From Inefficient to Efficient

I was invited to speak at a recent manufacturer conference in Las Vegas. With me were some of the best trainers and vendors in the business, all bringing insight and solutions to the daily process of managing the modern pre-owned vehicle department.

One speaker of note was my friend, Dale Pollak, founder and chairman of VAuto. Dale is so smart, if Harvard ever decides to offer a doctorate degree in pre-owned vehicles, he would hold it.

Dr. Dale and I don't always agree on everything concerning the business. But there is one area in which he and I are completely aligned in our thinking. We both recognize the fundamental change in the pre-owned vehicle business from an inefficient to an efficient market.

This new market efficiency is driven by the almost real-time availability of information on the Internet for both buyer and seller. Both now have equal access to knowledge of the products offered and average pricing producing results based on supply and demand.

In the old inefficient days, you could stock and market a pre-owned vehicle on the lot, safe in the knowledge that there was no easy way of determining how many others just like it were available in your market, or if your asking price was reasonable to the market.

As dealers, we relied on this inefficiency to realize the occasional home-run gross profit from the impulse buyer. We often depended on the “10-pounder” to cover up many of the mistakes we made as a result of our poor internal processes and unfocused management.

Well, that's the theory, anyway. So what does this mean to me, an old “car guy”?

This: As the market becomes more efficient, I must match that efficiency with sound disciplined daily management processes and adjust my focus.

For the most part my focus in the pre-owned vehicle department was pretty much on gross per unit and total units sold.

One conversation that was guaranteed to happen at the end of every month was when I sat down with the pre-owned vehicle manager and looked at total sold, gross per unit and wholesale loss. In today's market, the conversation needs to be focused less on gross per unit and more on total gross profit, inventory turns, return on investment and net retention after expense.

The average dealer turns inventory about six times a year; the best at least 12 times. Our focus needs to be on what drives the best return on our investment. It is stocking fast turners, leaner inventories, pricing to the market, good sales process and daily — not monthly — attention to aging issues.

If you are managing your aging issues daily, you may see lower wholesale profits or possibly a loss, but your focus should be on the total gross.

A few years ago, I was in a store that made money every month in wholesale, but total units and total gross were low. The store was also over-inventoried and had consistent aging issues.

After many basic processes were changed, the store began losing money every month in wholesale, but the “total gross,” including wholesale, was triple what it had been. And the total average inventory investment was half what it was.

Are you retaining 30% net to gross after variable and fair-share allocated fixed expense? If not, break down every account and see what's going in. If your sales commissions are high, look at how many flats you are paying on aged inventory.

Is it your pay plan that is driving the excess, or is it poor inventory management? Remember, the best way to avoid paying those big flats on old inventory is to not have any aged inventory in the first place.

Tony Albertson is executive conference moderator for NCM Associates. He is at [email protected].