The Massive Effect of Applied Velocity

How Focusing on Used Cars Drives Dealership Profitability

How is your used car operation? It remains the key driver of dealership economic profitability. Yet, with many dealers, there exist many holes in their used car operations. Recently, I was visiting with a dealer friend of mine. I asked, “How is your used vehicle operation?” He wasn’t happy. Volume was down, gross profit was down, and the situation was affecting profitability in all departments. It doesn’t have to be this way. Change the way you look at things and the things you look at will change!

Over the course of the last decade or so, dealers have been exposed to the Velocity Method of used car management. vAuto, led by Dale Pollak, has been an innovator in used car velocity. Mr. Pollak changed the way dealers should view their used car operations by focusing on Key Performance Indicators (KPIs) that influence profitability. Not that we as dealers were not aware of these KPIs, but, we did not look at these KPIs the way that Mr. Pollak did. Inventory Turn is a perfect example of a KPI that impacts profitability. 

Dealers typically looked at used vehicle inventory in number of days in stock where 60 or 90 days was the time we typically would dispose of slow-moving merchandise. When evaluating your inventory as a whole including over-aged units, the number of used car inventory Turns was not typically reviewed. With the majority of dealers in my 20 Groups, they would run 6-8 Turns annually. But what happens if you can Turn your inventory 12, 14 or 16+ Turns annually. The same inventory dollar capital is utilized and deployed at a significantly great rate. Let’s say your used car inventory is $1,000,000 and you make 10% on that money or $100,000 with a 7-Turn annual rate. That really means that you completely turn over your physical inventory and your capital in 52 days. Your $1,000,000 makes your dealership a gross profit of $700,000. Now, if you double your performance to a 14-Turn annual rate, that same $1,000,000 is deployed 14 times. Your inventory turn-over is reduced to 26 days and your dealership gross profitability is now $1,400,000. That is the simplified premise of used car velocity.

Now, let’s take a look at The Massive Effect of Applied Velocity. 

Applied Velocity is the concept of maximizing dealership profitability by concentrating on what Used Car Velocity impacts in all departments and/or applying the same principles to other departments or investments. In our example above, when we increased our Turns from 7 to 14, that improvement significantly impacted our Fixed Operations as Internal Reconditioning doubled. Analyzing Internal Reconditioning, we are now able to improve efficiencies in Parts Procurement, Parts Turn, Internal Reconditioning Labor, and other significant areas that impact the amount of time to Recondition the vehicle and get it to the front-line on the dealership lot for sale.

What is your average number of days to Recondition a used vehicle? Most dealers I know do not focus on this key metric. However, if you decrease the number of days to recondition a vehicle from 10 to 3, you have in essence tripled your labor velocity. In other words, from the time a vehicle hits your lot, the vehicle is ready for sale and on the front-line within 72 hours! Parts velocity is similarly affected. As you dig deep into each and every facet of your Reconditioning Process, you will find existing KPIs or New KPIs that will impact Fixed Operations Velocity. 

In my quest to implement Applied Velocity to my entire dealership operation, I developed Velocity Calculators that measured profitability throughout the entire dealership.  In what areas can you apply a velocity metric or KPI? As you discover more and more of these KPIs, your dealership will experience The Massive Effect of Applied Velocity. You and your managers will learn to work together and challenge each other experiencing throughput and profitability. 

If you need some help, give me a call or send me a message. I am glad to lend a helping-hand and help you develop and implement Applied Velocity into your dealership.

To your success!

Herm Brocksmith

303-944-3456