Is Your Used Car Department Reactive or Proactive?

A proactive Used Vehicle Department is comfortable taking calculated risks. They’ve put some thought into their “Risk Appetite” & clearly defined their “Risk Tolerance”. A reactive Used Vehicle Department tends plays it safe, always leaning towards “Risk Aversion”. Risk Aversion doesn’t win trades, it loses trade acquisition opportunities.?

Think of Risk Appetite as the amount of risk a dealership is willing to take, in order? to achieve its objectives. Example: more aggressive growth objectives will require a more aggressive risk model. Risk Appetite is a philosophy that is clearly defined to prevent Risk Aversion.?

Risk Tolerance is the amount of tolerated deviation from the Risk Appetite. Risk Tolerance is a much more tactical concept that identifies the risk of specific initiatives. An example of Risk Tolerance? is when a dealership states that after _x_ number of days, it’s no longer acceptable to keep vehicles in inventory; despite having a aggressive Risk Appetite to keep aggressively acquiring trade-ins.?

Examples of potential risks for used car departments include vehicle accident history, maintenance records, physical inspection, mechanical inspection, vehicle options & equipment, common problems, etc. These risk models adjust, and are different with each of the four different types of appraisals.?

The Four Types of Appraisals:

1. Showroom Appraisal - Showroom appraisals have historically presented the least amount of risk for dealers. This is obviously why dealers have historically attempted to get their clients to visit the dealership in person to conduct a showroom appraisal.
2. Driveway Appraisal - also known as Sight-Unseen Appraisals, Blind Appraisals or Virtual Appraisals. There is much less consistency with these types of appraisals,? and much more variation with how dealers handle these types of appraisals. There is also more risk involved with appraising vehicles that are not physically at a dealership showroom. Many Used Car Managers do not trust that clients will be truthful when representing their vehicle condition online, or over the phone. Providing accurate information & additional transparency reduces the risk around these types of appraisals.
3. Service Drive Appraisal - these are conducted with dealership clients during their service maintenance visit. Speed is critical with these types of appraisals, because these clients have a limited amount of time during their visit. Enablement and empowerment of more appraisers that are able to appraise these vehicles on the service drive, or while vehicles are in the service bays, is critical with these appraisals. Time constraints do not always allow these appraisals to wait for a Used Vehicle Appraiser to find these vehicles for proper appraisals. The risk of errors is actually the least with this type of appraisals, with the right process.?
4. Upstream Vehicle Acquisitions -

Current examples of reducing risk with appraisals??

Pulling an AutoCheck or CarFax vehicle history report during an appraisal. Or measuring the tread depth of each tire during an appraisal.?

• Pulling an AutoCheck or CarFax vehicle history report during an appraisal.
• Driving every appraisal to check the alignment & brakes. If you fail to do this 100% of the time, that is a calculated risk you are willing to take.?
• When an appraiser uses an OBD scanner to scan for codes during the appraisal, and there is an active or cleared error code, $1,257 in potential repairs are detected on average.
• Used a tire tread depth measurement tool to calculate potential risk of tire replacement for front tire, rear tires, or both.
• Verifying that all 14 ways of a driver’s seat power motor, all 8 ways of a passenger seat power motor work, and the air bladder of the power lumbar are all operational
• Checking that the power window and moonroof window regulators & motors are in working order
• Using an OBD scanner to scan for codes during the appraisal. When there is an active or cleared error code, $1,257 in potential repairs are detected on average.

Appraisals that are done without leveraging this type of process, fall victim to risk aversion. Risk aversion adversely affects used vehicle acquisitions when the reconditioning is overestimated, and negatively affects profit margins when it is underestimated. The primary issue with underestimating trade values or overestimating reconditioning is that it often results in not winning the trade at all.?

An effective Used Vehicle risk management process will help identify which risks pose the biggest threat to an organization and provide guidelines for handling them.

Example:

• Identify the risk- not acquiring enough consumer’s trade-ins, or over reliance of acquiring vehicles from auctions.
• Analyze the risk- what % of vehicles sold also have a trade-in attached to those transactions? What % of sold vehicles should have a trade? What is the financial impact of acquiring too many vehicles at auction, versus maximizing existing trade-in opportunities??
• Prioritize the risk- should the initial focus area be: Showroom Appraisals??Sight Unseen Appraisals? Service Drive Appraisals?? Upstream Online Acquisitions?
• Respond to the risk- define acceptable Risk Tolerances for the 4 different types of appraisals. What is an acceptable loss ratio? What is an acceptable variance for margin of error on appraisals?
• Treat & Monitor the risk- Review daily, weekly & monthly using a consistent, simple scoreboard. Daily monitoring prevents the cause of the issue from repeating itself again & again.

Losing a trade-in opportunity to a competitor is a risk that isn’t so easy to quantify, but it is the greatest risk of all when appraising vehicles. The amount of lost revenue and gross profit from lost trade-in opportunities is a report that not enough dealers review on a daily basis.?

What’s most intriguing to me is that it’s rarely Risk Appetite that prevents dealerships from getting more aggressive with Sight-Unseen Appraisals or Service Drive Appraisals, it’s Risk Tolerance (or lack of defining it) that stifles most UC acquisition strategies. So many want to bring up exceptions, rather than the majority of items that affect risk. The focus should be on managing risk, not eliminating it. The key is to know if you have a 6% loss ratio, and put a plan in place if it goes north of 10%. The biggest issue is not knowing that number at all. That’s what causes UCMs to overreact to any mistake that is made.?

Here is an example of intuitive Risk Assessment: during a recent Save A Deal meeting, a Used Car Manager is reviewing an active sales lead from the prior week. The prospect is interested in one of the aged Used Cars. The lead also has a potential trade-in.

The Used Car Mgr asks the Salesperson to call the client and, “Get Them In”, so they can take another look at the trade. The same trade they appraised the week before, but didn’t add notes, didn’t measure the tire tread depth and didn’t take photos of some key options on the vehicle.?

The Salesperson attempts to follow up, but there is no response to the multiple calls, texts & emails. Finally the client emails back a commitment. It’s an unreasonable offer, but it’s a commitment.?

So forget about all the short yardage scenarios of Service Drive appraisals or low-mileage Unicorns that we weren’t willing to provide a sight-unseen appraisal value for, because we couldn’t see it, smell it & feel it.?

Why? Because right now it’s time for a Hail Mary, which is more of an adrenaline rush anyway. Since this particular client is interested in an aged unit, one that we never should have buried ourselves in to begin with, the UCM is suddenly very optimistic about this prospect’s potential trade-in. Throw logic & reason out the window, pull up the Caterpillar front loader because we’re getting ready to bury ourselves in our next 61+ day old unit in Used Car inventory. Burying ourselves in the trade is much easier than taking a massive loss on an aged unit, at a price that would probably exceed the bookout amount anyway. But what do these banks know anyway? We'll just call the lender, burn a favor, and make this problem go away.?The issue is that it's an accident that could have been avoided with the right process & technology in place.

The UCM assumes that the tires are like-new and it’s mechanically sound on this Sight Unseen appraisal. The system is hitting the value way too hard because of the bad CarFax report, the worst possible exterior color & the excessively high miles shouldn’t negatively affect the appraisal value as much as the system says it does. (Which is ironically the same story with every aged used vehicle in inventory). So it’s time to switch from logic & data-based decisioning to intuition & gut feelings about potentially retailing out of a clearly bad situation, when it’s actually time to punt.

If you’ve ever worked in a car dealership, you’ve probably experienced the scenario above ?? more times than anyone would care to admit. But it’s a great example of reactive Risk Assessment. A much better way to approach risk is with a proactive Risk Assessment.?

• If a UCM is willing to appraise a vehicle like the scenario above, as sight-unseen, why not do it with the MORE desirable trades??
• How much $$ risk is there? Is that number consistently tracked?
• How many times has it NOT worked, versus the number of times that it HAS worked??
• What is the Look to Book on Sight-Unseen appraisals??
• What is the Look to Book on Service Drive appraisals?
• If the Service Dept Valets are trusted to take photos, measure tread depth, check battery voltage and record odometer mileage for repair orders, why can’t we trust and empower Salespeople to do the same for appraisals?

I can remember desking deals long-hand, using a four-square. I can still remember the formula for leasing= ((Cap Cost + Residual)*Money Factor) + ((Cap Cost - Residual)/Term)). That is how a lease is calculated longhand, you just need to add taxes & fees.

While that's an interesting conversation topic, it used to be a competitive advantage when you could quickly & accurately do that over & over again. But then computers and technology made that skillset less relevant. It moved from being good at math to coaching, leadership and associate development, as the desired skill set for New Car Sales Managers. Appraising Used Vehicles is already there. The samurai warrior art of being able to detect orange peel and paint work is good, but it's no longer a necessity. The technology is here. Speed, convenience, risk tolerance, empowerment and enablement will be the most important tools of the future Used Vehicle Departments.

Do you agree?