ProfitTime In Practice: Does Turn Matter Any More?

September 25, 2019

For many years, Velocity dealers kept their annualized used vehicle inventory turn rate top of mind.

The focus on inventory turn owed to one of the foundational elements of the Velocity Method of Management—that if you weren’t turning cars, you weren’t earning the money from retail sales.

Some dealers operated their used vehicle department with a specific annualized turn rate goal in mind. If used vehicle managers didn’t achieve the goal, they’d often face questions.

For some dealers, the higher the inventory turn rate, the better. At 20 Group meetings, these dealers would often have smaller front-end gross profits on the group composite, but they’d often lead the pack in terms of volume.

I’d submit that most dealers, over time, found the inventory turn sweet spot for their dealerships. I advocated that, to consider yourself a true-blue Velocity practitioner, you’d need to achieve an annualized turn of at least 12, a figure that, by definition, calls for timely attention to each used vehicle and its days in inventory.

Today, however, ProfitTime is prompting dealers to question whether inventory turn really matters.

It’s a great question, and one I’m happy to address every time it arrives.

The question signals that a dealer has begun to shed the idea that the time they hold a vehicle is not a reflection of its net profit and return on investment (ROI) potential and, consequently, should not be a primary driver of pricing decisions.

For example, dealers who follow a more Calendar-time based approach to making used vehicle decisions tend to regard every “fresh” used vehicle as a ripe banana, full of front-end gross potential.

But, as we’ve learned with the advent of ProfitTime, not every “fresh” used vehicle is a ripe banana, and not every 45-day old vehicle is a bruised or rotten banana that has to go.

As dealers shed their connection to what I call, Calendar Time, dealers often see some fluctuation in the inventory turn rates they’ve long regarded as bellwethers of their performance.

For example, if a Velocity dealer had consistently been achieving an annualized turn rate of 14-15 times, it might dip to 12 or 13 times with ProfitTime, even as sales volumes are stable.

When this occurs, alarm bells sometimes go off. Dealers worry that their used vehicle department is underperforming. Next, they start asking if inventory turn matters any more.

Well, the best answer, is that, yes, your inventory turn rate still matters, but it only matters to the extent that it truly reflects your inventory’s investment value.

For example, if I’m a dealer, and ProfitTime says that my overall inventory investment score is a 10, which suggests I have a sizable share of top-tier Gold and Platinum vehicles in stock, I probably wouldn’t have an annualized turn rate of 14 or 15 times a year.

If I did, I’d be effectively be giving away vehicles that have high demand, low supply and strong sales volume in my market—the cars that, by definition, don’t (and shouldn’t) need to be priced aggressively to retail as quickly as lesser-performing investments.

By contrast, if my overall inventory score is a 3 or 4, I’d know I had a lot of Bronze and Silver vehicles that I’d need to move quickly. In this instance, an annualized inventory turn rate of 14 to 15 times a year might be perfect.

A key point here is that, with ProfitTime, a dealer’s used vehicle inventory turn rate isn’t an objective. It’s an outcome that follows managing each individual used vehicle’s investment value to its fullest potential.

I would also add that, because a dealer’s inventory investment value fluctuates with the market, it’s not uncommon for dealers to see similar flux in their inventory turn rates—a dynamic that can be disturbing for dealers accustomed to seeing more inventory turn stability.

I encourage dealers to ride these changes in turn rates, focusing their attention and energy on ensuring that every used vehicle’s pricing reflects its investment value.

When you do this, you’ve done all you can to index your inventory and pace of retail sales to investment value, and you’ve created the conditions where your inventory turn rate effectively takes care of itself.