3 Ways To Turn Your Average Inventory Cost Into Advantage

June 10, 2015

It’s becoming more critical for dealers to pay close attention to the average cost of their used vehicle inventory.

I say this for three reasons:

concept-car-2First, today’s market can lead dealers to believe that managing your average used vehicle cost isn’t important. After all, cars are more expensive and, if you want to play in today’s highly competitive used vehicle market, you’ve got to pay.

Second, even if a dealer recognizes how/why a lower average inventory cost helps a used vehicle department reach its peak performance potential, it’s easy to look the other way when buyers or managers consistently pay too much for trade-ins or auction purchases.

Third, dealers who do proactively manage their average used vehicle inventory cost tend to sell more cars in less time than dealers who don’t. Among the best-performing dealers I know, the average cost of their inventory is a topic of conversation and investigation every day. They live and breathe the metric, and their results prove the benefit of their cost-minded commitment.

One of these dealers is Bradley Williams, general manager for Rivertown Buick GMC in Columbus, Ga. His take: “The further you drive down your cost, the quicker your inventory turns. Increased volume should follow.”

Some dealers may question this thinking but, if you step back, it makes sense. There are far more potential buyers for lower-priced vehicles, and these units also typically pose less depreciation and valuation risk than their higher-priced counterparts.

The key question then becomes, “OK, Dale, what’s the best way to set and manage our inventory cost targets?” Here are three best practices I’ve gleaned from Williams and other dealers:

1. Recognize the relationship between average new/used vehicle costs. I like Williams’ formula: He strives to maintain his average used vehicle cost at 50 percent of his average new vehicle cost. For example, if his average new vehicle cost is $26,000, his average cost goal in used vehicles is $13,000.

This goal serves two key purposes. It helps create an inventory mix that delineates the value proposition between new and used vehicles for customers and, if managed correctly, can mitigate the preferences of individual buyers/managers, who like stocking higher-cost cars.

2. Evaluate your inventory turn by cost segment. For Williams, this analysis taught him that lower-cost cars turn more quickly. “As I managed my $13,000 cost target, I could usually expect an increase in monthly volume of one unit when we landed $100 below the goal,” he says. “I could also expect a reduction in unit volume as average cost increased.”

Other dealers arrive at the same conclusion as they evaluate inventory age by cost segment. In many cases, the oldest vehicles are also the most expensive and, in turn, they often suffer from the most significant price (and gross profit) reductions as dealers do their best to retail them.

3. Be realistic, and not too rigid, with your average cost target. The best used vehicle retailers recognize that managing your inventory to meet your average cost target is a balancing act. If you’re too firm, you’ll pass up retail-worthy vehicles that happen to fall outside your cost parameters. If you’re too flexible, you run the risk of burdening your inventory performance with too many expensive cars.

“You have to be realistic,” says the used vehicle director for a six-store group in the Midwest. “There are times when I’ve relaxed our cost targets to make trades and fill inventory gaps. But when I do, I know I’ve got to focus on retailing those higher-cost cars quickly to keep our turn and grosses in line.”

In closing, I should note that I’m writing this article as the spring selling season is coming to a close, and analysts indicate used vehicle values in most segments are on the wane.

My prediction: This seasonal volatility will prove far less problematic for cost-conscious dealers who, through their ongoing diligence and discipline, will have the advantage of less inventory water to bail as summer arrives.