Understanding the Need for a ‘North Star’ to Guide Inventory Acquisition

February 23, 2022

We are in a unique moment in the history of the car business when it comes to how dealers acquire inventory for their used vehicle departments.

It’s a moment where dealers have learned a lot about how to source vehicles in a supply-constrained market. It’s also a moment where what dealers don’t know will come back to bite them.

Let’s look at what dealers have learned in the past two years, as the COVID-19 pandemic, chip shortages and strong demand in used vehicles has reshaped inventory sourcing:

First, we know that trade-ins, what might be considered the “old reliable” source of used vehicle inventory, don’t occur with the frequency they did in the past. The relative absence of trade-in vehicles forced dealers to seek inventory from other sourcing channels.

Second, we know that auctions have become a last resort for many dealers to find inventory. The last resort status owes to the unprecedented and ongoing appreciation of wholesale values we’ve seen in the past two years. In the past, auction vehicles were dealers’ second most-important sourcing channel.

Third, we know that as dealers look to acquire vehicles directly from customers (through their service lanes or off the street), they face stiffer competition. Today’s customers with vehicles to sell or trade are more likely than ever to have a purchase offer in hand when they present a vehicle to a dealership.

Now, let’s look at what we don’t know about this new era of multi-channel used vehicle inventory sourcing:

First, while dealers often know what constitutes doing a good job acquiring trade-ins, they often don’t know what a “good job” looks like when they’re sourcing vehicles from their service lanes or off the street. They don’t have a history of measuring the Look to Book (or win rate) and acquisition Cost to Market percentages (or for ProfitTime dealers the investment score) of cars in the more nascent sourcing channels. (Two quick definitions: The acquisition Cost to Market metric measures how right you own a car compared to prevailing retail prices for the vehicle. In ProfitTime, the investment score measures a vehicle’s investment return potential based on its Cost to Market, Market Days Supply and retail sales volume.)

Second, if you ask 10 dealers what a good Look to Book (or win rate) and Cost to Market or investment score should be for auctions, you’d get 10 different answers. To my knowledge, it’s the rare dealer or manager who tracks how often buyers win or lose at auction. In addition, the threshold for what constitutes an acceptable acquisition Cost to Market or investment score depends on how a dealer does business.

Third, the absence of the metrics that matter as dealers source inventory across more channels makes it difficult, if not impossible, to effectively manage the larger number of individuals who appraise and acquire inventory. As the old saying goes, “without metrics you can’t manage and, if you can’t manage, you can’t improve.”

My take on this situation is that dealers are effectively operating in the current multi-channel sourcing environment without a “North Star” to guide all the individuals and managers responsible for acquiring the right number of cars, for the right money, in each sourcing channel, where risks and opportunities are different. In any dealership, you could have two individuals working the same sourcing channel. One passes on a vehicle because of the acquisition cost, another buys it for more money. Who’s to say who’s right or wrong?

As the year unfolds, and brings more volatility to used vehicle wholesale values, retail prices and retail demand, it’ll be ever-more important for dealers to answer this question if they hope to improve the number of vehicles they acquire for the right money, and the right reasons, across multiple sourcing channels.

The question also serves as the cornerstone for the new ProfitTime Global Acquisition system. We built Global Acquisition to help dealers have ready access to the metrics they need to manage their teams in accordance with the North Star they establish for their inventory sourcing strategy. I’m excited for dealers to see the new Global Acquisition system, which is part of the all-new ProfitTime Global Profitability Solution, at the NADA convention in Las Vegas.