Inventory Management Best Practices for Car Dealerships

Automotive Retail Inventory Management Best Practices for Dealerships.

Is your vehicle inventory management costing you money or maximizing profit 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.

And it’s easier than ever for consumers to find what they’re looking for. A recent report from Freckle Killi discovered that 6 out of 10 buyers research vehicles online for six months before making a purchase. Now that buyers spend more time online looking for the perfect vehicle and visit an average of five dealerships, proper automotive inventory management is more important than ever.
Although 2018 was a good year for car dealers collectively, analysts are predicting the sale of internal combustion engines has peaked. Shrinking dealership margins compound the issue. NADA analysis shows that dealerships are making less money despite selling more vehicles. The 2017 midyear report showed gross profit as a percentage of selling price for new vehicles was 5.9 percent, down from 6.1 percent in 2016 and 6.5 percent in 2015. Gross profit as a percentage of selling price for used vehicles was 12.0 percent in 2017, down from 12.5 percent the year before.

What can dealerships do to balance the scales? Using dealer inventory management best practices can help you improve per-vehicle margins whether sales are increasing or slowing.

10 Car Dealer Inventory Management Best Practices

A lot goes into automotive inventory beyond number of vehicles. Maximizing profit comes from having inventory management processes in place and following the best practices below. It’s like a 10-point inspection for your auto dealer inventory management system.

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.

Today, car buyers are doing their research online and narrowing the list of vehicles they may want to purchase before heading to the dealership. Dealerships can use this consumer behavior to their advantage by learning more about which vehicles have the most interest. Simply doing Google keyword analysis can tell a dealership which vehicles are being searched for the most online.

Information on consumer preference is also contained in online reports from sources such as CarStory and J.D. Power, as well as a dealership's own data. Auto dealer inventory management software can help a dealership analyze sales trends in comparison to what’s currently on their lot. Price points for different types of vehicles should also be considered to determine which vehicles are in demand.

There are tools that can tell you which vehicles are right for a market, but dealers must exercise restraint and not deviate from the data. Decisions must be based on current market conditions, which means market research must be done on a regular basis.

New car dealers may not be able to control which models a manufacturer produces in a given year but there are other inventory decisions that can be made to fit the market. These include trims, paint color and upgrades. Understanding what consumers in your market want will also help you create effective vehicle descriptions that get cars sold more quickly.

Adopt Time-Minded Approach to Vehicle Pricing

In order to combat margin 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 that are less desirable in the market must be priced to sell quickly so they don’t take up space in the lot for too long. Offering very favorable pricing to get a quick sell and free up resources for more popular models is a more sound strategy than letting the car sit for months while you wait for the right buyer to come along.

Taking a time-minded approach to vehicle pricing goes back to knowing your market. A dealer must know what local customers are willing to pay and how comparable vehicles are priced at other area dealerships. Vehicles must be competitively priced if there’s any hope of moving inventory in a timely fashion. These days the competition isn’t just within the city limits. Consumers are comparing dealerships within a couple hundred miles of their location and are willing to go the distance if the price is right.

Price With Greater Transparency

Pricing isn’t the only aspect of moving inventory, but it’s a big component especially in terms of transparency. Dealers that implement a transparent pricing strategy tend to draw in more drivers and opportunities to make a sale.

Why? Trust almost always becomes a factor when a person is making a five or six figure purchase. That’s why price transparency is so important for auto inventory management.

The Internet is another reason transparency is more important than ever. Pricing research is the #1 online activityperformed by car shoppers. There are countless resources from Kelly Blue Book to competing dealerships that provide pricing information online. Consumers are more knowledgeable about pricing factors than ever before right down to the individual options. They’ll come to the dealership armed with that knowledge. 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.

Avoid Easy Mistakes

Having a vehicle inventory management system in place can help you avoid costly mistakes when you’re sourcing and marketing. Here are just a few ways established inventory management procedures prevent mistakes that can easily be avoided:

Enacting a sound appraisal practice lowers the chance of overpaying or stocking the wrong vehicles right out the gate.
Ensures inventory listings are up-to-date and free of errors.
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.Inventory data is updated in a timely manner so that vehicles are brought to market sooner.

There’s one more important factor for avoiding easy mistakes - assign someone to manage the inventory process. This inventory manager plays a critical role in making sure procedures are followed consistently and in a timely manner.

Find the Right Mix of Inventory

The 2018 auto sales numbers are insightful for many reasons. One of the most important takeaways is that auto dealers need to have a mix of inventory.

Variety is often the key to moving inventory at a dealership. It’s all about casting a wider net to catch more car buyers. Of course, in order to source the right mix of inventory you first need to know each vehicle’s market and what’s in demand among your customer base.

If you only sell sedans from the major U.S. automakers you’re probably going to have aged inventory issues. Sedan sales are dropping in the U.S. with one exception - electric vehicles. It’s a perfect example of how a mix of inventory can maximize profitability.

Focusing on just one franchise is also an inventory issue, even if it's your own franchise. If you stock too many vehicles from one franchise 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.

For used vehicles it’s important to consider the existing supply and demand since the number of used vehicles is increasing. The higher the supply is the more competitive you’ll need to be with the pricing in order to avoid holding a vehicle too long.

Having a mix of vehicles makes car dealer inventory management software that much more important. Software allows dealers to efficiently track sales by make, model, manufacturer and more to find the ideal inventory mix.

Keep Inventory Fresh

Aged inventory is a problem for turning a profit given the current excess of older vehicles in the market. The longer an aged vehicle sits on the lot the larger the wholesale loss will be. The goal is to create a used car inventory management system that moves aged vehicles quickly so that inventory stays fresh.

To do this dealers have to make inventory age a top management factor. It helps to create an aging policy that holds managers accountable and stringently adhere to it. The more conservative the policy is the better.

The 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. Doing so will keep depreciation under control and encourage dealership managers to move the aged inventory.

Aged inventory has a story, and that’s something that should be shared in the merchandising of aged inventory online and in-person. All the unique factors should be a highlight that imparts value and can breathe new life into an old vehicle.

Vehicles are also just as susceptible to trends as any other consumer good. Once again, understanding the market of a vehicle and what’s selling in your area plays a critical role in inventory that’s fresh.

Stay on Top of Aged Inventory

Cars that languish on the lot are essentially stagnant money. Dealers have to stay on top of aged inventory if they want to avoid stalled sales.

In addition to using automotive inventory management software, managers and salespeople can play an integral role in staying on top of aged inventory. Factors like how many times a vehicle has gone on a test drive and how many deals have been worked provide insight into the likelihood an aged unit actually selling.

Another way to stay on top of aged inventory is to make small fixes when vehicles are reconditioned. Small investments to correct obvious issues will help decrease the time to sell, particularly with used luxury vehicles.

Conduct Inventory Analysis

Dealers should always know what they have on the floor and in the lot. Regular inventory analysis should identify core inventory and note how long inventory has been held.

Data that’s gathered through inventory analysis can help a dealer 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. All of this data is much easier to source when you have the right auto dealer inventory management software.

Invest in Automotive Inventory Management Systems

What is DMS (dealership management systems) for car dealers?
A DMS provides inventory management for a car dealer with customized tools and resources. These inventory management systems support processes that lead to faster vehicle turnaround time and improved ROI.

Old automobile inventory management software that’s not up to today’s technical standards can be a huge hindrance. As noted above, time is money when you’re moving vehicles, and old technology can slow things down.

Auto inventory management software is becoming more integrated rather than being stand alone system. Tools that sync with websites and CRM systems provide more comprehensive technology that reduces the workload and makes management easier across the board. As car searches increase online integrated inventory management systems will become more beneficial for the dealer.

Another thing dealerships should look for when upgrading their inventory management system is mobile compatibility. Several years ago mobile Internet usage surpassed desktop usage, and this trend isn’t changing. For the sake of time and efficiency, dealers and managers need to be able to access systems from anywhere not just when they’re in the office.

Proper Inventory Sourcing

Sourcing is a key component of vehicle inventory management. Again, having a clear strategy is necessary for maximum profitability. A dealership’s sourcing strategy should establish how often and where wholesale vehicles are acquired, parameters for trade-in decisions and remarketing efforts.

Current market demand will also come into play. You can use past sales performance metrics to determine this factor.

Where to find inventory for the right price is always at the top of a dealer’s mind. Auctions have long been a popular way of sourcing wholesale used inventory. ACV Auctions is making it an even more profitable option by solving two problems - efficiency and transparency. ACV 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 eliminate the need for costly, time-consuming physical auctions.

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.