December Q&A: Inventory Management Is a Question of Balance
Dealership inventory management has long been an imprecise science that combines precedent, data, and dealers’ intuition. And that’s before all the variables are added in that affect inventory decisions: economic trends, changing consumer preferences, manufacturer demands and allocations, unforeseen events that affect supply and demand, and more.
This year has certainly been an example of the variables, with the downturn in new-vehicle sales and oversupply of pre-owned vehicles throughout the year suddenly jolted in September by the catastrophic Category 4 hurricanes, Harvey and Irma, which destroyed about 1 million cars, primarily in Texas and Florida.
The effect on the automotive industry was profound; by October, pre-owned vehicle sales were up by about 8%, and the used car SAAR jumped to 40.4 million units, up from 38.1 million in August, while new car inventory declined to about 4 million units.
Assuming no more similar disasters occur the rest of 2018, supply and demand will likely stabilize, but it just shows how volatile the market can be.
At the same time, American consumers are turning away from what used to be its go-to market segment — midsize sedans — in favor of crossovers, SUVs, and trucks — meaning that the right late-model pre-owned vehicles can often be a hotter commodity for dealers than the latest and greatest offerings.
Yet manufacturer allotments and the continued reliance by OEMs on incentives can hamstring dealers’ inventory flexibility and autonomy.
Dealership inventory management is, more than ever, a balancing act of data and tools, experience, flexibility, and research. To learn more about how to find the right balance, we asked three industry authorities with extensive backgrounds in automotive marketing, sales, and pre-owned vehicles to share their thoughts.
Indeed, their insights point to the need to combine human factors like research, discipline, and attention to the customer experience, while taking advantage of the power of today’s technology and inventory management tools. The right balance can be found, but it takes more work and skill than ever to find it.
Mark Maida, an automotive remarketing veteran and successful entrepreneur, founded AutoBuy (www.wepaythemax.com) with his son Anthony, and built it into a national business that has helped 100,000-plus private sellers, appraised $1 billion-plus in inventory and, with its eight locations (and more on the way), is helping to upend traditional automotive remarketing to the benefit of consumers and auto dealerships.
Maida started his automotive career as a Chevrolet salesman, and his extensive remarketing background includes founding a successful vehicle wholesaling business, as well as a used vehicle store and tent sales business that he sold to Enterprise Rent-A-Car.
Mark Sargeant is the sales and marketing manager at AutoMap, the leading inventory tracking and audit solution for dealerships today. Through AutoMap, dealer sales teams, management, and auditors are able to find any vehicle in their inventory across multiple lots in seconds.
The solution decreases staff frustration, eliminates customer waiting times, and accelerates floor audits and sales. Using AutoMap, a Bluetooth-enabled onboard diagnostics device (OBD) chip is attached to each vehicle, a simple setup that takes less than 30 seconds. Once the device is enabled, each vehicle’s location is broadcast to the main software site, and can be tracked. Dealership staff can instantly search inventory by VIN, stock number, or model across multiple lots on their computer or smartphone through the AutoMap mobile app.
Jeff Risner is co-founder and CEO of The Appraisal Lane, a real-time used car trade network and communications platform. He is a seasoned industry professional, with more than 30 years of automotive retail and wholesale experience.
Jeff is the co-owner of the Georgia-Carolina Auto Auction and former vice president of new and used vehicles for Lithia Motors (NYSE: LAD). Jeff was also a founding associate at CarMax (NYSE: KMX).
What do you expect to be the key inventory management challenges new vehicle dealers will face in 2018?
Maida: The challenge is that they’re going to have to continue applying these aggressive incentives on 2017 model-year cars — and on 2018 cars as well. We’ve spoiled consumers with these incredible rebates and incentives; they now expect it, and it doesn’t matter what model year.
What we see at AutoBuy, as a result, is that typical pre-owned automobiles, say $15,000 and under, are the vehicles that dealers are not trading for anymore because consumers are taking advantage of better opportunities to sell those vehicles to services like AutoBuy in order to get the maximum dollar amount. This gives us the most desirable inventory in the pre-owned market, and the consumer then waits for incentives to increase before purchasing their next new vehicle.
Sargeant: The human element is going to be our biggest challenge. In today’s business world, we are on information overload; there is a computer program for just about every building block of inventory management.
The hard part is convincing people to trust the systems they are using to identify vehicles that need to be unloaded, and purchase the correct vehicles to improve inventory mix, and to maximize sales potential and profit. These programs will also tell us what we should pay, as well as the correct retail price for the market.
Most of us believe we are smarter than computer programs. Some of us really do have great insight into inventory management, but numbers never lie.
Risner: The biggest challenge I see is discipline. Dealers need to keep in mind that even though there are plenty of opportunities out there, they could end up with unwanted non-core inventory by falling under the spell of selling a new car. Lack of discipline often leads to overvaluing a trade you don’t need.
To avoid this, use the same valuation process each and every time, versus picking different processes and tools to get the answer you’re hoping for.
What are some common, easily correctible mistakes or oversights that dealers make in their inventory strategy?
Maida: First, don’t evaluate a car based on your emotions . . . use tools and statistics. And don’t allow your inventory to become aged; keep in mind that the average is 45 days. Don’t over-appraise your inventory, and do not overprice your inventory to your competition.
Most of all, avoid buying a car that’s already been remarketed on five or six websites. Do your research before you purchase! What makes you any better than the next dealer that just had it and couldn’t sell it — the competitor who put it on five different websites? Buy a vehicle that is fresh and has not been marketed.
Sargeant: [One common mistake is] holding old-age inventory too long. Your first loss is usually your least loss. Make your inventory dollars turn at the highest rate possible. Be willing to accept defeat on aged inventory vehicles purchased in the past.
Risner: The most pervasive mistake in our industry occurs when dealers overvalue trades to make retail deals. The long-tail expense often outweighs the short term benefits of overstated front-end gross. It’s important to stick to your stocking plan and to be realistic about the value of the trade from the get-go, not after the fact, when downside risks are much greater than the upside retail benefits.
Given industry uncertainty — declining new-vehicle sales, pre-owned oversupply, changing consumer preferences — should dealers stick with a conservative inventory approach, or take a forward-looking, “outside the box” strategy?
Maida: In today’s market, the business strategy is to have what we call preferred inventory — unique inventory. Being forward-looking and out of the box is imperative, but must be done based on research around the top 10 hottest-selling pre-owned cars.
Taking a more outside-the-box approach must be done strategically during peak times, such as tax season, along with managing the inventory based on the tools at your disposal. With all the smart technology out there, you can be aggressive and out of the box, but yet still very strategic, and on the market.
That’s key: Be aware of the market. Research. Know the week’s trends by looking at the previous week’s sales.
Sargeant: The conservative inventory approach usually contributes to old-age vehicles sticking around too long. The faster inventory turns, the more chances at hitting home runs in the gross-margin game.
If a dealership can supply the customer with the vehicle they want when they want it, rather than being limited to what is just at the dealership, they will be able to satisfy a larger number of clients and close more sales.
To take advantage of other inventories, partner suppliers must have an inventory management system that can locate these vehicles and get them to the dealership — without delay — to the customer.
Risner: It’s important not to confuse an outside-the-box strategy with managing by the exception and not the rule. Just because you grossed $3,000 last week on an anomaly doesn’t mean you are guaranteed $3,000 gross on the same unit this week. It’s bad business to make fiscal decisions going forward on exceptions to the rule when the chances are great that you’ll end up wholesaling or losing money on those deals. Your best bet is to implement a consistent process, and stick to it every time.
How important do you consider customers’ perception of a dealership having superior new and pre-owned inventory to its competitors versus other factors (price, service, etc.)?
Maida: Inventory is not No. 1 for consumers! Customer service is No. 1. If you can present your dealership the right way, and create a good experience from the very start, inventory should work out OK. Don’t forget that consumers visit only 1.5 automobile dealerships; so they aren’t really hunting for inventory, but for the right experience, because most of it is done online.
At AutoBuy, everyone builds a bond with the client, from greeters to buyers, processors, and customer service teams. Remember: Referral business is the best business. Vehicle selection is very important, but with today’s inventory availability and all the tools we have, it’s not hard to trade that purple Corvette for a yellow one, even if it’s 200 miles away.
So, while inventory is very important, in today’s technology-heavy sales experience, if I don’t have it, I can get it. The bottom line: You can’t rebuild your credibility with the customer, but you can always find another car.
Sargeant: Customers are more educated today about the vehicle they want to purchase than ever before. The perception of a greater selection will always be a draw for the consumer, and whether the dealership has the vehicle on the lot may be immaterial, because if the dealership has access to the vehicle, that’s what matters.
Knowing the location [and getting] that vehicle in front of the customer as fast as possible is key to securing the sale while maintaining an inventory as lean as possible.
Risner: Consumers conduct 90% of their research online today and the truth is, they’re inundated with so much information, it’s tough for dealers to stand apart to get people off of the internet and into their stores regardless of their inventory.
That’s why it’s critical that dealers provide an exceptional level of service from the very first interaction. Ask questions, find out what features are most important for the primary driver, offer other comparable optional vehicles in your inventory, and quit the hard-sell approach.
Adopt a consultative sales approach by listening and delivering on the customer’s needs and wants. Sure, you might have that blue Camry in stock, but chances are your competitor does too. The overall experience you provide — right out of the gate — is what sets you apart.
What current inventory-related tools and technologies are being underused, and how can they help dealers better forecast and manage their inventory?
Maida: First and foremost, [use] the tools on the internet: doing the work of researching the car. You can find out how long the car has been in the owner’s hands, who owned it before that, who owned it before that . . . a little research on the internet provides the history of the car.
Research is absolutely No. 1. Today’s tools offer great ways to get information about the car. Professional knowledge is another great tool, as well as experience. Understanding what’s hot (and not) in your market is very important.
You have to understand the desirability of a car being offered for sale in your market. Just because Subaru is doing $2,000 above market value doesn’t mean that it sells in Miami, right? There’s really no need for all-wheel drive.
Look also at your sales history. I sold 10 Nissan Maximas; I had 10 in stock and I sold them all. I also had 10 Camrys, but I sold just one of those. What did that tell me? Analyze it simply, and don’t overcomplicate. Regardless of the tools you use, it’s all about the research. That’s where the success is.
Sargeant: Depending on the size of the dealership and the number of off-site lots, a vehicle location service may be warranted. Several systems are available, ranging in spectrum from simple data entry and manual scanning to automated GPS mapping. Knowing what is on your lot, the location, and each vehicle’s readiness for sale is crucial to sales follow-through.
Make sure the system you choose can also tie into your inventory aging, so that you can avoid having vehicles on the lot for over 90 days. As stated before, the salesperson needs to get the vehicle the customer wants and in front of them as soon as possible.
Risner: It’s unfortunate, but inventory stocking–plan tools are often underutilized. These are data-driven tools that give dealers a much more in-depth picture about the inventory they should be stocking for their market and their customers’ buying behaviors, rather than [relying on] an intuition-based decision.
Technology also exists now that enables dealers to tap into a community of independent third-party appraisal experts who know their market and demand, and who know a broad range of vehicles beyond a dealer’s core inventory.
Most importantly, have consistency and transparency for both your internal and external customers. Pick your process and your tools, and stick with both for every transaction.