What does a lost dollar in used trucks cost me?
Over the last few weeks, we have brought up the topic of total absorption several times. As a reminder, our target for total absorption in your dealership is 130%. The big difference in Total Absorption and traditional Absorption measures is the inclusion of the used truck department. Why? Because dollars that are lost in the used truck department often get “lost in the wash” with little opportunity to recoup them like you have with new truck sales. Dollars lost on the used truck lot simply disappear from the bottom line forever. It’s possible to have a fully absorbed dealership that doesn’t send any money at all to the bottom line if you don’t keep used trucks in mind!
If you make 70% margin on labor sales, your top line growth from the service department needs to be $1.42 for every lost dollar in used trucks. (That means if you lost $100,000 in used trucks last year, you needed to have sold another $142,000 in service to be totally absorbed!)
If you make 29% margin on parts sales, your top line growth from the parts department needs to be $3.45 for every lost dollar in used trucks. (That means if you lost $100,000 in used trucks last year, you needed to have sold another $345,000 in parts to be totally absorbed!)
If you make 6% margin on a new truck deal, your top line growth from the new truck team needs to be $16.67 for every lost dollar in used trucks (That means if you lost $100,000 in used trucks last year, you needed to have sold another $1,666,667 in new trucks to break even!)
How do I protect myself from losses in used trucks?
Part of the reason that used trucks can sneak up on you is that they move slowly. They creep. There really isn’t much that you need to measure daily, which often leads to dealers never measuring them at all. That’s a sure-fire way to get yourself in trouble. If you’re not measuring daily, what should you be measuring and at what intervals?
Weekly measures:
Inventory turns and overaged units. These are technically two different measures, but they go hand in glove so we’re counting them the same here. Dealers most often get in trouble in the used truck game when they carry too much inventory and aren’t selling through it fast enough. The measure for inventory turns is the same in the whole goods world as the parts world (annualized cost of sales/ cost of inventory) but it gets looked at very rarely in our experience. An important secondary measurement is the number of units that are overaged. If inventory is rotating around a few pieces of inventory that have become a fixture on your lot, I’m betting you’ve got a few unrecognized losses that are going to hit your bottom line like a freight train at the end of the year.
Monthly measures:
Average reconditioning cost (monthly reconditioning costs/ number of units put into inventory) and days to front line ready (used truck days in shop/ number of units put into inventory). Most dealers are at least “OK” when it comes to the actual buying and selling of trucks. A good portion of the danger in this department now lies in reconditioning costs and the lag time before a unit is ready to sell. It’s important to have an idea of how much you’re spending to get trucks ready to sell and take that number into account when you’re making investment decisions. If you don’t adjust your number up or down based on the condition of the truck those recon dollars are going to come right out of your bottom line.
Quarterly Measures:
Gross profit (Revenue – Cost of Goods Sold/Revenue). This one seems a little obvious but hear me out. Many dealers miss the forest for the trees when it comes to used trucks. They live and die by every deal, and never want to take a loss on an individual truck where a mistake was made. That’s an exhausting way to run a department and has more of a tendency to maximize mistakes rather than minimize them. Hire the right person for the department, equip them with the tools to get their job done and let them go to work. Some deals you win, some deals you lose. Some months you’re up, some months you’re down. But focusing on GP on a quarterly basis as opposed to a daily, weekly or monthly basis allows your dealership to roll with the punches. Capitalize on opportunities to win, but don’t be afraid to lose small and get back in the game. This focused quarterly conversation makes sure to check in and ensure that you’re winning more than you’re losing.
