How much used stock should I carry?
Dear Jeff,
I’ve heard a lot about stock turn and I think I understand what it means, but can you use it to calculate how much stock you need in the future rather than just stating a statistic about what you have done in the past?
What I really want to know is, how much stock should I be carrying at any one time? If I carry too much, I end up trading it and suffering a loss after 90 days. If I don’t carry enough stock I don’t hit my budget!
Do you have an answer for this?
Regards,
Steve Bruce
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Many thanks for your question Steve, you have not stated whether this is for used cars, used trucks, used bikes or used power equipment, but the strategy is the same. It can be quite complex, but here’s the simple version.
As with all business decisions, your focus should be on Return on Investment (ROI); are you going to get back more profit than the money you are investing? First set your target, I suggest 120% (If you are at all unfamiliar with Used Vehicle ROI, see The KPI Book, page 46)
The next question is how many vehicles are you going to sell and how much Direct Profit will they generate? For the sake of this exercise, let’s say that we’re going to generate a Direct Profit of £250,000.
Now let’s take a look at these two figures. If £250,000 represents 120% ROI, then the stock holding would be around £210,000. To calculate this: Profit ÷ ROI%, or in this example £250,000 ÷ 120% = £208,333. I simply rounded up to £210,000.
The instruction to the Sales Manager is, “You have a maximum fund availability of £210,000 for the sole purpose of used vehicle stock. Do not exceed it”.
Now the Sales Manger thinks, “If my average SIV is £7,000 how many vehicles can I hold in stock at any one time?”
£210,000 ÷ £7,000 = 30 units
Now it is the down to the skill of the Sales Manager to manage that £210,000 and the 30 units to the best of their ability so that they generate a profit of £250,000.
When you improve your stock turn by selling more vehicles or holding fewer vehicles in stock or a mixture of both, your ROI% will increase. This gives you a magic window of opportunity because you have more time to recover from mistakes (you will make a few) and it will be much easier to achieve your profit objectives.
The golden rule is to take the emotion out of the product and place all your focus on money.
Best regards,
Jeff Smith
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Used vehicle stock management is a key factor in profitability and for franchised dealers one area over which the manufacturer, arguably, has not quite so much control, thereby allowing you to maximise your unit profitability. You could perhaps also look at it from this angle:
First consider your new vehicle target. Then consider what a reasonable Used : New ratio would be (KPI Book p53). This will tend to vary from franchise to franchise and dealer to dealer but should be >1:1. Personally I like to aim for 2:1, i.e. two used vehicles are sold for every new one. This also can help to even out total new and used monthly sales and give a flatter cash flow. Then consider what your stock turn should be. Once again turn to the KPI Book and you will find the benchmark of >8 times (p49/50). This will allow you to calculate what level of stock (in units) you will require, as follows:
New Vehicle Target 348
Used : New Ratio 1.5 : 1 gives Used Sales of 522 (348 x 1.5)
Used Vehicle Stock Turn is 9 times. This gives a stock of 58 Vehicles (522/9). Now that you know how many vehicle you will need, you can spend your money wisely. As always it is a question of stocking the right vehicles at the right price at the right time.
This is the ‘mathematical’ answer but you should also consider:
Do you have the space to hold this number of vehicles? Many an optimistic business plan has failed because it did not take into account the physical limitations of the dealership.
You can also consider the benefits of selling ‘off the screen’ from your manufacturer’s own stock of vehicles.