Change is inevitable. And as with any industry, there are certain underlying forces behind the need to change and adapt. The car dealership is no exception. Below are the 3 forces behind the need to streamline your used car recon process and turn your vehicles faster. Those that are the front-runners for change will position themselves for long-term success. While those that are hesitant may find themselves in an unfavorable situation.
The economics of all business is to grow revenue while reducing or mitigating costs. We are seeing in our industry the costs to recondition a car are going up. Inflation for parts is affecting our bottom line. Auto parts are made of steel and plastics and are affected by changes in prices of steel and oil in the open market. As prices to make the parts goes higher, that cost is passed down to the buyers of the parts, the dealership.
Another economic factor is to consider is labor. Labor is getting harder to find. When you do find good help the cost to keep that individual is increasing. According to the Bureau of Labor Statistics, we have seen a $3 per hour increase in labor cost in the last 10 years. This places considerable strain on used car margins.
Another economic development that is causing used car margins to get tighter is the influx of off-lease vehicles hitting the market. USA Today wrote an article in May of 2017 titled, “Off-lease used cars are flooding the market, pushing prices down.” The article explains how leasing practices 10 years ago is starting to affect the market now. “As a result, used-vehicle prices tumbled 7% during March compared with a year ago, according to NADA Guides Index.” The article goes on to say, “The organization expects them to fall 6% for the full year.”
The economic situation in the used-vehicle market is a major reason for the importance to do what you can do at your dealership to mitigate costs and turn vehicles faster. But if that wasn’t enough, let’s look at the social forces that are playing a role in why it matters to find a solution for your used-vehicle make ready.
There are a few social forces that are taking place in the auto industry. Be aware of these forces in order to stay on top of the competition during this time of margin compression. Over the last few years, more and more dealers are getting competitive with pricing. Not only are dealers being “forced” by some economic forces to lower prices, many are finding the need to lower them further to stay competitive in their respective marketplaces.
In 2009, Dale Pollak introduced the idea of Velocity in the dealership. Velocity, as it applies to vehicle sales, is the maximization of effort. It is not a short-term tenant, it is a long-term path. As such, velocity wants to maximize long-term profitability by speeding up the acquisition of profit. This is why vehicle turn is so important. By increasing inventory turn rate by pricing vehicle to market, we increase profitability long term while reducing holding cost. As this practice continues to grow in dealerships, more and more cars will be priced to the market creating an even more competitive environment.
Technology has changed the game for many industries. We have been able to experience this change in our own worlds as we have witnessed many technological breakthroughs. In short, technology is making our lives easier. In an article written in Autodealer Today, Joseph Clementi states, “Technology within the dealership environment has the potential to improve satisfaction, training, communication and, most important, profitability.” So why not embrace it?
One of the biggest challenges we have seen in dealerships is their ability to communicate between departments. Technology has made communication easier and simply put, the better we can communicate the more likely we can get cars to the market faster. Imagine getting a text message to approve a work order while out at an auction or on the beach somewhere. Work can continue to move forward by connecting the different departments via technology.
Another benefit of technology as it applies to your reconditioning process is the ability to track actual recon costs and compare them to estimates. See our blog on Recon Estimates, to find out more about how we can help here. But many dealers, and by many I mean MANY, do not track the actual costs of recon. This can have huge implications on future deals for the dealership. A greater understanding of actual costs can put you in a better position to offer more on trade-ins and the like.
As with any industry, there are underlying forces that are constantly driving change. The forces pointed out in this article are not mutually exclusive. There are other factors that might influence you and your dealership’s need to take action. We will see over the next 5 years the dealerships that have accepted the need for change vs. those that are reluctant. If you wait too long, the forces of change might be too much for your dealership to overcome.
If you and your dealership are serious about controlling your pre-owned margins, then having UVI meetings are critical. I have been able to witness first hand a variety of different UVI meetings and styles. Below are 5 keys to effective UVI meetings to get you and your team working toward a common goal.
I’m sure there are stats somewhere about how many dealerships have a daily UVI meeting, but we’d be willing to guess there is about a quarter of the industry that still does not have a daily UVI meeting. Set a time in the day and make attendance mandatory for those that need to be there.
If you are striving for an efficient make ready department you should strive to only discuss things that focus on making the process efficient. Sure, build in time at the beginning to discuss the hickey on Billy’s neck from a fun-filled night that Saturday, but when it is time to get down to business, focus the discussion on the process improvement. Meetings should be stand up and kept within 5-10 minutes.
You need to know how fast vehicles are moving in and out of your make ready department. Speed to Market is a term that is picking up steam in the pre-owned world. Managers also need to know if there are any trouble areas or hang-ups on any cars. As a manager, you are there to help the process along. If there are roadblocks you can help remove from the process, you can step in and assist.
Having the metrics and info available is a start, but now it’s time to dive into why things are the way they are. Ask questions to understand what is going on in the process. The owners of the UVI process should be able to identify exactly what needs to be done and where.
Seek first to understand, then be understood. After understanding yourself the current workings of your UVI department, now it is time to get the kinks out of the hose and assign tasks. The key here is asking how are you and your team going to tackle any challenges in your process and then executing.
Every day you should strive for at least 1 15-minute UVI meeting with your team. Some of the more ardent believers in the importance of the process will establish a morning and afternoon UVI meeting. How often you have the meeting is dependent on your team. But ensuring you run them effectively and have the right information readily available is critical to the success of you and your make-ready team.
If you are not estimating your recon costs then one could say you don’t care about your costs. But you would be hard-pressed to find a dealer operating in our diminishing margin environment that doesn’t care about their costs. However, you may find more dealers that are not comparing their estimates with their actuals. If you are not comparing your estimated costs with your actual costs, then one could say you don’t care about improving your process.
Comparing your estimated Recon to your Actual Recon you do on your vehicles will help you understand and control your costs. Improving your process based on this comparison will help you maximize your used car profits.
The comparison between estimated recon and actual recon should be as close to ZERO as possible. You are doing a good job if you can continually fall within the range of + or – 5%. Outside of this range, you will need to determine whether it is the estimations or the actual recon that is causing the issues. It is important to try to get in on the front of this as much as possible. Meaning, set up the correct work (as close as possible) before you acquire the vehicle.
Let’s take a look at how Trace can help you on this process improvement journey.
Estimating your used car recondition is the first step to understanding your costs. Your dealership will need to decide on your standard process for this estimation. Some dealers assign a set cost to any car prior to reconditioning. Others will do the trade walk and then assign packs and enter this information into their IMS/DMS. The first step is setting up the correct work.
Recon overage is when your actual reconditioning costs are greater than your estimates. You are not setting up enough money up front if your recon average is over your estimate. Therefore you are losing front-end gross that the trading customer should be paying for. If you constantly have recon overage, you need to look at your evaluation process for assessing each individual car or raise your estimate on cars moving forward.
Many can understand recon overages, but understanding recon underage could be a huge differentiator for your dealership. Recon underage is when your actual recon costs are under what you estimated.
If your recon average is under your estimate, then you might be missing trades. This one is BIG for a “velocity” store. Let’s say at the end of the month, you average $500 under your recon. Well, if you traded for 100 vehicles then that means there is $50,000 made on overestimating recon. This can be looked at in 2 ways depending on how you view your business.
One way to look at is, cool…I scooped 50k additional gross from customer trade in. Perfectly valid
…And the way I personally view it is, that is $50,000 I could have used to be more aggressive on trades. I would really dig into this if your Look To Book in vAuto is not where you wanted to be. You could look at this as saying hey, if I gave $2,000 more on some trades, then I could have closed 25 more car deals. Those 35 car deals would generate $2.5k-4k in additional gross….plus (depending on your trade-in %) you would possibly acquire 1/2 as many trades for your inventory..and the reconditioning that goes along with them. So if your average recon is $1,000 and you make $2,500 Front/Back Gross per vehicle…then when you look at the total gross generated you would be at (25*$2,500 = $62,500) + ($1,000* 12 = $12,000) = $74,500. That’s a 30% increase in gross from just “scooping” that 50k. This is also not including the sale of those trade-ins
How Trace can help
Trace pulls your estimated recon costs from your IMS or DMS. So your current estimation process stays the same.
Then Trace will track any additional costs associated with the vehicle during the reconditioning process. You will also be able to see a quick view of your reconditioning overages and underages for the month. Remember, the average overage/underage will tell you how much per vehicle you are losing or can give up on the next trade.
Used vehicles are becoming a fickle thing. For most dealerships, used vehicles remain as the true profit center. Yet, a lot of times we mistake generating gross for generating profit. While generating gross most certainly is the star, how that money flows through to the bottom line is one of the most fundamentally misunderstood mechanisms in the business. And it all starts with Holding Cost.
Holding cost is simply how much per unit it takes to hold and maintain your inventory. Generally, you would take your fixed expenses plus your gross floor plan expense and add them together; some dealers like to add in personal (lot porters, etc), but for the sake of this discussion we will just talk about Floorplan and Fixed Expenses. Now that we have your overall Holding Cost, we need to get a per unit basis. Most would just take your average inventory levels and divide the two. This, however, is wrong. You see, as your turn increases, an interesting effect occurs; your per vehicle holding cost goes down… thereby increasing your profit per vehicle. Lost yet?
Let’s say your average fixed costs plus gross floor plan costs are around $300,000 and you keep an average of 500 units in stock. Well, your Holding Cost per unit would be $600. Given a 30 day average month, then you’re paying $20 per day in holding costs on each vehicle. Now, here’s where most dealers get tripped up. TURN lowers that holding cost per unit. The more units you have run through your inventory, the lower per unit your holding cost is. The lower the cost, the more profit flows through to the bottom line.
Total Holding Cost: $300,000
Average Inventory: 500
Holding Cost Per Unit: $600
Now, let’s say you start turning your vehicles faster. Your sales volume increases, but your average inventory stays the same. Since your TURNING faster, the overall inventory that is attributed to your holding costs goes up, therefore decreasing your per unit holding cost
Total Holding Cost: $300,000
Average Inventory: 500
Additional Inventory from Turning: 100
Holding Cost Per Unit: $500
So just by turning your vehicles faster, you decreased your holding cost per unit by $100 per month. That means if you sell 200 used units per month, that’s an additional $20,000 in PROFIT per month!
Traffic jams, government paperwork, bathroom drains, make-ready departments; no matter what the bottleneck, it can cost you and your dealership time and money. Time and money are 2 things many want to hold on to, so speed to market is criticle for used car margins.
So how do we identify and measure bottlenecks in our recon process? By far the most important number we look at is the deviation in our process. This tells us the variability in our make-ready department. Said another way, how streamline is your process.
To visualize this, think of a water hose as your recon process. Now water can be pumped into it as much as possible, but there are 2 limiting factors to the rate of which that water comes out the other end.
If you were to pick up a water hose and water wasn’t coming out fast enough, what is the first thing you do? You look for “kinks” in the hose. That’s your process deviation. If anyone of your steps is higher than 24-hour deviation then you got issues.
The second factor is the size of the water hose, how wide is it? This is capacity. But as you can see, you can’t speak about capacity until you get your kinks out of the hose. Once that’s done then you can work on capacity.
Deviation measures the spread of your process. Let’s assume your average Speed To Market is 5 days and your Process Deviation is 4 days. That means a vehicle in your process could take 1-9 days to get to market……not very tight. However, if your average Speed To Market is 6 days but your Process Deviation is only 1 day this means vehicles in your process take between 5-7 days. So even though in example 2 your average speed to market is 1 day higher, it’s tight…it is not all over the board like the first example, which can cost you time and money.At Trace, we shoot for a sub 48-hour deviation.
To use this to make business decisions, I follow this procedure. When you look at each step in your process, if your deviation is good in that step, but the Average Time In Step is still high then that means you have a good process but you don’t have enough capacity and therefore need to add more capital to increase throughput. Capital can take the form of additional labor or equipment. But now you can put a $$ amount and calculate your return on investment. Here is some quick math: say your average Holding Cost is $50 per day per vehicle, and your detail department is taking 3.6 Days to get a vehicle out; then take the number of vehicles in your recon process, multiplied by your average holding cost multiplied by the difference between your current time in step vs your goal.
Average holding cost: $50 (estimated)
Number of vehicles in recon: 103
Current: 3.6 Days
Goal: 1 Day
Difference: 2.6 Days
Total: $50*103*2.6 = $13,390
So currently your Detail department alone is costing you $13,390. Now you can have a business discussion on whether you should add more detailers, wash bays, power washers, etc…what would be the cost and the increase in throughput(capacity). Gone is the guess work.