Test-Drive These Best Practices to Rev Up Your Used Car Operations

June 09, 2017

Used car sales represent a hefty chunk of revenue and profits for many dealerships. They also can help diversify a dealership’s income stream — if new car sales are lagging, used cars can help make up the difference.

This obviously makes it critical that dealerships pay as much attention to the used car side of the lot as they do the new car side. Here are some suggested best practices to help you fine-tune your used car operations.

Manage used inventory wisely

Improving used car operations starts with better managing your vehicle inventory to increase annual turns. The industry standard is to turn your used inventory six or more times a year, which equates to a 60-day supply of inventory. Doing so could potentially boost your annual revenue by hundreds of thousands of dollars.

For example, if you carry $2 million in used car inventory and your gross margin is 10% or $200,000, your revenue would increase by approximately $400,000 if you increased from six to eight inventory turns a year.

Top performing dealerships use a combination of technology tools and research to help them maintain the right levels of used car inventory. For instance, inventory management software programs (RedBumper from CDK Global, Provision from vAuto and others) can recommend which types of used cars to buy and how to price them.

You can supplement such tools by studying vendor cross-sell reports to find out what consumers in your market area are actually buying. Obtaining monthly vehicle sales-registration reports customized for your market will help you match your used car inventory to market demands. Also scrutinize manufacturers’ reports and your own historical data for information about sales in your area.

As for vehicle mix, a recent trend is to widen the variety of used car brands offered beyond the franchise. Traditionally, 60% to 80% of used cars on a franchise dealer’s lot have been the dealership’s own brand. However, some dealerships are focusing more on stocking the best-selling brands in their marketplace, regardless of whether or not they match the franchise brand.

Vary used car sourcing

Many dealerships today are relying more and more on online auctions to source their used car inventory. Doing so provides access to a much wider array of vehicles than just attending auctions in person. Participating in online auctions, such as Auto Auction Mall and Davis Auctions, also eliminates the time and cost required to travel to brick-and-mortar auctions.

The downside is that you’ll incur shipping costs when you buy vehicles online that are located outside your area. You could reduce these costs by having employees transport vehicles located within a certain radius, such as 100 miles. Buying relatively close to home will also reduce shipping costs and enable you to get cars on your lot faster.
Another recent trend is buying inventory on a more frequent basis. Some dealerships are buying fewer cars at each auction but visiting auctions more often — for example, several times a week. This can provide more flexibility when it comes to reacting to market fluctuations.

Recondition vehicles efficiently

Reconditioning used vehicles is a critical but often overlooked part of used car operations. Every day that a used car is being prepped for sale is a day it’s not being test-driven and purchased.

To control this factor, establish a turn policy for used car reconditioning, such as 72 hours. Then enforce it. This might require revamping your reconditioning procedures and resetting your service employees’ priorities.

At some dealerships, service employees have been taught to focus primarily on customer-pay work and let used car reconditioning fall by the wayside. Employees should be retrained to understand that reconditioning work is just as important. Another way to correct this practice is to adjust the internal labor rate to equal your retail door rate so that there isn’t a profit motive for prioritizing customer work over used internal work.

Speeding up reconditioning also might require investing in additional resources, such as a reconditioning manager or one or two additional service technicians. This investment can pay off if it shaves from three to five days off of your reconditioning turnaround time.

And here’s a tip for small dealerships: Take your oldest used car to lunch. You may notice what your customer isn’t telling you. Then send the car back to the detail shop.

Improving your performance

Don’t make the mistake of focusing so heavily on new car sales that you neglect your used car operations. By implementing some of these best practices, you should be able to rev up sales in this segment — and its profitability.

© 2017