The Ins and Outs of Inventory Management
Properly managing inventory is essential to the success of every dealership. It doesn’t matter if you’re in rural West Virginia, suburban San Diego, or the heart of New York City, having the proper inventory is vital to the growth and prosperity or your dealership. Of course, what sells well in one location could be a dud in another. That’s why it is essential for every dealership, large and small, to examine their dealership and their area to determine which vehicles are right for them.
Determining which vehicles your dealership should stock is only the first step, however. After you have determined what vehicles you should carry, you need to figure out how to get them on your lot and what to do with trade ins that do not fit your inventory profile. There are different philosophies about how to manage inventory, not all experts agree. So, in order to help you sort through all this and figure out what you need to do for your dealership to succeed, we’ve spoken to three experts in inventory management: Jesse Biter president and CEO of HomeNet Automotive as well as Biter Enterprises, LLC, Doug Hadden senior manager of inventory solutions for DealerTrack AAX, and Dale Pollak, chairman and founder of vAuto, Inc. They may not always agree, but our goal is to bring you a broad range of opinions so that you can examine them with your dealership in mind and determine what will work best for you, because every dealership is different.
Retail or wholesale?
The first thing you have to do when you take a vehicle in trade is determine whether you are going to wholesale that vehicle or retail it. The question is what is the most efficient way to do that?
HomeNet, founded by Jesse Biter, has over 18,000 dealer clients, and this wide variety of clients has led him to believe that you need to be flexible and determine what works best for your dealership. “If there is one thing we’ve learned, it is that each dealer does it differently and wants that flexibility,” he explains, but there are common factors that many dealerships consider. “We see a lot of dealers that set criteria based on miles, age, cost, etc. Some examples include: wholesale all vehicles that have less then 110k miles, are more than 10 years old, or cost less than $7,500.”
He adds that, “It is important dealers understand the current demand side of the equation and focus there. Tools that analyze past sales miss early changes in market conditions as they unfold. By looking at the type and quantity of leads coming in from various classified sites and buying services, dealers can analyze which vehicles people are shopping for. Also analyzing area dealers’ inventories helps a dealer decide what not to buy and what unmet needs he can fill.”
Doug Hadden also believes that what vehicles you decide to retail should be determined by examining your store. “To start, you must constantly analyze your business, look at retail and wholesale sales, and identify what vehicles you do well with, those that you sell repeatedly for higher than average gross. Those are the vehicles you want to target as having the highest potential to retail. Also take into consideration market performance. What has been selling quickly, profitably, and at high ROI in the market. These cars are your target.” Once you have determined what those vehicles are, “make sure you have a set turn and pricing strategy—and stick to it,” he adds.
Dale Pollak takes a different approach to determining whether to wholesale or retail their vehicles. “Today, the internet allows the dealer to retail any vehicle. Unless the vehicle is not safe, worthy, or falls significantly outside the dealership’s brand/segment identity, I see little reason to wholesale a vehicle,” he offers, “the internet allows dealers to be free agents in terms of what they sell into the used-car market, and free agency is a good thing.”
Doug Hadden sums it up well, “Strategies may differ from dealer to dealer, but building these fundamental plans and processes and sticking to them will help you master the art of quickly and clearly identifying vehicles with the greatest retail potential.”
The right price
Once you have determined that you are going to retail a vehicle, the next step is to set the price. This can be tricky. Price the vehicle too low and you won’t make a profit; price it too high and no one will buy it. The trick is to find the Goldilocks price—not too high, not too low, but just right. That, however, is easier said than done.
“A dealer needs to be smart about what they buy and how they price it,” explains Jesse Biter of HomeNet. “Looking at the vehicle’s average listing and transaction price in the region prior to purchasing the vehicle helps the dealer ensure they can fairly price their vehicle and still make money.”
“Also, tools that automatically lower the price of the vehicle each day it’s in stock beyond a certain threshold help dealers sell their aging vehicles with minimal effort,” Biter adds.
Dale Pollak, of vAuto, adds that it is essential to be flexible with your pricing depending on the condition and type of vehicles that you take in trade. “The key is not to price the vehicles all high or all low, but rather to know which ones can and should be priced high and drop slowly, versus the vehicles that should be priced low from the start and dropped rapidly. This involves a two-step process,” he explains. “First, the manager must address the physical attributes of the vehicle. Some vehicles are truly unique, special and irreplaceable, and other cars are ordinary and you can get all you want. Being able to differentiate one from the other is the first important step. The second step is the ability to assess the odds of the vehicle achieving the dealership’s objectives, those being fast turn and high gross.”
Doug Hadden, of DealerTrack, agrees with the importance of properly pricing your inventory. “Pricing is constantly changing based on consumer demand and is something that dealers need to monitor and track continuously. While the theory of “Low Price Leader” has the potential to drive increased traffic to your store, you don’t want to give up gross if you don’t have to,” he explains. “It [properly pricing your inventory] comes back to a few basic principles:
- Understand your core—vehicles that sell well for you at higher than average gross.
- Understand your market—know how other dealers in your market are pricing similar vehicles (but be careful, don’t try to just undercut price).
- Have a plan for every vehicle—at the time of acquisition, understand its potential.
- Utilize feature rich descriptions for your online listings, building value in each and every vehicle.
- Capitalize on your reputation and relationships you have built with your customers over the years, leverage your past successes to acquire inventory that carries retail reward.”
Inventory management is a complicated subject, so we asked our experts what advice they would give dealers who are concerned about their inventory management.
Jesse Biter of HomeNet advices that, “no matter what system you use the best advice I can give is do it. You can’t completely outsource this job. You wouldn’t leave the vehicles on your lot unorganized and dirty, would you? Then why would you online? You can hire companies to take pictures and print window stickers, but only you can present your vehicles with the passion that will engage shoppers. If you want to move the needle on your sales then you have to manage your online inventory. If you advertise junk then that’s the type of leads you’ll receive—–junk. Advertise quality, and you’ll get quality leads from quality buyers.”
Dale Pollak of vAuto reminds us of the importance of your people, strategy, and process over software. “Software is not the answer for used vehicle performance improvement. Rather, improvement only occurs once the dealership adopts an appropriate strategy and makes the necessary commitment to its execution. It is people working a process consistent with the strategy that produces sustainable improvement. Software simply enables individuals to work the process.”
Doug Hadden of DealerTrack also had some good closing advice for us. “Always have a plan, put processes in place and stick to them, and utilize an inventory management tool.Use factual information to make decisions, don’t go by gut feel.If you or your team cannot answer the ‘what to buy and why’ question thoroughly, more homework is needed before any money is spent.”