A Dealer’s Guide To Improving Reconditioning Expenses

February 11, 2014

I constantly remind dealers that their reconditioning process likely represents one of the greatest opportunities for gross profit improvement. Seldom, however, do dealers heed this advice. Reconditioning inefficiency is probably the greatest cause of gross profit disappointment.

r rear tire-sideHappily this morning, I received a copy of a memo written by General Manager Paul Lynch of DePaula Chevrolet to all employees. Paul’s memo outlines what I consider to be the 8 commandments for reconditioning management. All dealers and managers would do well to adopt Paul’s requirements for reconditioning

I am still looking over last month’s recon numbers…January 2014

We spent $134,665 in reconditioning our delivered used vehicles in January, that equates to $1,112 per vehicle (121 used cars delivered). This number is before we add the $369 fee to Certify our CPO’s.

I personally believe those figures are too high, we need to average roughly $150-$200 per unit lower.

Things to consider:

  • We must limit the amount of Body Work that our pre owned units need. It drives up the cost and slows down the process. We also need the minimum possible estimates every single time a body shop estimate is written.
  • We must demand the cheapest parts and tires go on these units…..I understand the GM parts loyalty part but we still need to make sure we are getting the cheapest qualifying parts or tires.
  • We must limit outside vendors, PDR, Dent wizard, tire/wheel repair, and Air brush vendors…..negotiate these guys down to the lowest possible rates when we absolutely need them.
  • If we made a mistake with a purchased vehicle, and it needs significantly more than we expected or estimated, we must NOT make a second mistake and approve a much higher recon bill. If the numbers don’t leave us a desirable initial sale profit we move the car to wholesale and run it through auctions, including OVE and Smart auction. We must accept that we made the mistake and move on without it costing us more money.
  • We must recognize that when we purchase vehicles from Smart auction as Market ready, that they should not really need anything, and if they do we can ARBITRATE. This should be done every single time.
  • We need accurate measurements on tires, brakes, etc., and we need estimates that are solid and not padded or inflated with non-sense.
  • We need to know when certain parts or jobs are covered under bumper-to-bumper or powertrain warranties.
  • We need to build a trust between the used car department and the service department, so that it is no longer a one department vs. another department tug of war for gross profit, but more of a uniform goal and mutual understanding. If we take all selfishness, greed, and our own personal pay plan out of any situation we all know what is right and what is wrong. What we need to do together is to do what is RIGHT all the time. If we can do that our potential has no limit. It should no longer be a Service department vs. Sales department battle, but going forward it should be a DEPAULA way of doing business.

What our goals in used car reconditioning should be are QUALITY and SPEED (2.5 days or below). I believe another store goal should be to get our average monthly recon RO dollar amount under $1,000 per copy. Last but not least, the final goal of the reconditioning department should be to minimize policy expense. In January, the used car department totaled $7,442 in policy which equates to $61 per used car delivered. I think we should target $30 policy per used car delivered. If we execute on all 4 of these goals we will sell more used cars…….and the parts, service department, and used car department will ALL make more money.

I take specific notice of the fourth and sixth bullets. What happens at your dealership when the vehicle’s on the rack and it is discovered that the needed reconditioning is far in excess of the original estimate? In most dealerships the repairs are completed and the reconditioning amount is added to the cost of the unit. This excess cost does not increase the value of the car, but only reduces the amount of gross profit that is yielded upon the vehicle’s sale. Seldom do dealers realize that the gross profit deficiency is attributed to an incorrect estimation of needed repairs and the thoughtless completion of such repairs once the vehicle is purchased. If gross profit is important to you, compare the reconditioning estimate of the buyer/appraiser with the actual estimate of the needed repair. If the actual amount is more than 20%, stop the process and wholesale the vehicle. This single act will increase your vehicle gross profit by tens to hundreds of thousands of dollars per year. Further, this process will also help you identify and coach buyers/appraisers that chronically miss reconditioning estimates.

Finally, Manheim has a product called DealShield, which I believe costs less than $200 per vehicle on average and allows a dealer to return a vehicle to the auction with 100% money-back guarantee for any reason. To me, this looks like a very reasonable gross profit protection.