ACV facts & figures
10 Minutes w/ Randy Barone Podcast
Episode #1 - Owning Your Used Car Market with Inventory Management
Listen to Randy, as he discusses how you can own your used car market with Inventory Management. In this episode he shares how you should set a used car goal based on what top dealerships in your market are doing and some key calculations you can use for your dealership like calculating your inventory turn rate and calculating your optimal day supply.
Hi, my name is Randy Barone. I'm going to be bringing you a series of podcasts covering used car inventory management and ways for you to be able to own your used car market. So starting out today we're going to be talking about probably one of the biggest issues out there, inventory management and actually knowing many stores are way under stocked with vehicles today, they don't have the right number of cars to be able to even achieve their goal. I just came back from a dealership group that I was doing some consulting in, and when I looked at what their overall goal was as far as how many cars they needed to stock, when I looked at how many cars they actually had in stock and actually took them through a model that I'm going to share with you here in a second, they were actually under stocked by over 30 cars.
So they even have a real opportunity to be able to even hit their goal. So the first things I would need to go through and ask you right now are what is your overall used car count right now? Currently right now, how many cars do you need to have and knowing how many cars you need to stock right now to be able to hit your goal? So first you got to come up with a used car goal, and when we talk about coming up with a used car goal, I'm not telling you to look at what you've done in the past or hey, a year ago we used to sell this many. Actually look out into the market and actually see what's happening in your market. See what the top dealers are doing, top franchise, top independent. If you are number one in your market area, then expand your market area.
I'll give you a quick example. In the market that I was in, my used car operation Texan Ford, we were selling 208 used cars on average, we thought we were killing it. We thought we were number one, nobody could sell more used cars in that particular part of Houston and we were doing a phenomenal job. All of a sudden, CarMax opens up and they open up four locations. Each one of those locations selling 500 cars suddenly. Now selling 208 didn't really mean anything. If you got a group that's selling 2000 cars, Texas Direct opened up and in one month's time they sold over 2000 cars that made 208 look like nothing. So what I'm going to tell you is expand your goal. So when you truly come up with what your goal is for your used car operation, now we need to figure out how many cars do we need to stock to be able to know that we're going to hit our goal or have the best opportunity to hit that goal.
Many used car operations today are stocked, and this particular podcast is actually going to go through and share with you the best ways to be able to know that you have the right inventory, the right amount of inventory. So through these series of podcasts, you're going to pick up on how many cars you need to stock, what are the right cars to stock, what are the best ways to be able to sell those cars and have the right number of opportunities to sell those cars and having the right people to sell those cars when I've got the right inventory, the right amount of inventory, the right number of opportunities, and the right number of salespeople, that is an unstoppable combination and that's what these series of podcasts are going to go through cover. So let's just jump right into it. So when we're talking about the right number of used cars, you need to start knowing what your inventory turn rate is.
What I'm not talking about is inventory turn rate. From opening up your inventory management system and seeing what that number is, I'm actually telling you to actually calculate that and I'm going to give you the formula to be able to calculate how do I calculate inventory turn rate because it's a vital part to be able to know that information. Then I also need to know the day's supply. So what is my optimal day supply of inventory? So as we jump into it, I'm going to give you the way to be able to calculate your inventory turn rate, and I'm actually going to give you that formula. First of all, you're going to have to calculate what is your cost of sales, and when I say cost of sales, you're going to take your overall used car sales for whatever period of time that you want to use.
So what is my total used car sales? What is that dollar amount? Then I subtract out my total used car gross and that's going to give me that cost of sales. I turn around and take that cost of sales and I divide it by the number of months that I actually used in this calculation. So if I did it off of six months, I did it off a year, you would use that calculation. I divide that by the number of months and that gives me my average month's cost of sales. So once you have that average month's cost of sales, you can turn around now and you take your total current used car inventory, what it is right now, and you divide that by that average month's cost of sales, that's going to give you your month's supply. So you're going to take that month's supply and you're going to turn around and take how many months or in a year you take that number of months in a year, which is 12 divided by that month's supply, and that's going to give you your inventory turn rate.
So you'll actually have that formula. I highly recommend that you go through and manually look at that, manually figure out how to calculate it. It doesn't help you look in your inventory management tool and just see what that number is. You actually have to know what goes into that number, what makes up that number. When you do that, you'll firmly understand how you can fix it. What do I mean by fixing it? Well, if my inventory turn rate is too low, that is a problem. If my inventory turn rate is too high, that is also a problem. NADA says, your inventory turn rate should be around 12. Some other companies say 12 to 15. I would tell you if you're somewhere between that 12 to 15 times a year, so how many times you're turning your inventory, can't tell you how many 20 group meetings I've been or different speaking associations that I've spoke at, and I ask the dealers, what is your inventory turn rate? And they go 70% or they give me some other answer that actually lets me know that they don't really know exactly how to calculate that. So knowing how many times you turn that inventory, so let's say that your inventory turn rate was nine times. Obviously that's well below 12 to 15. So when it is low, what is actually happening? You're not turning your inventory. What can cause that? You could have a poor sales process, you could have the wrong inventory,
Could have too many cars in inventory. Many factors go into that because I just showed you the formula. You actually now know how to calculate that and actually see what goes into it. What happens if I said your inventory term rate is too high? What happens if I said it's 25 times? I just came from a group not too long ago and their inventory turn rate was 25 and they were actually celebrating that inventory turn rate being 25 times. What I would tell you off it being too high is that they're missing out on so much opportunity. They're missing out on so many sales because one, they don't have enough inventory, they could sell so many more cars. So inventory turn rate being too low or too high is a problem, but now you actually have the formula to be absolutely know how to calculate that.
The next thing I would go through and show you is what is a real inventory formula? So if you took, what is your goal? So the goal, you just calculated and figured out this is what we want to sell because you looked at what's happening out in your market or saw who the biggest player is out in your market and you came up with a real goal for that. So I take that goal, then I take what my current day one inventory is. So when I started the month, how many cars did I have in stock? So let's say you're a store that actually had a hundred cars in stock and then we have to multiply that times your inventory turn rate. You're going to take that inventory turn rate. So let's say my inventory turn rate is 15 times. I divide that by 12 and that gives me 1.25.
I take that a hundred cars now and I multiply that time, that 1.25, and amazingly enough that comes out to be 125 cars. That means I didn't hit my goal. I really didn't have enough cars to hit my goal. The first thing I hear from a dealer when I say that is, well, Randy with a hundred cars, we've sold 150 before, so your formula is wrong. I'm going to tell you that I'm talking about a good consistent amount of times that you've sold hit your goal. I'm not talking about that one super heroic month that you had. I'm talking about keeping a nice level, consistent inventory and stocking the right number of cars to consistently hit or exceed your goal. So in that same example, let's go through and look at a store that has their goals still sell 150 used cars, but day one they had 120 cars in stock multiplied times that inventory turn rate, which is 15 divided by 12.
In this case that gives me that 1.25. So 120 times that 1.25 equals 150. So that store actually stocked the right number of cars. So for their store it was 120 cars consistently throughout the month. That means they kept their inventory level and with that inventory turn rate of 1.25, which was 15 times a year, they actually hit their goal and would have the right cars to be able to do that. So knowing that and understanding it vitally important. The next area they'd be able to go through and look at is how do we calculate our day's supply? Day's supply is incredibly important and if you look at what goes into it, so it's very simple. If you take your year to date sales, divide that by 12. Obviously there's 12 months in a year that's going to give your average monthly sales pretty self-explanatory.
Then I divide that by 30 because there's 30 days in a month's time that's going to give me my average units per day. I turn around now and I take my current used car inventory divided by those average units per day, and that's going to give me my day's supply. So I'm recommending to dealers right now that they keep a 30 day supply. It doesn't mean I want you to sell less cars. I just want you to be able to turn that inventory, turn that inventory fast. So what you've picked up from this podcast today is a formula to be able to know how to calculate my inventory turn rate to be able to come up with a formula to be able to have, if I have this many cars that we want to sell, here's how many we need to stock day one and keep that inventory nice and consistent in the future.
In these podcasts, I'm going to actually going to show you how to stock the right car. So it's important to have the right number of cars, but then it's going to come down to having the right cars. What makes up the right cars, what are the best ways to acquire the right cars? And my answers are going to actually shock you. Even though my name's Randy Barona, I'm one of the vice presidents with ACV Auctions. I'm going to tell you that the best place to get cars is number one on trades, lease returns, buying cars out of service, buying cars directly from the consumer, and the last place is actually the auction. So even though I work for an auction, I'm going to tell you that if we can magnify increase the number of cars that we trade for the number of cars that we buy off of lease returns, the number of cars that we buy out of service and the number of cars that we buy directly from consumers, we're going to knock the cover off the ball and we're going to become what we call inventory independent. I'm not worried about everything that's going on. I'm actually focused on that we're able to acquire so many cars that we become a wholesale profit center because we're supplying other dealers with cars. My name's Randy Barone and I really enjoy you attending my podcast. I look forward to talking to you next time.
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