Dale Pollak
Last year dealers experienced an unprecedented phenomenon: difficulty sourcing used cars. To be clear, there was no shortage of used cars but rather a tightening of supply and a wholesale market that rose faster than the corresponding retail market. The result was that dealers found it very difficult to buy used cars. It is likely that this condition will continue and even worsen this year.
There are, however, several strategies that dealers can use to ease the problem of sourcing used vehicles. First, dealers can and should expand the horizon of vehicles they will consider stocking. There are always segments of vehicles, in particular makes and models, which are available at more reasonable prices than others. Often, however, such vehicles are either not recognized as such or otherwise excluded due to the fact that they are not a vehicle that the dealership has sold in the past or is consistent with their new car franchise brand. By simply expanding the set of acceptable vehicles for consideration, dealers will have more choices and opportunities. The most current technology allows dealers to identify these types of vehicles as well as where they can be sourced. Remember that when you have market knowledge that is not commonly shared and you can act upon it that constitutes a true competitive advantage.
A second strategy that can be employed is to expand the sources of acquisition. Most dealers use a small number of local auctions. While these locations may continue to be useful, they do not provide dealers with the maximum number of choices and opportunities. This means that dealers may have to undertake the burden of traveling regionally or potentially even nationally to find the vehicles they want at the prices that are right. The technology of online purchasing can ease the burden of using distant auctions. Every dealer should invest the necessary time to properly identify and learn about the available tools to purchase vehicles online.
Having expanded the types of vehicles and number of auctions, there is still much more that a dealer can do to source vehicles more effectively. For example, the dealerships appraisal process and win rates (look to book) become critically important. Today, the appraisal process takes on the added dimension of importance as a sourcing mechanism as well as its traditional role as a deal maker. Dealerships should review their process of appraising, win rates, and even manager and sales person incentives for achieving superior performance. Remember that sales people become sourcing agents for the dealership every time they encounter a customer with a trade. Properly managing the appraisal process will result in both more sales as well as more trade-ins for reasonable prices.
There is still more. However, to go further requires challenging long standing dealership management practices. The first such approach is to reduce the amount of expected gross profit necessary to justify the acquisition of a vehicle. Most managers won’t justify the purchase of a vehicle unless they can foresee at least a $2,000 profit. Often, the wholesale going price of the vehicle is $500-$1,000 more than what the buyer thinks it needs to be. If they were to pull the trigger it would mean that the profit opportunity might only be $1,000-$1,500. But the choice is not between purchasing for an expected profit of $2,000 versus $1,000 but, rather, a choice between $1,000 and nothing. There are simply periods of times in markets that call for temporary adjustments in expectations and changes to traditional beliefs and practices.
Just to turn the temperature up even a bit more, I am going to further suggest that dealerships re-think the amount of their pack. Packs cause buyers to expect to purchase vehicles that allow them to make expected profit plus the pack amount. This creates an even greater perception that cars can not be purchased for reasonable dollars. Once again, there are moments in markets, and this is likely one of them, where adjustments to past practices should be considered to maximize the opportunity that exists.
Whether or not a dealership adopts any or all of these suggestions, it is a certainty that sourcing vehicles will continue to be of great importance to used vehicle operations. The amount of time necessary to identify the hottest vehicles, understand what price to pay, locate their sources of sale, and execute their procurement will be greater than ever. It is also a certainty that traditional used car managers have more than ever to do with fewer resources. This is an organizational problem that further impairs the dealership’s ability to source vehicles. I therefore recommend that dealerships provide used car managers with the assistance of stocking analysts. A stocking analyst can do much of the computer legwork of identifying vehicles and the locations where they can be sourced. They can even create appraisals in order to know how much can be paid for each vehicle. Such an individual doesn’t have to be highly compensated and may likely already be on the payroll. They simply need to have strong analytical ability and a general sensitivity to the used vehicle marketplace. Once the work of the stocking analyst has been performed, the traditional used car manager can review and approve the stocking plan and purchase recommendations prepared by the analyst. Such an approach facilitates aggressive sourcing and allows traditional used car managers to focus on all of the other critical tasks for which they are responsible
The bottom line is that the market is creating new challenges. Dealerships must respond with new thinking and solutions. There is no doubt that the new challenges in sourcing can be overcome – there just needs to be a willingness to do so.
