Bump Up Your Bottom Line with an
Aged Inventory Action Plan
Aged inventory is an age-old problem but it’s no joke. The ugly truth of the matter is if you’ve got a problem with aged
inventory, you’re tying up cash and hurting profitability because you’re sitting on a depreciating asset. Yet, this is an
entirely manageable situation, and with today’s tools and technology, aged inventory should be a mere blip on your
balance sheet. So let’s take a look at what you can do to get on the right track and eliminate the issue of aged inventory
in the future.
Instincts Plus Insights Create a Solid Exit Strategy
Dealers have been buying and selling cars using their well-honed instincts quite successfully for generations. Today,
though, you have the ability to combine your institutional knowledge of the car business with technology and tools that
you can use to devise a process and an exit strategy for every vehicle you acquire.
Processes, which are purposely devised to be objective, are important because they compel you to treat every vehicle
that you take in the same. Processes help you manage risk and ensure a predictable, efficient and cost-effective
procedure. It’s the same approach that, for example, every successful professional sports team, golfer, NASCAR driver,
farmer and homebuilder uses. All of them, in some way, blend their experience with data and processes that help inform
their strategic and tactical decisions.
One of the most critical components of a sound process is an exit strategy that minimizes losses. Regardless of how
you acquire a vehicle, whether it’s from a trade-in, auction or direct from a consumer, you need to have an exit strategy
that defines what you’re going to do with that vehicle if it reaches 15-, 30-, 45- and 60 days.
Tips for Moving Aged Inventory
• Analyze your inventory. The first thing you should do is take stock of where, how and what you paid for every
used car on your lot and percentage of units by days in stock. In all likelihood, this inventory analysis will reveal your
buying pattern. It will also lay the groundwork for retooling your approach to acquiring future inventory.
• Organize your inventory by its aged status. While accepted industry practice is 60 days, you’re freezing
capital. Thus, your process should include tactics that address cars at 15-, 30- and 45 days and beyond, which
should include weekly monitoring of your aging inventory on the Search Results Page (SRP) and Vehicle Details
Page (VDP) on your website as well as third-party sites.
• Start moving your vehicles.
• Get your cars front-line ready as soon as possible. Use a tool such as vAuto to see how long it will
take you to get the vehicle to your website and third-party sites, fully merchandised from the time you
purchased it. Coming out of the gate quickly helps drive down days in inventory as well as turn rate for
your store.
• For cars at 30, detail a selection of your aged vehicles and move them to another location on your lot.
Reevaluate your pricing. If you’re in a group, call other dealers to see if they will take any of your cars.
• At 45 days:
• Detail the cars again and move them to the front line of your lot
• Go online to see what they are retailing for and check out their wholesale price; adjust prices
down accordingly
• Use AutoTrader.com’s TIM tool to get offers/bids for a car. Reevaluate whether you want to keep
the car or dispose it through TIM.
• Look at SRPs/VDPs and dealership traffic through your CRM tool to see what kind of activity you’re
getting. Determine if there’s a problem or the vehicle simply isn’t a good unit for your store.
• At 55 days, retail remaining aged inventory at above wholesale anticipated gross profit or loss.
• Spiff your salespeople. Traditionally, sales personnel get paid on gross profit per vehicle so there’s not much of
an incentive to sell a car that’s been discounted. Instead, incent them with a cash credit representing the actual
number of days the car was in your inventory.
• At 60 days, turn a negative into a positive. According to the NADA, the cost of keeping a used car in inventory
is $28/day. Although this varies by market, you’ve likely sunk well over $1,600 per unit for every car that’s been on
your lot for 60 days, so it’s time to cut your losses. Your options:
• Wholesale every car that’s over 60
• Go to AutoTrader.com’s Trade-In Marketplace (TIM) for offers
• Call your auction house
Moving Forward
Cleaning up aged inventory can be a painful lesson, so it’s important to learn from your experience. Here are some tips
to assist you in building a process for managing used inventory in the future.
1. Perform a whole-lot inventory analysis. Assess the value of every vehicle on your lot so you can determine the
right mix of core and non-core inventory. Use this information to determine optimal turn cycles as well as the right
time to buy and sell inventory. It can also help you price competitively for your market.
2. Have an exit strategy for every car that you acquire. Source vehicles so you can retail them; don’t let their
wholesale price determine your pricing strategy. Instead, take into consideration whether that vehicle is appropriate
for your market — does it have the right equipment, features and options? If you live in the mountains and you’re
looking at a convertible, can you really turn it in 60 days or less?
3. Reset the way you look at used cars. Unlike good wine, used cars on your lot don’t get any better with age.
Approach every used car acquisition with an eye to move it quickly.
4. Develop a proactive strategy for managing, marketing, buying and selling your vehicles. The strategy
should take into account gross profit, return on investment (ROI), days to turn, average cost of sale, seasonality,
realistic guidelines for evaluating and appraising trades, and an explicit aging plan.
5. Get a state-of-the-art pricing tool — and use it. Pricing tools can be all show and no go. Get the best you can
possibly afford; the investment will pay off because you’ll use the tool to price your vehicles to sell at a profit in the
shortest amount of time.
6. Redefine your sourcing strategy. Instead of looking at the vehicle’s condition, use factors like a model’s past
performance and aging history, current market demand and residual value.
7. Invest in an inventory management system. Software packages like vAuto can help you do the monitoring.
They can be set up to scan the market in various assigned radiuses for similar vehicles and their price differential to
your vehicles. These tools will also help you competitively price your vehicles so they’re more likely to sell.
8. Retrain your sales personnel. You can safely assume that every person who walks into your dealership has done
some research online. It’s important that your salespeople understand this new shopping behavior and are prepared
to work with consumers that are armed with competitive pricing. Your personnel should know how a car’s pricing is
derived and be able to explain it in a transparent manner to a shopper.
For more information, refer to NADA’s Used-Vehicle Turn Schedule and NIADA’s Daily Inventory Cost Per Day Calculator.
Daily Inventory Cost Per Day Calculator
Use this calculator to help determine the appropriate daily carrying costs of your inventory.
Write your dealership’s numbers in the empty column (sample data is provided as a guide) to
see how much you could save per day by selling cars faster.
Sample
Dealer
(I) Average number of cars on your lot
Your
Dealership
Formula
30
Average cost per car
$6,000
(T) Total investment
$180,000
Cars on lot x avg. cost per vehicle
10%
Place your percentage rate here
(R) How much do you want to make
per car (%)
(O) Opportunity cost of capital
$18,000
TxR
(D) Daily target rate of return per vehicle
$1.65
(O/365)/I
(P) Average gross profit
$1,500
How much do you profit per vehicle?
(V) Average days to sell
45
What is your average inventory turn?
(M) Inventory turnover
8.111
365/V
(S) Annual gross profit per space
$12,167
PxM
(A) Daily opportunity cost per space
$33.33
S/365
COST OF INVENTORY PER DAY
$34.98
A+D
Source: 2010 NIADA Used Car Industry Report
Used-Vehicle Turn Schedule
Day
Activity
1–3
Frontline ready
4–20
Vehicle marketed at top dollar
21
22–42
42
Reevaluate, correct as needed:
• Correct a reconditioning issue
• Correct a pricing/market-value issue
• Correct advertising/merchandising issue
• Forecast outcome for the next 39 days
• Make necessary corrections
• Wholesale unit now if appropriate
Average gross accepted
Wholesale now or keep until 60 days
43–55
Retail at above anticipated wholesale gross profit or loss
55–60
Out — absolutely!
Source: NADA 20 Group’s Lifeline to Profits, 2012