It has been said that more new-car dealers fail because of problems with their used-vehicle departments than for any other reason. In my experience, the key reason is neglect.

Your used-car inventory represents the fastest-depreciating asset in your dealership. It also represents the greatest opportunity for return on your investment. So let’s take a look at how the proper stock, combined with a foolproof distribution strategy, can turn a profit sink into a profit center.

Find the Right Mix

The most successful used-car operations have a solid mix of inventory. This mix is based on both internal and external market data. While it is extremely important to know which vehicles sell well on your used lot, it is of equal (if not greater) importance to know what is being sold by your competition in the surrounding market.

There are numerous software programs that can help identify core vehicles that are good sellers in your market. While it may be clear that the 2012 Taurus sells well based on internal data, for example, it doesn’t do much good if the dealer down the street is outselling you three-to-one by stocking 2010 Accords.

Another common used-car inventory mistake is stocking too many of the same franchise units carried by your new-car department. This may discourage customers entertaining the thought of trading brands. It could also have an adverse effect on customers who may be looking to purchase a pre-owned vehicle of any stripe.

Remember, potential customers are going to assume that any given dealership has its own franchise in used cars. Stocking too many late-model units of the same brand puts your new and used departments in direct competition with each other. When that happens, your used-car department is no longer bringing in incremental income; it’s taking away new-car sales.

The best used-car managers are good at non-franchise acquisition. Aggressively pursuing external market data (e.g. cross-sell reports) and using this information as a guide when stocking your used inventory will lead to increased sales.

Keep It Fresh

Aging inventory is another common issue. While many dealers have aging guidelines in place, they are often haphazardly enforced or simply allow vehicles to stay in stock too long. Aggressive management of aging is essential to improved profitability. Assigning consequences to those responsible for managing your inventory provides management with a clear picture of the importance of this issue. Stagnant money yields low returns and high losses.

Stagnation can occur at a variety of places in the life of a used vehicle, from how quickly it gets in or out of service to delays with off-site reconditioning. Holding used-car managers accountable to strict aging guidelines will help improve efficiency. The following is a general guideline for inventory age distribution:

  • zero to 15 days: 50% of inventory
  • 16 to 30 days: 25% of inventory
  • 31 to 45 days: 15% of inventory
  • 46 to 60 days: 10% of inventory

The more informed the used-car manager is about basic things like how often a vehicle has been taken on a test drive and how many deals have been worked on the unit, the better able they will be to decide whether the unit should be kept in stock. This decision should be considered well before the vehicle hits the 30-day mark. Return on investment is the expectation. Informed and aggressive action is the key.

Review your aging guidelines and distribution of inventory, as well as places where your money may be stagnant. If a vehicle isn’t getting much attention, don’t be afraid of disposing of it earlier rather than later, and reinvesting in a different unit that will drive traffic and create gross. Be aggressive!

Bill Mokry is West regional manager for Service Group, an F&I income development company. [email protected]