How to restructure operations to win in today’s market place

June 24, 2009

Used vehicle primacy exposes inefficiencies

In my last column, I discussed that it is time to give used vehicle operations more primacy in the dealership. Why? Because it is the one area of the variable operations that can still be controlled given the uncertainty caused by the volatility in today’s marketplace.

However, I believe that it is also necessary to address some of the operational challenges that come with prioritizing used vehicle operations and a velocity-based, “turn and earn” approach. The challenges can best be summed up in a single word: “inefficiencies.” At stores where used vehicles are now a focal point, dealers and used vehicle managers are acknowledging that some of the ways they have managed key aspects of their variable operations-sourcing, acquiring, selling and merchandising-have benefitted from a top-to-bottom review, resulting in a more streamlined organizational structure for managing these efforts.

I am going to take this one step further. My conversations with dealerships about inefficiencies has led me to believe that the time may have arrived to consider a new dealership structure, one that reflects the realities of today’s Internet-driven marketplace as well as the need for dealerships to operate with lower costs.

First, let’s take a look at some examples of the inefficiencies to which I am referring:

New and used sales departments: Some dealers and used vehicle managers are asking why they need to have two separate sales departments with separate cost structures and management. This becomes an even more relevant question when considering the increased blurring between new and used buyers. In many cases today, a customer’s initial intentions don’t match their final purchase. Sales teams with the knowledge of both new and used products may make increasing sense to the extent that “sales are sales.”

Vehicle marketing and merchandising: It’s not uncommon for new and used vehicle sales managers to handle the marketing and merchandising of their respective inventories. Yet, all of these vehicles are, to a large degree, headed for the same dealer-owned and third-party merchandising sites. Some dealers have recognized this commonality and begun to question how to get the work done more effectively and efficiently-and in a manner that ensures the respective managers can do other critical in-store work, such as managing reconditioning, taking TOs, closing deals, etc…

The roles of the Internet and BDC departments: Here again, dealers are asking how the two departments, given the fact that most new and used vehicle buyers shop online before coming to a store, are distinct and different enough to merit stand alone operations to manage leads, calls and potential customers. As more than one dealer has shared, “The auto business is an Internet business-we should operate that way.”

Vehicle sourcing and pricing: At “turn and earn” stores, used vehicle managers are finding it increasingly inefficient to split their time in order to give the needed attention to properly manage sourcing and pricing. In today’s market, finding vehicles is considerably more challenging than in the past and competitive pricing is increasingly critical to capture the interest of more knowledgeable online buyers. Some stores are addressing this challenge by designating inventory acquisition and pricing specialists, who, with the guidance of a used vehicle manager and inventory management tools, can prepare buy lists, identify the online and physical sources to purchase used units, and set competitive pricing when a store acquires a unit.

A Potential Dealership Structure for the Future

If, in fact, these inefficiencies and today’s market necessitate a new dealership structure, here is, perhaps, what this structure might look like. Variable operations would have three departments-sales, inventory and pricing management and marketing. Here is a brief overview of how this model might look and function:

Sales: This department would handle both new and used sales and the back-end financing on deals. Managers and sales people would focus on taking care of customers (through initial and follow-up contacts, no matter the method), making deals and ensuring that other sales-reliant processes run smoothly. The emphasis here is on the process of selling vehicles and taking care of customers-though managers would also play a role in stocking, detailing, reconditioning, appraising, closing deals, and other decision-making that’s tied to the new and used products they sell.

Inventory management/pricing: The idea for this department flows directly from the availability of technology and tools that can guide to make informed decisions about what new and used inventory will sell best, the price point that makes each unit competitive and the trigger point for cutting one’s losses with inventory that’s grown long in teeth. Clearly, the specialists who work on managing inventory and pricing would need guidance and input from experienced managers. But the time and energy they spend studying inventory and marketplace data to make decisions would come at a less costly hourly rate than if the new and used vehicle managers focused on these tasks.

Marketing: This department would handle all the advertising and marketing that occurs in the dealership-offline or online. It would address the inefficiency at some stores where new and used vehicles handle this responsibility or where a store segments the online elements to an Internet department. As one dealer says, “We don’t have a cable, TV or radio advertising department, why do we separate online marketing?” The specialists in this department would take their guidance and cues from managers, but the day-to-day tasks would again fall to people at a lower pay grade than the managers themselves.

I believe this model might make a lot of sense. Historically, we built our dealerships around a belief that a high gross profit on every deal is the best recipe for success. In today’s market, where competition is fierce and customers are more educated about pricing and alternatives, it’s fair to say that high gross profit deals are few and far between. Instead, we’re seeing more deals with leaner gross profits-a reality that calls for an operating structure that allows dealers and managers to effectively and efficiently do more for less.