Managing inventory age [by focusing on how many days a car has sat on the lot] leads to less-than-optimal outcomes — a fallback reliance on the hope that you'll get lucky with profit-troubled vehicles and the persistent press of aged inventory on your used vehicle performance and profitability.
But the real problem is that age is the wrong metric to manage — it's the money, or the quality of your investment in each used vehicle, that really matters.
Think about it: A vehicle that, for whatever reason, isn't blessed with the ability to deliver a satisfactory or sufficient margin contribution from day one usually doesn't get any better by days five, 10, 15 or 20.
Dealers and used vehicle managers generally understand that a distressed used vehicle will only get worse.
But their retail instincts and traditional training get in the way of making decisions from an investment perspective.
Unlike investment managers, dealers and used vehicle managers find it difficult to view the early signs of a poor investment in a used vehicle as an opportunity — a cue or curtain call to redeploy their capital into another car that offers greater potential to make a satisfactory and sufficient return.
The key, of course, is knowing how to assess a vehicle's investment health right away to avoid making a bad or questionable investment, which will only get worse over time.
The assessment should cover these elements:
- An eyes-on assessment of a vehicle;
- The vehicle's cost-to-market ratio; and
- The vehicle's market days supply.
On a day-to-day basis, here's how this assessment plays out.
Let's say you have two vehicles you're considering to acquire. The first looks very sharp. After your pack and reconditioning, you own it at an 84 percent cost-to-market ratio, which gives you a respectable 16 percent spread between your investment and its prevailing retail price.
The market days supply is 60 days, which suggests a relatively high level of demand in relation to supply.
The second vehicle is more plain, with less likely shopper appeal. After your pack and reconditioning, you own it for an amount very close to its average retail asking price. The market days supply is 93 days, which suggests it'll take some time to retail.
The investment quality of the two vehicles should be readily apparent. The first vehicle represents a decent risk and offers the prospect of a sufficient return on investment. The second car has all the markings of a soon-to-be-aged unit.
You'll notice that, in this exercise, the age of the vehicle isn't even mentioned. That's because age is irrelevant when you focus on the quality of your investment in each used vehicle.