The Need for a Balanced Approach to Used Vehicle Inventory
An interesting conversation has popped up in recent days regarding used vehicle inventory and the wisdom of relying too heavily on “Market Days Supply.” Some highly regarded experts consider it to be the single metric dealership managers should focus on when making decisions about stocking the used car lot. It’s certainly something to consider, but in my experience, geographic location is not the most important elements – not by a long shot.
Here’s why: While dealerships do many things really well, most automotive sales teams are exceptionally good in three key situations:
Selling their Brand
Selling vehicles that they have sold successfully in the past
Selling their trade-ins
Given these fundamental realities of the car business, it makes sense that a dealer’s “like” history and an analysis of vehicle success/failure should be the initial key factor to a competent stocking strategy. It’s simple: Replace what we sell, and in the correct quantity. Advanced Inventory Management Systems, like Inventory+, give a detailed look at data such as this to help us make better decisions when stocking.
So where does that leave Market Days Supply? It’s a metric to use when considering the valuation of a vehicle with no “like” history, or when examining the risk of carrying a specific vehicle. It does not, however, eliminate the importance in analyzing your own inventory first.
Perfect Stock vs. Overstock: Don’t Buy 80 Pounds of Salmon
Think about used car inventory like a specialty fish market. Let’s say you sell 40 pounds of salmon each day. Like clockwork, by the end of each day, you sell out of your stock of 40 pounds of delicious salmon to your satisfied customers. Would you go out and buy 80 pounds of salmon to restock for the next day? No. Your RISK of spoilage and loss of capital would be too high. Instead, you might try 50 pounds and see what happens. You are limiting your risk. If 50 pounds sold out that day, you could increase it slowly to meet the demand.
As good as salmon sales are, you know that you need to expand your business, and a few of your customers tell you that they like tuna. Your employees have also done a good job of keeping track of your missed opportunities, most of which point to tuna as well. So you go out and buy 10 pounds of tuna, and you sell it. The next day you happily replace it and add a bit more. Congratulations! You have now grown your business through a balanced approach to stocking.
But there is a small problem: Your fish market is located between two meat markets, and they sell a pretty large volume of meat. You think that maybe you can get in on the popularity of meat, and you buy 20 pounds for your fish store, stock it and watch the vast majority of your customers ignore the meat and buy fish. The meat gets old and you end up selling it for 25 percent of your original investment.
Too Much of a Good Thing
The fish market story teaches us that too much of a good thing can lead to spoilage and loss – and that relying just on what your market is selling is a dangerous experiment. The responsible approach to growing sales with profitability demands that a product have strong DMS integration, with a detailed view of the dealership, the dealer group and the market view to help determine what vehicles are best to help foster growth – with profitability. The Inventory+ platform does exactly that by giving dealers a 360 degree view of the market – and delivering recommendations on how to balance growth with risk.