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Inventory Prediction Programs: Can They Be Used in the Special Finance Department?

Anyone that has heard me speak at Special Finance training seminars, or has read my writings, knows how important I feel having the proper inventory is when it comes to having a successful SF operation. It is one of my Ten Critical Components and the only component that I rate more important being the underlying commitment to SF. That commitment must run from top to bottom, to ensure all the other components are in place.

The bread and butter SF inventory currently ranges from the current model year to 2002, has an ACV of $7,000 to $12,000 (in most areas of the country), has under 50,000 miles and is a minimum of $500 below average left-hand book (whether it be NADA or Kelley Blue Book). Sourcing this inventory always seems to bring a fiery debate. Some dealers (or, more correctly, their used car buyers or managers) feel this inventory doesn’t exist. Their competition is often buying these vehicles by the truckloads, at the same auction or another one nearby.

Over the last two years, a number of what I call “Inventory Predictor Programs (IPP)”, have become available on the market. These programs are designed to look at a dealer’s historical sales by year, make and model, compare it to their current inventory levels, and then offer suggestions as to what inventory should be purchased. Some will involve comparing the data to the registration data that exists for their market area. Some will go so far as steering dealers to particular auctions, or arranging the purchase of the vehicle at a particular price, from another dealer or auction.

I believe these IPPs can be very helpful in assisting dealers to predict and manage traditional inventory levels. The more data a dealer, used car manager or buyer can use to most accurately appraise a trade or determine the price to pay for a vehicle at auction, the better job they should be able to do. Having the right units in stock, at the right levels and at the right price, will both maximize gross and prevent aging. It can also help prevent enterprising wholesalers (no offense meant) from setting artificial market values for used car managers who don’t attend many auctions.

With that said, after speaking with clients who plunked-down some serious long-term licensing fees for their new tools, I felt compelled to warn them of some traps that IPPs can set for them. Consequently, I feel the same advice should be passed on to my readers.

Most IPPs will look at a dealer’s sales from prior periods to predict the future. While that can be invaluable for the prime credit market, the correct inventory for the SF market is directly impacted by how it can be purchased in relation to the left-hand book value. An IPP may note that your dealership sold 11 Malibus in the same month a year ago, or even three months ago. Does that necessarily mean that you should expect to sell a similar number next month or that you should be able to inventory them at a similar or factored value? It shouldn’t.

Let me expound.

All 2007 models have likely been valued in the books by now, but anyone who has been in the SF arena for any length of time knows what some of the best inventory you can have in stock is. It is current year models that have not appeared with values in the used car guides. Many finance companies will advance based on a factor of “like invoice”, which gives SF managers significant spreads between what will be advanced and what they are able to buy the vehicles for.

As soon as the vehicles hit the book, that spread often evaporates. Anyone that has owned this type of inventory knows the pain that can arise from suddenly owning the inventory for more than book.

Most IPPs would not factor these situations. They would recognize the fact that you may have sold six 2007 Dodge Calibers last month that had been inventoried at a certain ACV and would suggest you maintain a similar inventory level next month. If those vehicles were purchased and sold under the “like-invoice” program, that prediction could be a disaster.

Similar situations can take place as the ideal SF vehicles shift and as the ability to buy the vehicles in relation to left-hand book changes. This often occurs due to fluctuating quantities of vehicles returned to auction by rental car companies.

Astute dealers and buyers know where the “holes” are in the market. It may be finding a new source of vehicle that suddenly becomes available. One of the best SF dealers I know is continually able to find these holes. For six months it may be Malibus, then Optimas, and later possibly Suzukis. The bottom line is most of the IPPs I’ve seen don’t offer this vision for the SF department.

The IPPs are based on many things. Book and auction values are part of the equation. Book values have always just been guides. Sharp used car managers and buyers use them as such, and know where the vehicles trade in respect to the guides.

When it comes to IPPs and SF, remember the same. Just because the IPP gives you a green light or suggests to maintain a specific quantity in inventory at a certain price, understand that you cannot blindly accept that information as a given. For SF managers, this means communicating with the individuals buying your vehicles to keep them aware of pertinent information. For the dealer, make sure that both sides are communicating. IPPs can be terrific tools, and most tools (when used properly) can be of significant benefit to your bottom line.

Vol 5, Issue 2


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