A Call for “Bucket”-Minded Inventory Acquisition

June 13, 2022

If you scrolled the clock back 15 or 20 years, you’d find very few dealers who managed their used vehicle inventory in what we now call “buckets.” Rather, dealers managed used vehicles in blocks—cars that were less than 60 or 90 days old and those that weren’t.

Over time, the bucket-based approach to inventory management has proven to be a superior method. Dealers set up buckets based on a vehicle’s age or time in inventory, as well as other criteria. Each bucket generally has parameters for pricing and promotion to manage sales throughput in each bucket. The parameters usually tie to market metrics (like Cost to Market, Price to Market and others).

In the past two-plus years, with the help of vAuto’s ProfitTime GPS, some dealers have gone beyond buckets, using each vehicle’s investment value and automated price recommendations to manage each vehicle to its appropriate investment return.

I share this bit of inventory management history because it’s helpful to understand where we are in the current moment with used vehicle inventory acquisition. In a nutshell, I believe we’ve arrived at a time where dealers should follow a bucket- or channel-based approach to acquiring used vehicles, lest they miss out on opportunities in today’s supply-constrained market.

My thinking follows the evolution of how some dealers quickly shifted the way they acquire inventory as the COVID-19 pandemic disrupted the wholesale and retail markets for used vehicles. Dealers who relied on auctions or trade-ins for inventory found themselves in a pinch. Many turned to their own customers, looking for vehicle acquisition opportunities in their lease portfolios, service lanes, off the street and we’ll-buy-your-car programs.

Unfortunately, this shift occurred at a time when dealers didn’t necessarily need to worry about how they were acquiring these cars. What’s the point of sweating how right you acquire vehicles if you know values are rising, customers want almost any car and, if you have the cars, they’ll likely sell quickly?

Well, such favorable conditions are fading right now. Meanwhile, dealers who want to maintain their retail sales volumes and profitability have no choice but to continue acquiring inventory from as many channels as possible to meet their goals, and to know, in no uncertain terms, what buying a car “right” means for any specific sourcing channel.

That’s why I believe it’s time for dealers to apply a bucket- or channel-minded approach to managing their inventory acquisition efforts, just like they’ve done with managing and pricing vehicles in their inventories. The shift needs to start with metrics that help dealers and managers know if/when appraisers and buyers are doing the best job as they aim to acquire cars and/or customers. The metrics should inform acquisition teams of the type of vehicles typically available in each channel, the channels where they can acquire the best cars, and when they should step up, or step back, on purchase or trade-in offers due to the individual circumstances of each deal and each sourcing channel.

I’ve been working with dealers and vAuto ProfitTime GPS developers to define the metrics that matter most to optimize inventory acquisition in the current multi-channel sourcing environment.

Volume: This metric tracks the number of cars that flow from each sourcing channel, helping dealers and managers identify (and prioritize) the channels where cars can and should come from.

Model Year/Odometer: In today’s supply-constrained environment, it’s important to know the channels where you can source late-model vehicles that might fit certified pre-owned program criteria and higher-mileage, older vehicles that fit the needs of budget-minded buyers. This metric gives dealers the insight to pursue channels with specific vehicles and characteristics in mind.

Investment Value: I’ve always believed that the job of used vehicle managers isn’t to sell cars, it’s to make money for their dealers. Hence, it’s critical to source and stock vehicles with the highest money-making potential. In ProfitTime GPS, the investment value metric shows dealers the sourcing channels that produce the vehicles with the best money-making potential. With this knowledge, dealers and managers can prioritize the channels that help them achieve their business objectives, whether it’s volume, gross or a balance of both.

% On/Off Strategy: As dealers source inventory from a wider variety of channels, it becomes more important to establish an overall strategy that guides how appraisers and buyers approach cars and customers in each channel. The strategy sets the parameters for buying a vehicle “right” in a specific channel, while giving appraisers and buyers latitude to make deals, provided they have good reasons. Over time, dealers find the strategic baseline enables closer collaboration and oversight to achieve optimal outcomes in each channel.

Days to Sell: This metric helps dealers connect the dots between the investment value of the vehicles they acquire in a specific channel and the time horizon by which they expect a retail sale/investment return. It’s a thumbnail-quick way to know the retail performance of vehicles sourced from individual channels, and explore why vehicles from specific channels do not perform as well as expected.

When dealers use these and other metrics to manage the performance of appraisers and buyers across all the sourcing channels they activate, good things tend to follow. They arrive in the form of realizations where “pockets” of the just-right inventory can be acquired, where investment acquisition strategy targets or thresholds might be adjusted in a particular sourcing channel and greater appraisal and valuation consistency across every channel.

The outcomes mirror what we saw when dealers began bucket-based inventory management. They priced vehicles more consistently, developed rationales, reasons and rules to ensure their teams made the right decisions and, ultimately, sold more cars. I’m not surprised at all by the parallels between used vehicle acquisition and pricing when the right metrics are applied to each. After all, you can’t manage what you can’t measure and, if you can’t manage, you can’t improve.