By: Ed French
(Excerpt from the "Advanced Guide to Pre-Owned Success"/ DealersEdge)
Learn to Score the Risk and Reduce Loss Exposure
High gross profit dealers have a strategy and firm policies for dealing with “Vehicles at Risk”- those with highest risk of producing a low, or no gross profit return. Here’s a formula for scoring those risks….
All segments of your used vehicle business are susceptible to “Risk”. You can find “Risk” in A cars, B cars, C cars and even in CPO vehicles.
You need to be able to Identify those vehicles that are “At Risk” so that you can reduce, mitigate and deal with the issues that cause the risk.
The “Risk” is created at acquisition. The vehicle that becomes 45 to 60 days old in your inventory became a problem when it first arrived in your inventory.
The process for controlling these potential losers, is to identify and score the risk at acquisition. Whatever your hard turn policy, if a vehicle is determined to be “At Risk”, successful dealerships will insist that is not permitted to age beyond 21 days. For “At Risk” vehicles it has to be 21 and done.
This vehicle can be a “gross killer” for the entire department and needs to get out of your inventory.
· The 10 most expensive vehicles in stock
· The 10 oldest vehicles in stock
· The 10 “Worst Risk Score” vehicles in stock
With higher price vehicles it is harder to earn a 30-45% return on investment. There are few vehicles with a $50,000 acquisition cost on which you can earn a $15,000 gross profit (30% R.O.I.). So the higher the price, the more “At Risk” you are with that vehicle. These vehicles enter your inventory “At Risk.”
Those vehicles in your inventory the longest… are “At Risk” by definition. When acquired, the plan for marketing that vehicle and turning it quickly was in error. Keeping it longer, incurs more hold costs. It does not get better. Action must be taken to dispose of these vehicles in order to improve the mix in your inventory.
Scoring the Risk
The following are all issues or identifiers of vehicles “At Risk”
· Trade was over-appraised to help close a deal
· Odd equipment (cloth seats, 3rd seat delete, etc.)
· Poor previous sales history, or no experience at all
· Undesirable color (lime green?)
· Potentially high reconditioning costs
· Bad CarFax
· Miles inappropriate to the model year (rental cars)
· Your “Car Gut” tells you it is “At Risk”
The points deducted can be adjusted to your preferences, but the important thing is to score the risk, unit by unit and then develop an action plan accordingly.
SCORING THE RISK AT ACQUISITION
As you trade or otherwise acquire used vehicle inventory, score the negatives. As you can see, in this score sheet… used by many dealerships across the country… we deduct points out of a possible 100 based on various criteria. Some are higher deductions… others lower… depending on the potential risk involved.
Your “A” cars should be scoring at or close to a full 100 points. In all risk elements, this vehicle is extremely low risk. Your “B” vehicles may have some less weighty deductions… say they score out at 85%.
Use this as a guide with regard to your “Cost to Market.” If the Risk Score for a vehicle turns out to be 85 out of 100… you do not want to pay more than 85% of your Cost to Market.
You can always override the Risk Score… but by doing so you are placing the vehicle in a higher risk category and the potential for low, or no gross profit increases.
Taking Inventory of Your Inventory
As the vehicle ages, you need to identify the vehicles in which the Risk is increasing. Remember, your goal is only own that vehicle for a maximum of 21 days before definitive action is taken to move it.
With that in mind, taking inventory of the inventory with this chart can provide a periodic review so you are always identifying how “At Risk” vehicles are performing. Perform this review weekly, but no less than every 10 days. Again, 21 days is your target.
Taking Inventory of the Inventory
We all know that used car inventory does not get better with age. In fact, the value of that vehicle to the dealership diminishes significantly. Having a lot full of cars may look good. But if they have been sitting there too long your Return on Investment is going to suffer.
The health of you Used Vehicle Operation is going to suffer if you do not pay detailed attention to the mix of vehicles and the cost of holding on to “At Risk” vehicles.
Thought Starters for Ridding Your Inventory of “Nasty… At Risk” Inventory
· Consider a Recon Adjustment… If the vehicle as over-appraised in the effort to complete another deal, consider doing any reconditioning at other than full retail.
· Employ a Special Marketing Effort… Spotlight adds, Make it a Used Car Special, Put it up front where it will get more eyeballs and sign it as a special deal.
· Special Aging Bucket… this vehicle is “At Risk” and you should plan to make it have a new owner by day 21. Avoid holding on for that special buyer. Chances do not improve after 3 weeks.
· Incentives to Sales Staff…If you have identified the vehicle as “At Risk” incentivize the sales staff on day 1. Typically dealerships offer sales incentives after the vehicle has already aged 30-45 days. Remember at 45 days you have 45 days of holding costs already built into this vehicle. You would be better off to make that decision as soon as you decide the vehicle is “At Risk.”
· Make sure your management pay plan does not dis-incentivize the sale of a “At Risk” vehicle. This is especially true if they are not responsible for bringing the “At Risk” vehicle into inventory. You want to have them working with you on the movement of this vehicle… not at cross purposes.
The two overriding factors with vehicles “At Risk”…
· You want to score and identify them at acquisition
· You want to sell them and get them out of your inventory as quickly as possible
Ed French is the author of a remarkable new resource… Advanced Guide to Pre-Owned Success. Ed takes you step-by-step through what it takes to compete in the digitally efficient used vehicle business of today. See the details at https://www.dealersedge.com/french1. If it is your goal to adapt, compete and expand your Used Vehicle Departments… this is the “How to” of 2020 and beyond. Look for the Special Launch Savings!
Edward French's career spans over 30 years of executive automotive experience. Today he serves as President of Auto Profit with a focus on dealership turn-around and profit expansion. He assists his dealer clients with financial management, process improvement, leadership and profitability. Currently, he serves on the Board of Directors for TruWorth Auto, a digital first, pre-owned group. He has served as NADA 20 Group Moderator and as Director of Operations for Community Auto Group. He is a graduate of Purdue University.