While there are about as many different views on inventory management as there are used car managers, all dealerships face the same challenges when acquiring inventory. The supply of vehicles to buy at auction is low, and wholesale prices are up. Auction fees are inevitable. Dealers also have to get vehicles to the lot in a timely yet affordable manner, and let’s not forget about evaluating trade-ins and managing reconditioning.

Four dealers from across the country – from Sioux Falls, S.D., to the Washington, D.C., area – shared insight on today’s market and some of their strategies for overcoming these inevitable challenges with used vehicle acquisition.

Lions in the Capital
Easterns Automotive Group is comprised of six locations in and around Washington, D.C. The stores sell a combined 500 units per month and stock about 1,000 vehicles. Robert Bassam, CEO of the group, responds to the woes of buying inventory by going on the attack.

“We’re lions … we want to be on top of that food chain and get ours, and we’re using the online experience to do that,” he explained. About 85 percent of the group’s inventory is acquired via online auctions, and the bulk of his online buying (about 70 percent) is via ADESA.

Buying that many cars online takes more than a few clicks a day. Bassam and two other buyers handle the online buying; they purchase from 17 different auctions east of the Mississippi River. Limiting purchasing to the eastern half of the country keeps their transport time down to about seven days to get to the lot, and the average per-vehicle transport cost is about $250.

“Online buying is a lot more sophisticated. We back into our data,” he explained. To prepare for online auctions, they create wish lists based on their stores’ historical data and review condition reports. “Then, we seek those cars within the shipping distance that we’re willing to go to,” he said. “[Buying online] really expands our buying ability. It expands our field, the number of cars we look at. We’re able to find a targeted inventory that we want, versus whatever is on the shelf that day.”

To help organize the online buying process, he uses the tool Auction Genius. “I’m one of the original pilots of Auction Genius. … As much as I want everyone to know about it, I don’t want them to know about it,” he quipped. Streamlining the process is essential to productivity. Bassam said, “We look at 1,000 cars. We will mark about 100 cars [to research]. We will bid on 20 cars to get one … That’s a lot of work.” All that work to buy one car adds up quickly, considering the group buys about 600 vehicles a month at auction.

While online buying is how Easterns stays at the top of the food chain, he said, “It is not always the best experience in the world.” However, the pros outweigh the cons, and one of the pros is not everyone has committed to online buying like he has. In 2011, only 25 percent of vehicles sold by Manheim were online purchases.

Bassam said, “It’s just new and unknown, and not everybody around the country is comfortable with it … All in all, for Easterns, it absolutely works. It’s given us an edge.” Thankfully for him (and other dealers), the online acquisition experience has improved over the years. “When I started [buying online] four years ago, the technology was not one-tenth as good as it is now.”

One thing Bassam hasn’t quite figured out is why the fee structure is different for various online auctions. “[The buyer’s fee] varies. Everyone varies. There are sales here on the east coast that rank the highest on fees. I don’t know their formula. I wish I knew.” He added that fees are on the rise. “It’s the worst I’ve ever seen it … it’s a mind-boggling fee,” and it’s something he must consider when buying.

“It gets in your head when you’re bidding. I’ll pause a few hundred dollars back of where I want to be because I’m thinking, ‘That’s plus, plus, plus.’” He recounted, “There’s a $50 to $70 online purchasing fee, and there’s a PSI (post-sale inspection) fee of anywhere between $70 and $115 … Then, there’s your average buy fee that’s reaching near $500.”

Easterns still buys about 15 percent of its vehicles at traditional auctions. The cars purchased at physical auctions aren’t your run-of-the-mill used cars. He explained, “There’s a certain caliber of cars that you have to see in person.” For example, if he’s looking to buy a late-model Mercedes S-Class, he wants his buyer to see it. “The description in the condition report says one thing, but he sees it with his professional eye and can make that decision on that car.” Another type of car he prefers to buy at auction is one under $10,000.

While Bassam acknowledged that acquiring inventory comes with challenges, he said, “That’s the fun of it though, isn’t it?” Spoken like a true lion.

Casting a Wider Net
Kevin Nachbar, the vice president of sales and remarketing for the McCarthy Auto Group in Olathe, Kan., acquires inventory for the three-location, six-franchise group. He mainly focuses on the two GM stores, and said, “It’s a job to try to keep inventory flowing into them. It’s not getting any easier.”

A couple of years ago, off-lease vehicles made up of a significant portion of what he acquired. He recalled getting warnings from Ally (previously GMAC) that the supply of off-lease vehicles was going to drop, but he never anticipated how low it was going to get. “That supply of pre-owned cars that used to come out of the lease market seems to me like it’s down 75 to 80 percent, even from last year.”

To combat the lower supply, Nachbar is casting a wider net in his search for inventory and loosening his buying parameters. He said, “You’re having to look at cars with higher miles, cars that have a worse condition, and you’re paying more aggressive prices. Then, you’re trying to pass that onto the consumer … From a dealer’s standpoint, it seems like your margins are continuing to be squeezed.”

Ideally, he’d like to buy model years 2007 to 2010 with fewer than 30,000 miles, but now he’s buying down to model year 2006 with up to 50,000 miles (sometimes even reaching 70,000 miles). “I can certify vehicles up to 70,000 miles,” he said, “but it’s very difficult to buy an expensive vehicle … that has 55,000 to 60,000 miles on it because there aren’t that many people that want it.”

To find the best vehicles for the McCarthy lots, Nachbar doesn’t attend traditional auctions. “I don’t go to physical auctions at all. I haven’t for probably 10 years. I’m one of the guys that embraced the online acquisition process from the beginning.” He makes sure to leave no stone unturned online. “I use all the auction platforms to research and find vehicles … Manheim, ADESA, OpenLane, SmartAuction, AuctionPipeline. Those are really the five sources that I try to look at almost every day,” he said.

To help with the online buying process, he uses a stocking guide from FirstLook (the inventory management tool he uses). “For example, if you want to run a 45-days supply of inventory, then it’s going to break out by make and model which of those you need to have in stock and it’s going to tell you which years … you need to be stocking.”

However, he doesn’t always find what’s on the list. “What you need and what’s available are two different things.” He explained, “You still have to use your gut and emotions, and sometimes you duplicate vehicles you already have in stock based upon [availability] and … gamble a bit on being overstocked in that particular area.”

There are other factors he must keep in mind. “I have to look at the freight component on what it takes to get it [here], and then I’ve got to look at the auction fees and all the reconditioning expenses … and I have to have a reasonable margin to work with. It’s really time-consuming.”

Being in Kansas, centrally located in the contiguous 48 states, provides one advantage—the ability to buy vehicles nationwide with reasonable transport costs and times. He usually has vehicles on the lot within a week and spends an estimated $500 per car in transport fees. To arrange transportation to the dealership, the group uses CentralDispatch. Nachbar and his team post the vehicles they need shipped and the price they’re willing to pay; then, shipping companies contact the dealership with offers to transport the vehicles. 

Nachbar said CentralDispatch has a rating system similar to eBay, so he can research a company before contracting it. “We do our due diligence on transport companies to make sure we use the most dependable and reputable ones that are available,” he said. He estimated he saves a couple hundred per car using the service. “We price the cars at a fair rate, and because we’re not paying a middle broker – we’re dealing directly with the transport companies themselves – we’re saving that expense.”

Another way he’s stocking the lots is with trade-ins. “We’re keeping a lot of [trade-ins] that we used to wholesale. We’re having to make it work.” He said the stores now keep 60 to 70 percent of trades, most of which have fewer than 100,000 miles.

More recently, he’s been considering his service drive as a place to acquire inventory. He posed the questions: “How can we figure out if cars coming into our service lane are ones we are in need of on our used car lot, and how can we present competitive bids to those consumers in a professional, businesslike manner, and then relate to them what kind of deals we have for them on our new cars or even a newer-model used car?”

He’d like to set this process in motion but said the biggest issue is “manpower.” He feels like this task requires someone who is knowledgeable about the service department and “can put a quality appraisal together in a timely manner that will turn that customer into a sale or purchase.” He said, “We’re in the process of discussing how we would do it, and the biggest key right now is personnel.”

Ready to Turn on a Dime
Brad Dumdie, the owner/operator of Autoland Inc., consisting of three locations in Sioux Falls, S.D., does 90 percent of the used-vehicle buying for the dealerships on online auctions, and he expressed the importance of always staying nimble. He said, “It’s like the stock market. It can turn – what’s selling and what’s not – on a dime.” And it’s no eight-to-five, Monday-through-Friday job. “I drive my wife nuts because sometimes I’ll be on the computer until two in the morning looking at the prices.”

He’s been buying online for over 10 years now, and he recalled the one reliable auction he purchased from when he first started. “I was using a GM Manheim auction out of Florida. That was the only dependable one that had condition reports.” Now, sometimes he buys from different auctions simultaneously, and there are several auctions he regularly purchases from (mostly Manheim).

He said, “The reason we use Manheim auctions the most is because they have a better grading and scoring system.” He explained that vehicles are given a score of up to 5.0. Dumdie doesn’t typically buy anything under a 2.9, and if he’s considering something with a lower score, he “really scrutinizes the condition report.”

He added, “When you’re buying something that’s a 4.0 to 5.0, you’re pretty safe other than checking the [tires].” Over the years, he’s become accustomed to how the different auctions score vehicles. “With the auctions we use, we’re kind of used to which ones are tougher on the condition reports.” When he’s buying at auctions that grade tougher, he’s more willing to buy cars with lower scores because he knows a vehicle with a score of 3.5 might be considered a 4.0 elsewhere.

In total, he buys about 80 cars a month and prepares for sales on a daily basis, which is a time-consuming process. “I would spend the whole night prior looking at condition reports, making my notes, checking CARFAXes, looking at everything from damage to tires to histories, and get myself prepared.” He recently started using the Auction Genius tool to help simplify the research and acquisition process, and said it has been a very valuable tool. “It’s shaved hours off of my buying process.”

As for online buying, he said, “I think it’s the future. Why wouldn’t it be?” He said if dealers can do the necessary research to buy vehicles intelligently, why wouldn’t they just buy online? One of the benefits to buying online, he said, is having access to more information. “There’s just a lot more knowledge at your fingertips … I want to know what the CARFAX is … I need to know if it’s had an accident and how many owners it’s had,” he explained. “CARFAX has become such a huge deal for consumers … You actually have to have so much more information because the consumer has so much more information.”

When researching cars online, he makes sure to check the tire tread on every vehicle. Autoland spends $400 to $500 a car on recon, and the average is kept low, in part, because Dumdie tries to buy vehicles that don’t need new tires. “The cost of tires, rubber, has gone up … so much that it’s a factor in buying a car or not. When we look at them online, we look at the tread depth, and if it’s too skinny you’ve got to add money to the car [for recon] or you just don’t buy it.”

To supplement the cars he buys at auction, he also keeps as many trades as he can, but said he doesn’t get many (something he attributed to being an independent dealer). The trades he keeps typically go to his “budget lot,” which houses cars that retail for up to $5,000. About 20 percent of the vehicles on the budget lot are trades.

His other two lots stock vehicles that retail in the $5,000 to $30,000 range, and he shared some insight into what’s performing well. “The crossover section has been particularly strong, the Acadias and Enclaves … That’s probably the hottest market right now. Surprisingly, even with the high gas prices, we’re selling an awful lot of … H2 Hummers and trucks with Hemis … It baffles me because nationally, it’s looking like small cars are everything. Maybe it’s our Midwest area.”

Keeping an Eye on The Bigger Picture
At Grogan’s Towne Chrysler Jeep Dodge in Toledo, Ohio, the store might sell a used vehicle and only gross $200 on the front end, and Marc Ray (partner and general sales manager) is OK with that. He explained that front-end gross isn’t the end-all, be-all number to look at. “I’m going to finance it. I’m going to service it. I’m going to get a trade-in. I’m looking at how much money I’m making per transaction. … I do $750 in finance. I make $300 or $400 in [internal] service [work]. I get a $250 doc fee. I get a customer back in my service department, for life, hopefully. Then, I take in a nice trade-in … and that’s the one that I make the money on.”

While he’ll accept a lower front-end gross from time to time, it’s not a regular occurrence. On the occasions it happens, though, Ray doesn’t stress about it. He takes a bigger-picture approach and focuses on inventory turn. “You’ve just got to make decisions quick … and move on,” he said. As of mid-May, the dealership was on a 28-day inventory turn, which means the dealership will turn its inventory more than 12 times in 2012, provided it maintains that average.

The dealership does gross less per vehicle than before Ray adopted this new philosophy, but the dealership easily makes up for it (and then some) by selling a lot more cars than it did in the past. He said gross per vehicle is down by about one-third, but the store is selling 300 percent more vehicles. Even still, his grosses are nothing to blink at; the year-to-date average total gross (front- and back-end) per used vehicle retailed at Grogan’s Towne Chrysler Jeep Dodge is between $1,800 and $2,000. NADA Data’s March 2012 Dealership Financial Profile revealed that dealers are averaging $2,180 per used vehicle retailed in gross profit.

While he said some dealers may think his strategy is nuts, the bigger-picture approach Ray adheres to is paying off very well—and not just in the used-car department. Granted, the dealership has had a couple of record-breaking months this year in the used-car department; however, internal service work and parts sales have jumped as a natural result of stocking and selling more used cars.

Getting back to inventory acquisition, he said, “There are so many different things we’ve tried and so many different things that you can do.” His acquires the bulk of the store’s inventory via online auctions. “We’ve averaged about 75 purchases a month for the last 12 months … and a couple months where [my buyer’s] purchased 100.” He conceded, “I understand everybody’s complaints when they’re talking about [having trouble] getting inventory, and we’ve found some ways to acquire inventory and still be able to turn it.”

He’s one of many dealers who swear by vAuto and recently began using the company’s Provision tool to help with acquisition. The tool assigns a letter grade (A, B, C, D or F) to each car in the dealership’s market based on demand, interest, volume in market, market day’s supply, profitability, availability, and the dealership’s past experience with the car. Ray targets vehicles by letter grade.

For example, he tells his buyer to only look at vehicles with a grade of B- or better. Once his buyer started buying only those vehicles, the dealership’s inventory became much more popular on AutoTrader.com, with cars turning up on more searches and getting more click-throughs to vehicle-detail pages. The real kicker is he also saw an increase in sales as a result.

The store is selling about 150 used vehicles a month, and he hopes to continue to grow that and claim the top spot in his market for used vehicle sales. He said, “We’re number two in the city of Toledo now.” The number-one dealership sold 230 used vehicles in April 2012 to Grogan’s Towne’s 148. Prior to adopting its current inventory management strategy in early 2011, the top store outsold Grogan’s Towne four to one. Now that the spread is much closer (around 1.5 to one), and he’s made it a goal to claim the top spot. “I’m going to catch those guys.”

With so many vehicles coming in, it’s a challenge to stay organized. He keeps everything straight by tagging keys with three different-colored zip-strips, each signifying a different part of the intake process (one for photos, one for service and one for detail).  Once a car has been through each phase of the process, the corresponding tag is cut from the key ring.

Ray explained, “Any time I look at my keys, I can see what needs done on a car.” In most cases, the process of getting vehicles front-line ready takes four or five days. Much of the work is done in-house, but he’ll send out 20 to 30 vehicles a week for detailing to ensure cars are not sitting on the lot waiting if the detail department gets overloaded.

Vol. 9, Issue 7

About the author
Jennifer Murphy Bloodworth

Jennifer Murphy Bloodworth

Senior Assistant Editor

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