In every business, there are costs that are influenced by external factors, making them difficult to directly control.

Such costs often involve macroeconomic factors – these could be consumer trends that impact the business, supply and demand, rising raw material prices, or global fluctuations in interest rates that affect costs within your business. In this case, for you as a dealer, it’s mainly about being well-informed to manage these factors as best as possible – but generally, there is very little you can do to change these external influences. When it comes to stock days and the impact of these external factors, they will sometimes create favorable conditions for the industry, and other times be a source of concern and worry.

There are also internal factors that influence the cost structure of a business. Here at Carcare, we talk about the cost of vehicle inventory. We divide this into fully controllable stockdays and partially controllable stockdays.

The days that are harder to control are how quickly the car sells. However, some variables can be controlled here.

Pricing strategy – This is a strong controllable factor; how you price your cars to stay competitive over time.

Sales channel – dealership, export, auction, or selling the car yourself.

Advertising strategy – The format, such as a correct ad, good headlines, video, high-quality images, etc., but also the amount of exposure. A harder-to-sell car needs more exposure to be sold within a reasonable time or alternatively, you might choose a different sales channel. There are many services available to automate this aspect of advertising. Carcare can help identify when a car is hard to sell and automate other services to increase exposure of specific vehicles based on data points like how hard it is to sell the car.

Beyond that, the market controls how quickly the car will be sold. If you gain insight into how quickly a car will sell when you trade it in or even before, it’s a good support for deciding whether it’s wise to sell the car on your own or not. A good tip is also to have a clear disposal strategy tied to the typical values at which your inventory should be sold. For example, adjusting the price within a tight range and selling the car when it gets a certain age. Here, you can use the profit margin on the car to decide when a car should be disposed of in order to avoid a negative result on the vehicle.

When it comes to controllable stock days, it refers to the time from when a car is traded in until it is ready for sale, and from when the car is sold until it is delivered. This part is entirely under your control and is incredibly important for the overall results in your used car business. There are several factors that we see as common among those who succeed in creating good results in their used car operations.

1. Clear goals and responsibility allocation

The process for managing a used car needs to be defined and clear to everyone involved – sales and service market. If there is no process that clearly outlines how you operate your business, it’s wise to create one.

2. Data and follow-up

In order to know how long it takes to prepare a car, you need data on it. There need to be measurable points that are continuously tracked. I want to emphasize how important this point is because data is useless if it is not used. A suggestion is weekly meetings where the KPIs you wish to measure are followed up. These KPIs might include preparation time, turnover rate, number of deliveries, and number of purchases, which can be directly linked to the budget.

3. Prioritizing used cars

For brand dealers, clear prioritization is key to creating profitability for used cars. If new cars are always prioritized in the service market over used cars, the flow of new cars needs to be monitored in order to make the right decisions to prepare used cars quickly. Otherwise, there is a risk that used cars will be neglected when a high volume of new cars comes in. By monitoring the flow of new cars and the influx of used cars, service market staffing can be done in an appropriate manner to cover volume fluctuations.

To get an overview of the daily cost associated with each unique vehicle sold, there are a few cost items we use. Cost per vehicle and cost per space.

Cost per vehicle refers to costs that are directly linked to each individual vehicle, and it is also the most commonly used cost today. It is the sum of the interest and depreciation that burden the car from purchase to delivery. The depreciation of your inventory is something we at Carcare can help you calculate continuously, and the interest you pay needs to be calculated by you. Even if you have internal financing, internal interest should still be considered in the calculation. Typically, we see a cost per vehicle per day around £25.

Cost per space also includes the fixed costs indirectly connected to each unique vehicle, such as staff, fuel, rent, etc. These costs are shared with other parts of the business, making them less common to calculate, as it requires more work. These costs vary between different car dealerships, facilities, and volume capacity, but a rough rule of thumb is to double the cost per vehicle. So, in the above example, the cost per space would be £50.

To calculate the total inventory holding cost per vehicle, you can use the following formula:

Cost per vehicle = (365 / [turnover rate]) x [cost per vehicle per day]
Turnover rate = [number of vehicles delivered during the year] / [average inventory during the year]

Simply put, the turnover rate is the number of vehicles delivered in a year divided by the average inventory. Once you have clarity on the turnover rate, you can calculate how many days it currently takes for a car to go from purchase to delivery.

Note: Keep in mind that just because you sell the car, the cost will still be incurred until you deliver it. Once you have the average daily cost and the number of days a car is in stock, you can easily calculate the cost of holding a car in inventory.

We will illustrate with a calculation example:

* The interest cost can be calculated by reviewing internal invoices and allocating it per vehicle. The depreciation is something we can help you with by comparing the initial listed price with the actual sale price of the vehicle. In the example above, we have calculated a depreciation of £730 per vehicle and then divided it by the average number of days a vehicle is kept in inventory, which is 42.59 days.

By systematically working to improve lead times, the business will benefit in more ways than just financial results. You will also experience better collaboration between departments, be able to actively work on understanding which external partners are delivering and which need to be replaced, and in the long term, centralize several key functions to further optimize the business’s profitability.

Lead time is also a key performance indicator (KPI) because it directly impacts efficiency, profitability, and customer satisfaction. Here are several reasons why lead time is crucial:

1. Efficiency Measurement: Lead time helps measure how efficiently a business moves from one stage to the next, whether it’s purchasing, preparing a vehicle for sale, or completing a transaction. Reducing lead time can streamline operations and reduce unnecessary delays.
3. Cost Control: Shorter lead times reduce the time that vehicles are held in inventory, which in turn minimizes associated costs like storage, interest, and depreciation. This can significantly improve the bottom line.
5. Customer Satisfaction: Lead time affects how quickly a customer can receive the product or service. A shorter lead time means faster delivery, which is a critical factor in customer satisfaction and loyalty, especially in competitive markets.
7. Inventory Management: Lead time as a KPI helps monitor the flow of inventory. By knowing the time it takes to prepare and sell a vehicle, businesses can better manage stock levels, reduce overstocking, and optimize inventory turnover.
9. Strategic Decision-Making: Tracking lead time allows businesses to identify bottlenecks in their processes and make data-driven decisions to improve their operations, leading to higher sales and better resource allocation.

In essence, having lead time as a KPI helps a business stay competitive, optimize operations, and deliver a better experience to customers.