Should You Write Down Your Inventory?

Should You Write Down Your Inventory?

Don’t bother writing your inventory down. Unless of course, you’re going to commit to some serious changes. It’s not unusual at this time of the year for dealers to write their used car inventory down, take a big hit and a deep breath, and say “OK, done, let’s move forward.”

Many dealers lack the discipline to steer away from what got them there in the first place. Therefore, in six months or so, the owners are staring at the same hot mess they tried to fix back in December.

Used car managers and dealers fall back into the same old rut because of the fear of losses they will have by taking aged units to the auctions and dumping them.

It hurts me to say this, and I know it’s going to cause a few of you to unsubscribe from my newsletters but taking units to the auction and dumping them is just plain dumb.

If you thought enough of that 60-day old unit to bring it into your inventory as a retail piece, you should have been able to find a retail buyer for it at some number. There’s a number that every unit can be retailed at.

Therein lies the problem. You won’t retail it for what it’s actually worth, yet you’re willing to wholesale it for what it’s actually worth.

Hey Einstein, which way do you think you have the greatest opportunity to recover from a unit that was probably a bad decision from jump-street? Insanity.

The instances where you have to dump a previously assigned retail piece in the wholesale market should be very few. If you’re in the retail automobile business, then retail your units.

Yes, the grosses on all that aged stuff are going to hurt you for a while. Dumping in the wholesale market will hurt you worse. If you have a lick of discipline and stay with it, you will be fine and never, ever have another unit over 60.

My Life-Cycle management process gives you the disciplines and strategies that will keep you from saying, “More write-downs, here we go again.”

I’ve never met a dealer who has figured out the 60-day concept that said, “Geez, I’d like to go back to those days when we had units over 60.” I’ve met plenty of dealers that are disgusted that they have to deal with aged units and write-downs every year.

Enjoy your write-downs. That’s all I’m gonna say, Tommy Gibbs

P.S. If you are going to write-down your inventory let me coach you through it. It costs you nothing for me to help you.

Profit Time Makes Sense

If you’ve been paying attention, you may have heard some rumblings in the vAuto world about a paradigm shift in their thinking on used vehicles.

The shift taking place is about changing your thinking of a unit’s age from pure days, which they refer to as “Calendar Time,” into a tool called “ProfitTime,” which is more focused on a unit’s overall investment potential.

To understand this idea a little bit more and how it relates to UpYourGross’ Life Cycle Management, let’s consider Velocity principles and the problem ProfitTime is trying to solve.

The Problem

Velocity principles would teach us that turning and burning units can boost ROI and allow grosses to accumulate. For many years, total gross vs. average gross has been something many of us have been focused on.

But what if there are some vehicles that we could have made more money on had we allowed ourselves to hold them a little longer and price them with a little extra gross built-in?

Strictly following the Velocity principles would leave these grosses on the table. As a general statement, holding a trade-in a little longer than something you acquired at an auction should make good sense to you.

The Solution

Rather than applying the exact same turn and burn strategy to every unit, what if we intelligently managed how we priced units based on their investment potential? This would allow us to strike a balance between applying a turn and burn mentality to the vehicles that require it, and seeking more gross for our great investment units.

This is exactly what vAuto has tried to capture with ProfitTime. They give each unit in your inventory an investment score each day. These scores range from 1-12 and segment into precious metal buckets. This allows you to understand each vehicle’s investment potential and execute a strategy that attempts to strike a balance between turn and burn units and hold out on good deal units.

So This Means Days Don’t Matter, Right?

Well sort of, but not so fast. Let’s step back a bit and take a closer look at the factors that drive a vehicle’s investment potential. Once you have a unit in your inventory, its investment potential is based on the gross the vehicle can generate.

Essentially, how well you bought the vehicle (odometer-adjusted cost-to-market) and the market conditions for that particular unit (Like-Mine Day Supply and Market Sales Volume). ProfitTime wraps these data elements together to determine the vehicle’s investment potential.

I’d envision using ProfitTime to understand a unit’s profit potential so that you can price your cars more optimally on day one and so that you can keep them priced right as their profit potential changes. This should allow you to strike a better balance between turn and burn units and staying firm on good deals.

It’s important to note that this investment potential doesn’t care if the unit is one day old or 40 days old. Therefore, from the ProfitTime perspective, how long you’ve owned the car simply does not matter.

However, I would be careful to not generalize and make a blanket statement that days don’t matter at all. If you just sit on a vehicle that was deemed to be Platinum on day one, it won’t look too rosy on day 100. In fact, as the days pass, the unit’s investment score will worsen, as would be expected with any depreciating asset.

Where Do Days Come Into Play Then?

Days still come into play when you are looking at your ROI. This is because ROI is not only based on the gross you’ve made, but also on how long it took you to make that gross. This all starts to come together when you see the bigger picture.

Vehicles with low-profit potential from the get-go will see their ROIs start substantially lower than vehicles with a higher profit potential. This gives you less time to move these units from day one if you expect an investment return. You can think of this as buying a green banana versus a brown banana. The green banana has more time to be useful on day one, while the brown banana is already running out of time.

You can still make money on brown bananas, but you must sell them fast and understand all the pluses that go along with cranking up the volume with brown bananas.

Additionally, vehicles with factors that lead to quicker depreciating market values will see their profit potential decline at a faster rate than vehicles with steadier market conditions.

These units will have pressure to be moved quickly too.
In nearly all cases, each day that ticks off the calendar lowers the vehicle’s ROI, even if its gross doesn’t go down. However, the starting ROI and rate at which the ROI deteriorates each day will vary for different vehicles.

How does ProfitTime fit Into UpYourGross’s Life Cycle Management Philosophy?

At UpYourGross we’ve been preaching a lot about a life cycle management philosophy that is built on the concept of having a unique strategy for every unit. The reason we do this is we recognize that not all vehicles are created equal. When we talk about a concept like setting an auction purchase unit to a shorter life cycle, we are essentially saying this vehicle has less gross potential, therefore, it’s ROI will automatically start lower than that of, say, a customer acquisition unit. Therefore, we need to get rid of it faster.

You can strike similarities between the concept of ProfitTime and Life Cycle as follows. Calendar Time is simply the vehicle’s true time or age in inventory. Intelligently setting a unique Life Cycle to a vehicle means that its expiration date is no longer tied to Calendar Time; rather, it’s tied to its investment potential. An auction purchase might expire at day 45 while a customer acquisition expires at day 60. This philosophy operates on the same fundamentals as ProfitTime.

So if Profit Time and Life Cycle are Similar Why do I need Both?

The truth is each tool offers you a distinct benefit and those benefits increase in value when used together. While you don’t have to have ProfitTime to use the Life Cycle management tool we’ve built with UpYourGross, knowing a vehicles ProfitTime score makes “intelligently” setting the Life Cycle for each unit a bit more analytical rather than purely experience-based.

This isn’t to say that there’s no place for experience, but as many of us know making decisions backed by data is a good foundation for establishing consistent and repeatable processes.

And, you don’t need UpYourGross to use ProfitTime. But when you pair the two together, they put you in the driver’s seat of driving more gross to your bottom line.

Think of it this way, the ProfitTime score will help you select and updated a unit’s life cycle and UpYourGross will help you manage your inventory when you end up with many different units all following distinct life cycles. With UpYourGross, you’ll be able to easily see which units are about to expire and know what units you should be focusing on.

I guess you could build a massive spreadsheet and hire someone to punch data into it all day to help you keep track of it all.

However, we recognized that establishing and managing a unique strategy for every unit could be a daunting task to manage in spreadsheets-the exact reason we created UpYourGross in the first place.

What if I’m not Ready for ProfitTime?

If you’re not ready to make the jump to ProfitTime, I’d still encourage you to stop treating all vehicles the same. Not all vehicles deserve a generic 60 or 90 days just because you find that process and inventory age timeline simple to implement.

Try following a process that sets a unique strategy for every unit and see how easy it is to manage that process with UpYourGross.

You might just be surprised at how your bottom line starts to look when you combine ProfitTime and UpYourGross.

Tommy Gibbs & Jarrod Tanton

Still Making a Plan?

Tip # 1-Dissect each department. Break them all down. Pretend you are starting from scratch. Don’t assume anything. Nothing is sacred. Be ready to change and perfect any and all processes.

Tip #2-Analyze, analyze, analyze. Make the numbers work.

Here’s a number you need to make work. 120%. Once you have figured out how many units you should be selling, think of how many salespeople you will need to get the job done. If you think your volume number is 100 and you think your team will average 10 units each then the number of sales people you need is 10. Right? Wrong!

What you really need to get the job done is another 2 salespeople. It takes 120% of what you think you might need. There are always a few sales people having a bad month. You fire some. Some quit. Someone is sick, broke a leg or whatever. You cannot hit your number doing straight up math. Think 120%. That’s how you will get your number. Don’t worry about overloading your sales force. You need to worry about overloading your bottom line.

Tip#3-Relocate; as in send some folks packing. Loyalty is a wonderful thing. Too wonderful. Yes, it’s a people business, but darn it, it’s a business. You’re not running a charity. There are some people that just need to go. If you love them so much you can’t part with them, then send them to the farm and mail them a check each month. Get someone on board who can get the job done.

Tip #4-Now that you’ve analyzed and figured out your team, lay out the new plan. Bring your key players into the new plan. Let them have some input. It’s ok to let them think it’s their idea. The more they think it’s their idea, the better.

Tip#5-Present it to the entire management team. Your key managers have to help sell the plan and create “buy-in.” Buy in is critical to the success of the organization.

Tip#6-Educate the team. It doesn’t matter how long you are in this business you need to continue to look for opportunities to ramp up your performance. Educating the team is never an expense. It’s an investment in them and your future.

Tip#7-Turn your used car department upside down. Look at it from every angle possible and start making changes.

Tip#8-Put the plan in play now. Not January 1. Now is the time to get the kinks out. It’s like spring training. You want to be able to rock and roll on January 1, not March 1.

2019 isn’t going to be easy. Now is the time to light the fire. You will win in 2019 by preparing to win right now. That’s all I’m gonna say. Tommy Gibbs

Need a Haircut?

When I’m in town I work out at a small 24-hour gym on Treasure Island in a little strip mall. Three doors down from the gym is a real barbershop. Looks and feels like one from yesteryear compete with the barber’s pole that can be traced back to the Middle Ages.

The other morning, I couldn’t help but notice the barber was sitting in his barber’s chair staring at the front door. Immediately it flashed through my mind that’s what I often see in dealerships today.
I see two types of people staring at the door.

1. Salespeople staring at the door waiting for that special up that the dealership has been so kind to advertise for. (Will we ever fix this?)

2. Management staring at two doors. The old school door and the you might fail door.

The might fail door can be pretty scary. Every once in a while, you walk over, crack the door, and take a peek. Your body starts shaking with fear because of what you’re seeing.

You’re seeing grosses and in some cases volume heading south. You’re seeing today’s pay plans not working, and you’re seeing today’s new hires leaving as fast as Superman and a speeding bullet.

They aren’t buying into your hours and your selling processes which aren’t much different than they were 25 years ago. And, they hate your pay plan.

Aside from being prettier, the physical work environment is about the same. You still have desks and you’ve fancied them up by putting computers on them. It’s sort of the lipstick on a pig theory. When the customer walks in, they still see a pig.

You’re also seeing the approach of some of the public
companies and bigger dealer groups by changing their hiring practices and hours, and adding iPads, sofas, and kiosks in the showroom.

You’re starting to wonder if you’ll still be around 10 years from now.

But you’re making a profit so why change? You need to change while you can afford to change.

You’re sort of like that barbershop. The only thing that’s changed for the owner is the chair is a little different and there’s no strap to sharpen the straight razor with.

That’s a really nice chair you’re sitting in. Enjoy your seat. That’s all I’m gonna say, Tommy Gibbs