Assessing Your Used Vehicle Acquisition Proficiency

This week, Cox Automotive reported that retail sales of used vehicles, while trending above last year’s sales volumes, have tapered off in recent weeks. The report also notes that the days supply of used vehicles on dealers’ lots is running close to 45 days, a few days less than the same time in the past two years.

Perhaps most important, the report notes that supplies of used vehicles are expected to remain tight through the end of the year.

Such circumstances will put dealers to the test, particularly for those where “go get some cars” is your typical MO when you need inventory. The fact is, given the variability and value volatility across vehicle model years, segments and powertrains, many dealers need to sharpen how they think about stocking inventory and how they can most efficiently acquire it.

Below, I’ve distilled some of the key principles I’ve gleaned from top-performing dealers as it relates to vehicle acquisition. These principles, and the extent to which they exist in your dealership, offer a way for you to check your acquisition proficiency. They also serve as the foundation of a fresh approach to acquiring inventory that I write about in my upcoming book, Invested: The New Science, Strategy and System for Used Vehicle Investment Management. The principles also shaped the tools we’ve built inside ProfitTime GPS to help dealers consistently maintain the right number and mix of vehicles in inventory.

Do you have a stocking strategy? For some dealers, the stocking strategy is pretty simple: We want to sell 80 units a month, so let’s stock between 80 and 100 or so to meet our sales goals. While this approach can work, it’s not likely to work as well as a strategy that accounts for the specific types of vehicles you should stock, and how many of them you should stock at any given time. The best stocking strategies break down a dealer’s inventory by vehicle segments (i.e., compact, mid-sized SUV, pick-up, etc.) and price points (i.e., <$10,000, $10,000-$15,000, $15,000-$20,000, etc.). From there, dealers determine how many vehicles to stock in each segment, based on an analysis of their segment-based sales in the past, and current sales by segment in the current market.

When’s the last time you updated your stocking strategy? It wasn’t all that long ago that dealers tended to follow a “set it and forget it” approach to their stocking strategies. It would be many months, or even a year or two, before someone took a moment to review the strategy and see how well it compared to current market sales trends. Today, I’d recommend that dealers conduct this review on at least a quarterly, if not monthly, basis, given how quickly market conditions can change.

Where do you plan to acquire the vehicles? In the past two to three years, as used vehicle supplies have been constrained and one-to-three-year-old vehicles have become harder to acquire, the best dealers have added another layer to their stocking strategy. That is, they’ll forecast the volume of vehicles they expect to acquire from individual sourcing channels, such as auctions, trade-ins, service lane, lease returns, off-street, etc. Such channel-specific objectives work best when they’re based on an honest assessment of what you can reasonably expect to acquire, not what you aspire to acquire from an individual channel.

What are your profit or ROI objectives for vehicles you acquire from each channel? Not long ago, we weren’t asking this increasingly important question. We typically acquired vehicles from auctions, trade-ins or lease returns, and we pretty much expected the same front-end gross or profit outcome with every vehicle we acquired—even if we knew we paid up to acquire an auction vehicle. Today, we know better. When dealers track the profit or ROI potential by sourcing channel, it becomes clear fairly quickly that your average Cost to Market or ProfitTime investment score varies by channel due to the unique nature of customer needs and available vehicles in each channel.

How are you addressing your performance improvement opportunities? The best dealers have long made it a daily practice to start each business day with a review of the prior day’s trade-ins to affirm or update an appraiser’s assessment of the vehicle and its optimal exit strategy. But I’d submit that such discussions rarely extend to vehicles you acquire in other channels and the performance of the individuals you’ve tasked with acquiring vehicles in a specific channel. For many dealers, such next-day discussions and ongoing channel-specific reviews offer a management opportunity.

I should note that while this acquisition proficiency check isn’t an end-all, be-all, the elements I’ve outlined here all point to an outcome we all know to be true—the dealer with the best cars in stock to sell is the one most likely to win a buyer’s business.