4 Ways to Make Smarter Inventory Sourcing a Competitive Advantage

Special Feature by Dale Pollak, founder of vAuto.

As the youngest of four boys, I fully understand what it’s like to be last in line.

It was the worst at the dinner table, when dessert went around. I hated it when my brothers had their turn first, picking off the best piece of cake or cookie before me.

But I got smarter. For example, when my Mom had fixed up one of my favorite desserts, I’d help her get it ready for the table. If we used individual dessert plates, I’d save the best for last, and put it at my spot.  If the dessert required serving, I’d assist, and make sure I got a decent piece or portion.

I share this story because independent dealers now face a similar situation as they try and source wholesale vehicles from auctions.

In today’s market, independent dealers are often the last in line. In some cases, the best cars won’t even cross the block, because they’ve exchanged hands in online auctions and trading networks, rather than a physical sale. In other cases, independent dealers aren’t aware of opportunities in other lanes, because they’re accustomed to focusing solely on the car in front of them.

And, in the heat of bidding, it’s difficult for independent dealers to keep up with competitors who use the latest technologies and tools to make informed, split-second decisions to back off or bid more on specific cars.

Just as I discovered as a child, eventually, the time comes when you have to get smarter. I believe this time has arrived for independent dealers who aspire for improved profitability and sales volume, and recognize that more effective and efficient sourcing of wholesale vehicles is a critical first step to improving your performance as a retailer.

A More Challenging Wholesale Environment For Independent Dealers

In the past several years, a remarkable thing has happened in the retail used vehicle market. The share of used vehicles sold by franchised dealers has increased—at the expense of independent dealers.

Broadly speaking, this shift owes to a renewed emphasis on the part of franchised dealers to do a better job in their used vehicle operations. During the recession, many franchise dealers applied greater attention and care to their used vehicle sales volumes and profitability. Initially, this operational emphasis came from necessity. New car sales had essentially dried up and they effectively had no choice.

Since then, however, many of these dealers have learned to appreciate the bottom-line boosting power of a high-velocity used vehicle department. It’s not uncommon for these dealers to consistently sell two to three times as many used vehicles in a month as they did three or four years ago.

As I look ahead, I don’t anticipate franchised dealers will let up on the gas pedal in used vehicles. In fact, they’ll continue to get better at what they do.

But while these competitive pressures create challenges for independent dealers, they also represent significant opportunity.

Independent and franchised dealers still command roughly equal shares of the retail used vehicle market. Likewise, there’s even greater opportunity for independent dealers to grow their operations by becoming more effective and efficient in the way they source wholesale inventory and the processes they use to retail these vehicles to increasingly well-informed buyers.

The following are four best practices I would recommend that independent dealers embrace to find the wholesale inventory they need to drive a higher level of performance and profitability at their dealerships:

1. Understand the retail opportunity inherent in every vehicle.  In today’s Internet-driven market, it’s increasingly important for any dealer to understand, at the point of purchase, how a specific vehicle might perform in your market. To address this, many franchised and larger independent dealers use technology and tools to determine how much they can pay to acquire the unit, given competition from the same/similar units available in the retail market.

When they access this data, the dealers typically find that “home run” gross profits of $2,000 to $4,000 on a vehicle are increasingly rare thanks to a highly price-transparent retail market. In addition to setting more market-realistic expectations of a vehicle’s potential, the data also give dealers the knowledge of how long it should take to retail a vehicle.

With these insights, dealers can plan accordingly, and adjust their merchandising and pricing efforts to maximize each vehicle’s front-end gross profit potential and minimize the risks of market volatility. In this way, a dealer’s inventory sourcing efforts become truly aligned with the rest of their retail operation.

2. Expand your inventory source network. In the 2014 NIADA member survey, nearly 30 percent of independent dealer respondents listed the lack of quality retail and wholesale inventory as a top problem. I would submit the problem isn’t really a lack of inventory. Rather, the problem rests with the way independent dealers choose to shop for the inventory they need.

I’ve come to this conclusion in part by recognizing that wholesale supplies of used vehicles are increasing, thanks to a healthier new vehicle market, a better economy and the rise of off-lease vehicles in the wholesale pipeline.

Likewise, the NIADA survey also showed less than 30 percent of independent dealers use online auctions/outlets to acquire inventory from auctions.

Taken together, the data suggests opportunity for independent dealers who expand their acquisition networks. For franchised dealers, this expansion has largely followed decisions to use online, rather than physical, auctions as a primary part of their inventory sourcing strategies. In fact, franchised dealers tell me they now acquire the majority of their wholesale vehicles from online auctions because they offer a more efficient way to quickly research, bid on and purchase a wider variety of vehicles.

As independent dealers include online auctions as part of their vehicle sourcing strategies, I believe they’ll find that there’s an ample supply of available inventory. Indeed, the challenge will become how to use these online channels more effectively and efficiently than the competition.

3. Get past your traditional sourcing techniques. I realize that many independent dealers refuse to acquire inventory unless they can see, smell and touch every vehicle. Unfortunately, this car-by-car approach is more inefficient and time-consuming than using technology and tools to quickly evaluate a vehicle’s opportunities and risks, without seeing it in person.

I also recognize that independent dealers distrust the reliability of the condition report data the auctions provide. On this front, I think it’s fair to say franchised dealers have done independent dealers a favor—they’ve pressured auction companies to standardize the process for inspecting and reporting vehicle conditions. There’s less variability in condition report grades across auction networks, and the average time auction companies spend inspecting vehicles (e.g., 22 minutes for Manheim) is typically longer than most dealers take as they physically inspect a vehicle.

In addition, auction companies have created vehicle buy-back programs and improved their arbitration services to address problem cars that dealers purchase sight unseen.

To be sure, there’s always room for auction companies to improve the protections they provide dealers who purchase vehicles online. But I would submit that independent dealers who fear they’ll get stuck with a bad car purchased online face much less risk than they used to.

4. Increase the throughput of your retail operations. In the last five-plus years, many franchised and some independent dealers have adopted a more efficiency-focused approach to managing their used vehicle inventories. This turn-and-earn strategy, which I call the Velocity Method of Management, emphasizes a faster pace of retail sales to mitigate the effects of margin compression and market volatility.

With this strategy, the dealers treat every used vehicle they acquire as an investment that’s required to deliver maximum return in the shortest amount of time. The dealers draw firm retail timelines and often regard vehicles that don’t sell within 45 days as a management failure.

But perhaps most significant, this operational strategy does two important things that pave the way for ongoing growth and success.

First, the dealers find they don’t need to increase the size of their inventory investment or lot space to retail a larger number of vehicles. In fact, many franchised dealers now sell a greater volume of vehicles by stocking fewer of the right cars for their markets.

Second, the dealers find that their new focus on inventory and sales velocity—and the additional profitability that comes with it—provides them momentum and motivation to consistently innovate the methods they use to source inventory, giving them a competitive advantage over dealers who resist changing the way they look for and purchase inventory.

Taken together, these best practices should affirm what many independent dealers are no doubt feeling—that today’s used vehicle market is more challenging and difficult than it used to be.

Faced with this reality, independent dealers have an important choice to make. You can do what I did as a child and find a way to create advantage and opportunity by working smarter. Or you can hope that the rise of the Internet and the difficulties of acquiring and retailing the right inventory for your dealership will someday pass.

If I was a betting man, I’d put my money on dealers who recognize that the time is now to become better, more innovative and more efficient used vehicle retailers.