Pub. 1 2018-2019 |Issue 4

11 The same occurs with your Used Vehicle Inventory. Inventory flows in through Trade-ins and Purchased Units. And the inventory flows out through Retail and Wholesale sales. You must ensure that inventory is coming in at a pace that can sustain the desired or actual flow out. Likewise, you must ensure that inventory is flowing out at a pace to sustain the incoming inventory. Thus, you have to constantly be in control of the “flood” gates to ensure nothing disrupts the flow. As you can see from the flow chart you now have four areas with which to establish controls and objectives, and each are dependent on the others. Anything that disrupts the flow of either of these four areas will have an impact on the overall flow. Each of these inventory areas must have a separate plan of action for desired results in sync with the others. For example, let’s assume your goal is to achieve 50 retail-used sales per month. Write in the number 50 next to the retail arrow in the river flow chart above. Staying with the guideline that your retail sales should represent at least 60 percent of your total used vehicle sales you would need to achieve 83 total sales (retail & wholesale), which means 33 would be wholesale. Write in 33 next to the wholesale arrow. Now you must establish the needed inventory (flow in of the river) to support these retail and wholesale objectives (the out flow of the river). Let’s focus on just the RETAIL SALES first. Again, staying within guidelines, you would like your RETAIL inventory to be made up of 50 percent trade-in units (that number has slowly declined from 60 percent over the past few years and varies by your make). Let’s also say you want a 45-day supply (also turn). Thus, to achieve the 50 retail sales per month with a 45-day supply of inventory the following numbers would be needed. • Fifty divided by 26 work days (average in Utah) equals a daily sales rate of 1.92 units. • Multiplying 1.92 times a 45-day supply equals 86 total retail used vehicles in inventory, of which 85-90 percent must be front-line ready for sale at any given time (every day). • Eighty-six units times the desired mix of a minimum of 50 percent from trade-ins equals 43 units. That leaves 43 units that need to be acquired through outside purchases. Write these numbers next to the appropriate incoming arrows in the inventory river flow chart. The decline in new retail sales, and the decline in retail- quality trade-ins, has steadily moved the New to Used retail sales from 0.85 used retail sold for every new retail sale, to a benchmark guide now of 1 to 1, and in many cases 1.25 used-to-new ratio. The high-performing new franchise used vehicle retail operations are now approaching a 1.5 used-to-new ratio. This transition is being seen across the industry for many reasons such as the increased cost of new inventory floor-plan interest and open lot insurance, selective factory new-inventory allocations not in sync with their volume incentives, as well as declining new vehicle sales, and so on. This is causing the inventory manager to seek more retail inventory from acquisitions instead of trade-ins as in the past, which makes proper inventory management even more important and impactful. Without excellent inventory management, you face the probability of declining used retail sales, along with new retail sales. Obviously, you would need to do the same for wholesale inventory (non-retail quality trade-ins and old-aged purchased inventory). The mistake many dealerships make is not setting an established plan of inventory acquisition and disposal for wholesale inventory as well as retail inventory. Wholesale disposition is a profit center as well as retail. It is essential that you have a well-defined, established and accountable plan of action for both retail and wholesale. This is just the beginning step toward more effective inventory control. Used vehicles represent the fastest depreciating inventory in your dealership. They also represent one of the best returns on investment if managed properly. You have four used inventory categories that need to be managed properly and separately: retail, certified, sub-prime and wholesale. Each need to have established objectives for acquisition and disposal in terms of volume, day’s supply, dollar amounts, type and dollar mix, desired turn, and return on investment. All must be profitable. The entire operation needs to focus on establishing all the processes and philosophies needed to ensure that you have the RIGHT CUSTOMER, in the RIGHT VEHICLE, with the RIGHT LENDER, to maximize your gross opportunities in an ever-tightening market today. Inventory management is just the beginning and just one part of the total puzzle. However, once you start with the big picture of the “flow,” you can then begin your trip down the river and not end up the river without a paddle. 3 Mike Edwards is President/CEO of First Group Family of Companies (First Innovations/First Guard/First Insured,) an Austin-based full-service training, consulting, product providing and dealer-wealth-building automotive-income developmental company with over 200 dealership clients in 12 states. For more information on Used Vehicle Management training, Fixed Ops training, Sales Training or F&I department programs, visit their website at www. firstinnovations.com or contact Mike Edwards at 800-395-8664. Wholesale Retail Purchases Trade-ins