Used-Car Aging Policies Avert Dealer Losses

I’m not a used-vehicle expert, but it’s the area of the business I enjoy the most and am probably the most fascinated with. 

My attraction to it may in part stem from the fact that a used car was the first vehicle I sold and got a commission on as a rookie salesperson years ago.

I recently participated in a used-vehicle workshop. I conducted a financial comparison and analysis of the participants’ operations. I also facilitated discussions on best practices that improve certain performance criteria, such as inventory aging, days’ supply and stock turn.

Typically and historically, there have been adjustments in the used-vehicle wholesale market as the fourth quarter approaches. One reason is that most vehicles have a birthday, and second seasonal adjustments begin to have an effect on wholesale pricing.

I point this out to remind you that through September is when to get your used-vehicle inventory in a position where you can act as an aggressive buyer in the real-time current market rather than flounder as a distressed seller. 

This is critical in order to avoid potentially large wholesale losses.

Let’s discuss aging and how important it is not to let vehicles linger on the used-car lot. From experience, I know that a failure to adhere to a firm policy on disposing of aging vehicles, especially during the fourth quarter, is a recipe for future losses. In the workshop, which included people from about 40 dealerships, everyone has a policy.

Several attendees acknowledged their 60-day aging policy was soft during the spring and summer, but firms up as the fourth quarter approaches. Two dealership groups have a firm 45-day aging policy, no exceptions. 

Maybe it’s just a coincidence, but among the attendees one of those groups had the lowest wholesale losses and highest gross per vehicle retailed.

Some people wonder why they should resort to wholesaling an aging vehicle that is not selling when they would have to pay an equal amount or more to replace it on the lot. As usual, that became a topic of lively discussion.

There is a reason an aging vehicle hasn’t been sold. Usually, it’s either priced too high or it isn’t properly reconditioned. The consensus was to replace the aging vehicle with something that has a greater chance of selling in a particular market.

Another lengthy conversation involved dollar inventory turn and the 30-day guide.  It’s amazing, but after having looked at thousands of dealership operating statements, I can say unequivocally the dealerships with the highest dollar turns also have the highest gross per retail and lowest wholesale losses. 

The reason for that is fairly simple. If I’m turning my total used inventory quickly, I eliminate aging concerns and I’m pricing fairly close to the market.   

Let’s look at how to determine a proper used-vehicle dollar inventory level.

Say your most recent month’s cost of sales was $350,000 and that’s fairly consistent with recent months. If I’m only selling $350,000 in vehicles monthly, that becomes my monthly investment in inventory. 

If your forecasted sales for the next month are greater than the $350,000, then you can raise your inventory dollar amount to a level consistent with actual dollar sales.  In fine-tuning your inventory, you should use this guideline at minimum to determine the individual amount of vehicle inventory to carry. 

The National Automobile Dealers Assn. used-car guidebook recommends vehicle inventory turns of 30 days. By implementing the aforementioned process, you will hit that NADA recommendation. You also will enjoy cleaner inventories, higher gross profits and better wholesale performance.

Good selling!

Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.