
IVP Success Stories
With a well-thought out IVP, monthly sales can improve dramatically. Currently, there is the major metro dealer that doubled his sales from 150 to 300 per month by simply taking an IVP approach. He will tell you that it’s all about understanding how each vehicle “fits” into the inventory that has made the difference. He has even added codes for each category into his DMS to further simplify the process.
Another example is a third-generation, small town Ford dealer who struggled for years with growing sales and profitability. “Experts” kept telling him to stock Altimas on his Ford lot, which resulted in significant wholesale losses. Fortunately, using Inventory+, we helped him put in place an IVP process in his dealership. Six months later, the dealer yields a 550 percent increase in variable Net profit on a 200 percent increase in volume. Even better, we are working to apply the IVP concept to new cars as well.
Technology Helps Create a Market-Ready IVP
Technology and data have merged to give dealers decision engines that help the dealer recognize profitability early on in the sales life cycle. Inventory+ and its Profit-Per-Day pricing engine delivers a 3600 market view to empower dealers to both find new profits and mitigate risk, just like IVP. Click here to learn how you can start increasing your Dealer’s Net Profit!