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By Jim Leman

The most direct path to better used-car gross margin is through well-ordered reconditioning.

Ordered reconditioning means management practices five disciplines for driving time, delay, friction and waste from this engine of used-car profitability.

Practicing these disciplines consistently helps get cars through recon in hours, not days.

The common thread shared by these disciplines is measurability. As management guru Peter Drucker famously once said, “What gets measured gets managed.”

Facts eliminate magical thinking. Guesswork and opinion are useless management tools. On the other hand, consider the benefits one gains through careful measurement of the following recon activities:

• Recon time-to-line (T2L) efficiency
• Parts sourcing and pricing, and fill rate
• The number of times techs “touch” cars until work is complete
• Work delay due to miscommunication and friction among recon, fixed ops and sales departments
• Shop and detail department supplies and materials costs

 

Drive Profit from Recon

Dealers able to get cars from acquisition to sale ready in three to five days drive significant benefits from reconditioning. Reducing T2L translates into:

• Additional inventory turns
• More profitable sales gross
• Fresher inventory that’s sale-ready having most of their 21-day prime retail window intact

Without T2L disciplines at work, even the most efficient manual recon operation takes eight to 10 days to get vehicles sale ready. This fact holds true whether the dealership recons 100 cars a month or 1,000. Consider:

• Faster T2L translates into reduced holding costs; NCM Associates calculates the average daily per vehicle holding cost at $40, which accrues from vehicle acquisition to its sale. For clarification, a 10-day recon cycle depreciates a car $400. The actual sale margin erodes by that much.
• T2L affects inventory turn. Reduce T2L by five days to gain two additional turns. On a 100-vhicle inventory at $1,500 sale gross equals $300,000 a year or $25,000 a month.

Dennis McGinn, a former Hewlett-Packard continuous process improvement disciple, launched the used car industry’s first recon-workflow software tool in 2010. Now used by 1,300 dealerships – from single rooftop to major public group stores – Rapid Recon is making dealerships’ used car departments more profitable.

“We bring structure, discipline, measurability, transparency, and accountability to the vehicle reconditioning phase of the franchise dealership used car profit center, which traditionally are  managed by guesswork or at best, spreadsheets on computers that simply cannot do the necessary job required of recon today,” said McGinn, Rapid Recon chief executive officer.

“Recon workflow automation is the only way to manage such a multi-faceted operation as reconditioning, and dealers using this T2L tool are pulling hundreds of thousands of dollars of unrealized additional profits out of used car departments every year,” McGinn said.

McGinn’s book, RECON T2L – The Starting Line for Reversing Margin Compression, now in its second printing, is the definitive textbook on T2L best practice.

 

Parts Priced Right – and Available

Shawn Larkin is the founder and chief executive officer for North American Dealer Parts Exchange Inc., a parts stocking analysis firm. The former fixed operations director for a multi-site Canadian group, Larkin is NADA and Performance Group 20 trained and is a contributor to industry fixed operations media.

He said fast and profitable recon hinges on the parts department’s ability to fill parts needs promptly.

To achieve that goal, parts departments must analyze their parts sourcing and pricing strategies and ensure fill rates.

Rarely do parts departments do that, he said.

“Those in fixed operations aren’t predisposed to the reality that used cars depreciate by the day, and when that’s not understood it means dealers take losses because their parts department isn’t efficient,” Larkin said.

“When this is done in conjunction with the sales department, all will see how recon can save money and get cars in and out more quickly,” Larkin said. “Otherwise, you're just winging it.”

 

A One-Touch Goal

Larkin believes techs and advisors assigned to recon work should not have to touch a car more than once. Here, parts sourcing, pricing and fill rate is critical.

The goal is to avoid having techs start work and then have to close it out because parts are not immediately available. When this happens, the shop earns no revenue.

Larkin outlined this solution:

• Establish a one-touch policy

• Give recon its own technicians, advisors and backup to avoid T2L delays during times off
• Whether recon is billed at retail or internal rates, give both the retail and internal operations the same priority; there is no reason not too

“The flow of cars into recon is usually rather consistent and thus can be planned and managed. It’s about shop loading. It’s about shop loading,” Larkin said.

 

Improve Communication, Reduce Friction

The beleaguered service director is often one individual in this process most squeezed by used car’s appetite for fresh cars.

Larkin and McGinn agreed how improving communication among departments and people reduced delays and bottlenecks and thus remove friction and frustration, which waste time themselves.

Prompt repair approvals, for example, contribute to a one-touch policy and otherwise keep the recon work flowing forward.

McGinn offered the following communications-related symptoms:

• Juggling tech and bay availability to meet the demands of both retail and internal needs
• Wrestling over labor and parts availabilities and parts costs
• Interrupting the work flow to wait for approvals, technician availability or parts
• Delaying getting cars arriving from trade or auction into the recon system and forgetting vehicles sent to sublets

 

Reduce Materials Costs

Doug Austin started his company StrategicSource in 1992 to help auto dealers manage expense.

For his dealership clients, his staff pores through expenditures across 100 categories, from office supplies to financial, sales, transportation, insurance and more.

“For a two-to-three-store Midwest dealer having $100 million in annual revenue, 5% of that is spend for various materials, supplies and the like. By eliminating 25% of that 5%, a dealer can flow $1.25 million back into the dealership,” Austin said.

“If managers can be disciplined about planning and controlling this spend going forward, that’s an ongoing saving for the dealership,” Austin said. “Twenty percent of that 5% would also apply to recon, including oil, tires, parts, uniforms and supplies – about $62,500 a year.”

 

It All Adds Up

From the sales floor to the service department – from used car reconditioning to shop and materials costs, the application of metrics to critical revenue centers help dealers wring out waste and capitalize on revenue opportunities.

The most critical metrics for modern dealers to focus attention on are:

• Time to line or T2L, the measurement of how quickly the reconditioning process gets cars sale ready, which is the dealer’s most significant opportunity to drive better used-car sales margins
• A parts department able to fill request promptly, at various price/quality points
• A service labor culture that embraces internal work as equally important and valuable as retail
• Creating clear, consistent and timely communications to reduce frustration, error, and time delay
• Shop and detail supplies, which most dealerships can economize without cost to quality

 

Jim Leman has been writing about automotive retail operations since 1992. Jimleman@gmail.com

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