How Car Dealers Should Manage Inventory During a Slowdown

Is your vehicle inventory management costing you money or maximizing cash flow with every sale?

Car dealer inventory management is a unique challenge. Between the makes, models and endless options there seems to be an infinite number of vehicles that can be pulled into the lot. But customers only want a specific vehicle, and they’re willing to go the distance to get it. You can have hundreds of vehicles for sale, but if you don’t have “the one” the sale is lost.

2020’s events have only compounded the difficulty of inventory management. In the past couple of years, profit maximization was the name of the game – it was worth holding out for the right consumer or dealer-to-dealer sale to ensure you got the most money for your used inventory. That is no longer the reality. The market for new cars is not collapsing, but it is on hold. As car manufacturers increase their promotions, used cars become harder to sell against their brand-new models. Shrinking dealership margins, a challenge before the COVID pandemic according to NADA data, are continuing to get smaller as a result.

What can dealerships do to balance the scales? In short – cash flow is king. Several bills in hand are worth more than the car sitting on the lot to keep the lights on and people paid. It’s time to roll up your sleeves and get to work getting vehicles out the door. Here’s how to do just that:

Car Dealer Inventory Management Best Practices

Have the Right Inventory Management Strategy

Know Each Vehicle’s Market

Dealerships that move inventory don’t rely on gut instinct or personal preference. Optimizing inventory and increasing front-end gross profit requires a keen understanding of each vehicle’s market.

Start with the data in your own backyard – review sales data from the past year, with special attention towards last month’s activity. Bucket your inventory into two groups – vehicles likely to sell, and vehicles that don’t. Get focused on the former group for your main strategy, and look for a way to offload the latter group as fast as you can – by selling it to another dealer or to a wholesaler.

Information on consumer preference is also contained in online reports from sources such as NADA and Manheim, but be aware that their data may be skewed by the recent market anomalies.

When in doubt, ask yourself how unique a certain vehicle is at serving a market need. Families who need minivans and workers that need trucks don’t have another alternative – demand for those vehicles is less prone to fluctuations in the market. Those vehicles, along with your bread-and-butter models like sedans, are going to continue to keep cash coming in the door, as long as your dealership market is made up of folks with that need.

That said, variety is still key to moving inventory at a dealership. It’s all about casting a wider net to catch more car buyers. Focusing on just one make or model easily leads to stocking too many vehicles that don’t sell that fast - you’re isolating buyers that are ready to change brands. You also run the risk of used car sales cannibalizing new car sales of the same make and model.

Source Inventory Intelligently

Sourcing is a key component of vehicle inventory management. Again, having a clear strategy is necessary for maximizing cash flow now and profitability later. A dealership’s sourcing strategy should establish what, how often and where wholesale and trade-in vehicles are acquired

Understand current production trends

New car dealers may not be able to control which models a manufacturer produces in a given year, but they can account for it in their used car sourcing. Given the aggressive financing promotions of OEMs, it is more important than even to find the gaps that new car manufacturing isn’t meeting. If that gap aligns with the needs of your car-buying community, double down on those makes and models from trade-ins or dealer auctions.

Refine your appraisal and trade-in process

Enacting a sound appraisal practice lowers the chance of overpaying or stocking the wrong vehicles right out the gate. Trade-ins should be approached with the same level of care. Both condition and consumer demand must be weighed before an offer is made. Even if a vehicle is in good condition, if there’s little market demand there’s a chance it will become aged and end up being wholesaled.

Adopt a More Aggressive Approach to Vehicle Pricing

In order to combat cash flow compression, dealers must be efficient when it comes to inventory management. This applies to pricing more so than many other aspects of the process.

First and foremost, models must be priced to sell quickly so they don’t take up space in the lot for too long, especially given the competition with new car models. Offering very favorable pricing to get a quick sell and free up resources for other popular models is a more sound strategy than letting the car sit for months while you wait for the right buyer to come along. This goes double for models that are less desirable in the market – in fact, it may be worth selling these to other dealers or wholesalers.

Taking a time-minded approach to vehicle pricing goes back to knowing your market. Make sure you are scaling pricing down based on age of inventory to ensure that it moves quickly.

Finally, its critical to be transparent about pricing on the retail side. Pricing research is the #1 online activity performed by car shoppers. There are countless resources from Kelly Blue Book available to competing dealerships that provide pricing information online. Consumers are more knowledgeable about pricing factors than ever before - it won’t escape them if a vehicle is overpriced. Pricing transparency can be improved by showing a price comparison with other dealerships and third-party websites. And don’t forget to put the price on the vehicle listing with all relevant incentives included.

Get on Top of Your Inventory Marketing

On the other side of aggressive pricing is marketing that maximizes perceived value of your inventory. For starters, ensure inventory listings are up-to-date, comprehensive and have rich visuals. Make sure this is available as a checklist that anybody can use to fully optimize your listings. Additionally, aged inventory has a story - leverage it in your listings to make it pop.

Read More: Dealership Marketing in a Post-COVID World

Be On Top of Your Inventory Operations

Making these processes work requires arming you and your staff with guiderails to do it quickly and consistently. Here are some ways to keep things on track:

  • Max out your reconditioning process – in the past, reconditioning efforts were more balanced against profit margins, making it easy to write off certain items. That’s not going to fly in a competitive market – a fully optimized reconditioning process could be the difference between cash in hand and not. Look for ways to slow-roll reconditioning
  • Inventory checklists and content guidelines provide assurance that listings are as detailed as possible. Include all of the features and list them in order of importance based on what the market is looking for at the moment
  • Puts emphasis on selling aged inventory rather than new models with less depreciation – offer specific incentives to associates who can move this inventory under a certain amount of time
  • Ensure inventory data is updated in a timely manner so that vehicles are brought to market sooner
  • If you can afford to, dedicate a team member to these inventory management items – that singular focus increases your odds of success
  • Create an inventory aging policy that holds staff accountable. The usual best practice is to hold 50% of aged inventory for a maximum of 30 days from acquisition - all used vehicles should be sold within 45 days. If it doesn’t sell in that time it should be wholesaled
  • Data that’s gathered through inventory analysis can help dealers fine-tune their resourcing. It reveals turn cycle, when it’s best to acquire inventory and a timeline for vehicle disposal. The analysis can also provide important insights on pricing within the market. Keep this analysis going more often during this time to make sure your data is as up to date as possible so it can help you make the most valuable decisions possible

Finding and selling inventory for the right price is critical to keeping the lights on, and ACV Auctions wants to arm dealers with as many tools as possible to make that happen. In addition to the advice listed here, ACV’s dealer auction platform wants to make inventory sourcing more efficient and transparent. Our inspectors come out to the dealership to create in-depth condition reports that are more thorough than the industry standard. The reports are used in real-time, online auto auctions that give buyers full confidence in what they are buying, and sellers a lightning fast method of inventory liquidation.

Sign up for an ACV account to see how we can make your inventory sourcing more efficient and transparent.