Inventory Management Tools Applying Science To The Art Of Selecting And Pricing Used Vehicles

With inventory management and marketing tools washing up on the shores of the used car department in waves these days, what is a manager to do? Buying this technology to help manage risk might seem like a good idea, but is it? Isnt the used car managers instinct good enough anymore?

Historically, dealers have stocked whatever came in through the door. If those vehicles were in demand for the dealers market and priced right, they typically moved rather quickly- if not, they languished. Today, with declining gross from new car sales, dealers want to make their used operations more productive money-makers.

Inventory management tools help used car managers better understand market dynamics, pricing sensitivities, and buyer preferences in order to help them make more informed appraisal, auction-buying, inventory pricing, and merchandising decisions.

Dealerships used to have to stock 60 units in hopes of selling 30, but with these tools dealers can now stock 30 vehicles and sell 45, notes Tim Zierden, assistant vice president of software solutions for JMsolutions, a subsidiary of JM Family Enterprises, Inc.

The ideal inventory for big retailers like Target is a unit of one-the right product for the customer, at the right time, with automatic inventory replenishment. Thats not practical for auto dealerships, but these tools help dealers get close to this ideal.

In general, inventory tools analyze market data pulled from departments of motor vehicles (DMVs), dealers own dealer management system inventory and sales data, and values from market guides such as Kelley Blue Book, Black Book, N.A.D.A., Manheim, and others. This data is then displayed to provide inventory decision guidance for users.

Some used car managers with an inherent instinct for what will sell and years of experience have done, and continue to do, a good job at managing and marketing their inventory without this technology. Those stores are probably in good shape as long as those individuals ply their trade there, and as long as their replacement is as adept as they are.

Everyone is familiar with the old saw, the right inventory and the right price at the right time, but that is only half the story- the other half is you cannot afford to have the wrong inventory at the wrong price at the wrong time, which results in carrying costs that are too high, margins that are too thin, and turnover that is too slow, notes Steve Brazill, chairman of the automotive marketing department at the Texas campus of Northwood University.

A few years ago we were all in the same boat- we managed and marketed our inventory by the seat of our pants. Today we have competitors who have successfully embraced these tools and they have been able to step up their game, so the rest of the folks in the market, if they cant stay close, are at a competitive disadvantage, Brazill adds.

There have been a lot of changes regarding how used cars are marketed and sold. Today, used car managers are selling in a whole new world unheard of just a few years ago-the world of virtual dealerships on dealer Websites and other Internet sites visited by car shoppers. Pat Ryan Jr., CEO of First Look, believes this is where used car managers can improve, by leveraging inventory management tools like those his company offers.

First, for the online showroom, correct pricing is paramount. Ryan notes that First Looks product, PING II with 360&deg- Pricing, not only analyzes Internet vehicle pricing on a daily basis but it alerts the dealer via email of his or her online listings that are at risk of over or under pricing. Second, better online pricing analysis and the broad reach of the Internet means dealers may find it profitable to make trades once considered risky for their market.

Now dealers can take conquest trades which they wouldnt or couldnt retail before because their store traffic did not match that vehicle, Ryan says. Dealers focusing more on their online inventory management is a trend were seeing- this is not just a risk management move but one in which a dealer can turn a high-risk wholesale situation into a profitable retail deal with a satisfied customer.

Dale Pollak, founder and CEO of vAuto, agrees that the Internet has greatly changed the dynamics of the used car market, but dealers often do not appreciate just how much.

When there is relatively equal knowledge between buyers and sellers-the Internet has done that-and the market moves from inefficient to efficient, the principles of supply and demand, and therefore price, become super sensitive, he says.

Today there is a big disconnect between the way most people shop and the way most dealers price vehicles, Pollak says. More than 75 percent of the used cars on dealership lots today are not priced in line with vehicle prices posted on the Internet.



Yet dealers continue to make large, critical dollar investment decisions without a complete understanding of these principles. They make decisions about what to stock, how much to pay for the unit, and how to price the vehicle based on their own experience and understanding of their market. What we have done is provide quantification of the supply, demand, and pricing sensitivities in that market at that moment, he adds.

For instance, vAuto research shows that about 85 percent of all dealers continue to use arbitrary, day one mark-ups of $3,000 to $5,000-something he calls the $4,000 fantasy.

The basic secret that defines the superstore, Pollak says, is an ability to execute essential Internet merchandising strategies focused on efficient pricing. These stores recognize that market-based pricing generates traffic and helps attract and retain qualified personnel.

Two things happen when used vehicle inventories are properly priced and merchandised. For starters, customers quickly show up and in large numbers. Second, the shoppers who do show up on the lot are less likely to negotiate because they know your price is a fair market value based on their Internet research.

The Internet is an extremely efficient medium that rewards dealers who price their vehicles more competitively than other stores in their market, Pollak continues. vAutos Live Market View and AutoMatch systems help dealers identify the fastest moving used vehicles in any market, at a level never before possible.

Through Web search and identification technology, we can identify every single used car for sale in the U.S. and track and record the time and date those vehicles first appear in the market for the first time, track every price change made to them, and time and date stamp when they sold, evidenced by the time they came off the Internet, and whether they were sold or wholesaled, Pollak says.

In other words, by tracking vehicles year for year, model for model, trim for trim, and equipment for equipment, vAuto, Pollak explains, delivers up identification clarity that doesnt just compare apples to apples, it compares Granny Smith apples to Granny Smith apples.

Knowing this, we can determine vehicle pricing sensitivity fundamentally redefining how dealers should make decisions about used inventory demand, supply, and pricing, he continues. The challenge is this perfect storm thats brewing, a confluence of change in the retail used vehicle market, manifesting itself in dealers having trouble selling units and making a profit. The key problem is that theyre not recognizing or understanding how to manage the context of an efficient market, where there is relative equality of knowledge of choices and alternatives between buyer and seller.

Modern inventory management tools deliver remarkable market insight-a proverbial birds-eye view of the used car market, in your own market, your competitors market, and the larger online marketplace.

First Looks Ryan hits the right note when he remarks, The Net is empowering for consumers but theres no reason they should know more about your vehicles and your market than you, the professional, do.

Think about it. Not only do shoppers know the specifications, options, and packages of the vehicles they are shopping better than most of the salespeople they will encounter, but they know the suggested MSRP, the invoice pricing, and often the incentives, holdback, and more- and as they surf looking for the best deal they probably know better than your used car manager what the real market price of your used Toyota Corolla should be to sell it quickly.

Do you understand the dynamics of your marketplace, from a micro as well as macro perspective? Market insight like this, from the AutoCount Executive Summary from Experian Automotive, can put both types of intelligence at your fingertips.

What if the hottest used vehicle in your market is not your brand? asks Brian Parent, manager of product marketing for Experians AutoCount Solutions. If you knew what they were, wouldnt you seek them as trade-ins or at auctions? In times like were in now, where business is tough, dealers who pay more attention to market dynamics will find the opportunities to capitalize on- the game is changing.

AutoCount Executive Summary details, by the dealers market, what consumers are seeking, the demand side, and what is selling currently. The data is collected from the DMV and reported to a dealer based on their own definition of their market, typically from a 15-mile radius around the dealership, and mapping customer concentration by zip code. It also shows hot vehicles for competing dealerships as well as the type of deals lenders are buying.

The map brings clarity to where the dealer is strong, as well as weak, in his market, Parent notes. As the market changes dealers will want to arm themselves with what they can, to better learn what is selling in their market because at the end of the day, its about driving profitability for the dealership.

Another benefit offered by tools, such as JMsolutions AAX suite of inventory management solutions, is transparency of the used car operation.

For most stores, the used vehicle inventory is the biggest single asset owned by the dealership, but ask a dealer if he would trust his used car manager to invest that $1.5 million in the stock market and they would hesitate. Yet that is what theyre asking their used car manager to do every day when he buys and sells cars, Zierden notes. The systems out there do a good job providing an in-depth look at how well those assets are being managed and in many cases how the inventory is being presented on the Internet, at their store or stores, as well as for their market. With inventory management tools you no longer have to leave it to chance.

Which tool is right for you?

Choosing from among the many inventory management and marketing tools can be a challenge but making the right choice is important, Northwood Universitys Brazill notes.

With the explosion of bells and whistles in this area, sifting through all the options can be a challenge. The danger is in not doing enough analysis of the various offerings, or having enough information about them, to determine which is right for your operation, he says. Is this one too big, this other one too small? Which is the right one for your store and the people who will be using the tool?

With the huge amount of data these tools can churn up, one danger is becoming so bedazzled by all the numbers that the user doesnt really take effective action to put the data to work.

These tools bring a lot of science to the art of inventory management, but art is still part of the equation, Brazill says. Its not just a question of understanding your market- we all do a pretty good job at that. Much of the art is in understanding your organizations, and used car managers, strengths and weaknesses.

For its part, First Look recognizes that users of these tools will benefit most from them when they understand what the data means and how to apply it to their real-world inventory management and marketing situations. That is why the company recently introduced training and consulting services to help its customers use its products more effectively.

These services, Ryan says, focus on helping used car managers develop fundamentals and operations tactics to eliminate aged inventory, optimize inventory advertising, emulate practices of big box retailers, and convert wholesale losses to retail profit, as well as more effectively use Internet pricing and merchandising to maximize traffic, use mystery shopping to enhance gross profit, and to close more appraisals.

Similarly JMsolutions sends consultants to its dealer clients using its AAX products to help them gain more value from its inventory management tools. We find there are two sets of users. The first is the used car manager who does a thousand things a day, managing the desk, working deals, buying cars, and all sorts of other activities. That user needs this information presented quickly and easily as possible, Zierden notes. The second user is very analytical and dives deep into the data or is the used vehicle director for multiple locations and needs to be able to see across all platforms easily with roll-up reporting. The companys consultants work with either set of users to help identify actionable steps hidden in the data and to recommend actions they might want to take to optimize their performance.

Tim Zierden also suggests that the final complement to these tools are follow-through, lead management, and other best practices that ensure, once these tools help bring buyers to the store, that the loop is closed.

Northwood Universitys Brazill agrees. In the final analysis, inventory management comes down to having the right customers, the right products on your lot, and the right people on your lot who can arrange the marriage between your customers and your products. These tools are valuable only if they can help you achieve one of these three essential steps in the process.

Michael Bowen

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