How To Source Used Cars at Reasonable Prices

This morning I had two lengthy conferences with dealers, one in Pennsylvania and the other in Rhode Island. Each dealer cited concern and anxiety for their inability to source vehicles for prices that would allow a reasonable profit. The pain of these dealers is without a doubt being shared by all. The solution, however, is understood by few.

I explained to these dealers that the answer to their problem lies in what I call “inventory engineering”. What I mean is that you have to be able to find the hottest vehicles in the market that are not understood by every other used car manager in town. In the case of one of the dealers, 97% of their inventory was either Toyota, Honda or Nissans. I asked, “How in the world would you expect to acquire vehicles of these makes for reasonable prices?” Every used car manager in town thinks that these are the right vehicles, and they’re out chasing them. The same can be said for a lot of other domestic vehicles.

I explained that the key is to have knowledge about which cars are hot in the market, but are not commonly understood by every other used car manager in town. For example, I demonstrated to the dealer in Redding, Pennsylvania that in the last 45 days, 17% of the vehicles being sold in his market were compact SUVs in the $15-$20k price range, and yet only 1% of the dealer’s inventory was comprised of compact SUVs. Hmmm…this looked like a problem. Next I said to the dealer, let’s find the hottest selling $15-$20k compact SUV in your market. You never would have guessed what came up number 1 on the list. How about an 08 Suzuki XL-7? I showed the dealer that there are presently 62 available in his market and in the last 45 days, 165 have sold. Wow! Triple wow! The market day’s supply of this vehicle was an astounding 17 days.

I asked the dealer if he thought this red hot vehicle was obvious to every used car manager in town and he predictably responded no way. I further asked him if he ever would have thought about stocking this vehicle, and he responded that he wasn’t even sure if he knew what the vehicle looked like. I explained that knowing something about your marketplace that is not generally understood by everyone else is the art of making money.

Next, I said to the dealer, let me show you that the market’s ignorance about this vehicle would make it an especially easy vehicle to purchase. I took the dealer to his appraisal tool where we booked the vehicle out in Black Book for an average wholesale value of $13,675, and a national auction value of $13,362. I then showed the dealer that there were currently 6 available for sale in a 150 mile radius of his dealership with an average retail price of $16,278. I further showed the dealer that after an anticipated $500 reconditioning and a $2,500 profit, he could purchase the vehicle for as much as $14,083 and have the third best value out of 6 in the market at a retail asking price of $17,083. With an average Black Book of $13,675, and an average auction price of $13,362, the dealer agreed with me that the vehicle could be easily purchased.

Interestingly, when I had the same discussion with the second dealer in Rhode Island, one of the hottest vehicles in his market was a 08 Kia Sorrento. Again, the dealer couldn’t remember stocking one and would have never thought about doing so. The appraisal exercise demonstrated a similar result in that the vehicle could likely be purchased because its supply and demand was not well understood by every used car manager in town. By the way, the 07 Suzuki XL-7 was the 7th hottest vehicle on the Rhode Island dealers list.

This exercise is called inventory engineering. Inventory engineering stands in stark contrast to the common practice of happenstance which is employed by most used car operations. In other words, the used vehicle inventory is stocked with vehicles that happen to be traded in or happen to be available at this week’s local auction. Happenstance stocking, I proclaim, is a poor way of creating conditions for success. Both dealers completely agreed with the merit of the different approach.

The problem, however, with the inventory engineering approach is that it takes time and effort and requires doing and thinking in a way that is unfamiliar and unwelcome by most used car managers. I try and explain that the time required to identify these vehicles is not time spent, but rather time invested. This is because the time invested in engineering inventory is in fact engineering future success. The best and most successful used car operations today are embracing the inventory engineering approach to stocking by providing their used car managers, and in some cases, stocking assistants with new tools and training.