Ongoing instability in the automotive marketplace is making it increasingly difficult for dealers to deliver the strong profits to which they have become accustomed. Re-examining their approach to managing their used-car inventory is one strategy to create stronger connections across both their wholesale and retail operations.
Thanks to a quickly shifting economy and volatile depreciation, dealers need to re-examine their approach to inventory management to remain profitable, not just today but in the coming years as well. This means shifting away from treating every car with the same sense of urgency.
Utilizing the power of data science to manage inventory can help navigate these shifting waters. A new inventory management approach in the market, known as variable management, uses vehicle-specific data to help dealers understand each vehicle’s individual investment value and retail potential and then suggests appropriate action to achieve the best outcome. On a day-to-day basis, variable management recommends pricing urgency on vehicles that offer the greatest risk and least potential for profit, and patience on vehicles that offer the least risk and highest potential for ROI.
Dealers who consider shifting their inventory management strategy can learn how data can paint the picture they need to see.
Unprecedented global economic conditions led to unpredictable conditions in the used-car market. As the lingering effects of the pandemic begin to lessen, the used-car market continues to show volatility due to the return of new-car inventory and pressing economic concerns, such as the sharp rise in interest rates.
To head off volatility, it’s important to consider the potential ROI of each individual vehicle based on attributes such as Cost to Market, vehicle age and price segment, as well as market conditions. Accurate, frequently updated data is crucial to successfully managing this process because it allows dealers to make a well-informed decision instead of relying on previous experiences or, even worse, gut instinct. Data that is up-to-the-minute is invaluable in a quickly shifting market.
Variable management for used inventory allows dealers to build a mix of used and new vehicles that complement each other, not compete against each other, and reduces some of the strain of volatility.
As demand shifts downward, dealers are often faced with a race to the bottom that can hurt overall profitability.
A shift to variable management can help mitigate these profitability pressures by treating each used vehicle differently according to its unique profit potential for the dealership and its market. Instead of applying a broad-brush stroke, variable inventory management encourages dealers to price certain cars to move quickly, while empowering them to hold out for greater profitability on other vehicles with additional patience. They can’t profit big on every vehicle, but with the right data, they can maximize the ones that have the greatest potential for profitability.
Losing gross profit on a vehicle is something every general manager is wary of, but in today’s volatile market, the threat of profit loss is all too pressing. Perhaps a trade came in that was unwanted, but got the deal done or is one of those factory unicorns that only a specific person will be looking for. Whatever the case, tough cars require a higher level of proactivity.
Instead of waiting for a miracle, variable inventory management encourages dealers to move challenging vehicles quickly off the lot instead of waiting for them to get to the point of becoming even bigger gross profit losers. Truth is, they may be losers anyway, but variable inventory management enables dealers to quickly assess and off-load low-potential vehicles, so they can bring better – and more profitable – inventory onto the lot.
Conversely, pressure to push for higher volume numbers can leave gross profit on the table, especially on high-potential vehicles.
The right data enables dealers to identify which vehicles on the lot are the “platinum” ones, considered highly sought after in the market. Unfortunately, what we see far too often is that these coveted vehicles get sold for far too less, while bronze-level (or the challenging cars mentioned above) vehicles are priced way too high. Dealers end up leaving money on the table with their high-value cars while taking bigger losses with their less-desirable units.
Using variable inventory management enables them to know which high-potential vehicles can wait for the right buyer and which lower-potential models should be pushed off the lot faster. This may be a culture change at the store level, but having the right data on hand allows general managers to institute these fundamentals.
Today is the day to start leaning into variable inventory management to determine the real value of a vehicle so dealers don't sell themselves short.
Derek Hansen (pictured, left) is vice president of operations, inventory management solutions for Cox Automotive.