Leveraging Asset Management to Respond to Market Opportunities
The idea that dealers need to be playing “offense” right now isn’t always a popular one. Most dealer principles and executives bear a heavy burden in the best of times. In times like these the “prime directive” is making sure the lights stay on and our employees can keep food on the table. To most of us, that sounds like battening down the hatches and making sure every piece of cash is conserved. This series of articles is not going to try to dissuade you from using that thought as a starting point. You do need to be looking at how your capital is conserved, and how your assets are managed (though we would argue that needs to happen in the “good” times as well). What we want to talk about that you need to take action is to put your dealership in a position to play offense. This is a rapidly shifting competitive environment. Old opportunities may disappear, and new opportunities will take their place. Actively and aggressively managing your assets is the best way you can lead your dealership through the rocks. We are going to be developing that idea over the next few weeks, discussing what managing assets means for each functional area and why having that deployable cash matters to your bottom line.
Asset Management in the Used Truck Department
When I think about the typical dealership, the most expensive and gut-wrenching asset to manage is the used truck lot. It’s easier to “face the music” in parts and service because the individual decisions are smaller and easier to rationalize. Parts are also an arm’s length transaction for most executives. Look at your obsolescence report for your parts inventory. How many of those parts did you have a hand in ordering? How many times would admitting to a mistake in parts mean taking some of the blame for yourself? Probably not very often. Now look at your used truck aging report. How many of those buys did you sign off on? How many did you tell the used truck department they were going to take because the dealership needed to get a new truck deal done? Managing assets in the used truck department is a much more personal experience and requires more people in a dealership to “own” the mistake. There is a laundry list of reasons that show the importance of aggressively managing your used truck inventory, but here are two of the big ones.
1.) The beating will continue until morale improves
Used trucks are one of the most expensive investments you make at the dealership, and they have no “backstop.” 99% of the time there is no supplier that will buy this unit back from you if it doesn’t sell, and the scrap value vs. initial investment ratio is much lower compared to the typical part on the shelf if no one will buy it back. The truck is yours and you have to deal with it one way or the other. When you’ve made a mistake on a unit, every day you own the asset past the point of likely profitability you can assume the value of the asset will continue to deteriorate. The likelihood that a hero is going to walk onto your lot and save you goes down, and the pain that will be felt when you move on from the asset increases. The “unrecognized loss” is going to be recognized eventually, waiting is only going to make that point of recognition worse.
2.) Used trucks are a moving target
3-4 years ago, integrated transmissions were a bit of a mystery to the used truck market. Over the course of 6 months in 2018 the value in the market went from a deduct, to parity, to premium. Most dealers who weren’t sure about these transmissions at the start of that period would tell you at the end of it that a straight 9-10 speed transmission in a sleeper was harder to move than an I-shift or a DT12. Think about how many units on your lot are older than 6 months. Those may have been desirable units when you bought them, now they might be dogs. Similarly, the market for MRD inventory looked good in early 2020, but then COVID-19 showed up and hit small manufacturing and the restaurant business like a sledgehammer. Units that the market liked in January are dogs in July and getting worse.
