In my last column, I suggested that “provisioning” is a more apt description for determining the types of vehicles that are appropriate for a dealership’s inventory and marketplace.

I like this term as a replacement for “stocking” because it better describes the need for a holistic regard for a dealership’s market and its sales and profit goals when acquiring and retailing vehicles. Likewise, with today’s used vehicle sourcing challenge, “stocking” doesn’t quite capture the time, energy and effort it takes to outfit a dealer’s inventory with the “right” vehicles for a store.

If you boil down the elements of a provisioning strategy, there are three key questions that serve as its foundation:

1. What vehicles should I acquire? The short answer to this question is “whatever units you can sell and turn the profit you’d like to achieve.” There’s more to it, of course, but one of the first hurdles dealers need to address is the reflex to “go with what they know” and skew their inventories with franchise brand vehicles. In today’s market, dealers who are successful used vehicle retailers typically run a minimum 50/50 split between franchise brand and off-brand vehicles. The reason: They recognize that, as brand-agnostic retailers, a diverse mix of makes and models means greater appeal to a wider array of potential buyers. Rather than limit their sales potential, these dealers expand it.

Dealers should also account for the time it might take to sell a vehicle. This market-based insight, known as market day’s supply, is critical to achieve what I call maximum “velocity” for a dealer’s inventory. Example: A dealer has two units under consideration—Unit A will likely sell in 10 days, while Unit B will likely sell in 30 days. It’s a no-brainer to recognize that a dealer could sell three “A” units in the time it takes to sell one “B” unit, and go to the bank three times instead of just once.

Historically, dealers haven’t fully accounted for the time it takes to sell a vehicle when they’re making “stocking” decisions. Similarly, their assessments of buyer demand and interest are often based on instinct, rather than the true-blue market data available today to aid vehicle acquisition decisions.

2. What should I pay? In today’s marketplace, dealers should first assess the retail price potential of a vehicle to determine the wholesale price. Let’s face it, paying $X at retail and adding a standard $Y mark-up won’t fly with today’s price-smart buyers. In fact, I’m hearing more dealers report that their customers are using trade-in values they gather from online sources to determine the retail amount they’re willing to pay. Such dynamics put greater pressure on dealers who don’t assess retail price potential when they determine the wholesale price point that will work for their stores.

Following this logic, dealers should also account for reconditioning and other costs they expect to incur to acquire and retail a vehicle as part of their “what should I pay?” determination. Similarly, they should add in the expected gross profit they expect the vehicle to achieve. Example: if a vehicle’s wholesale purchase price is $10,000, and the vehicle will require $650 in reconditioning, transportation and other costs, and the dealer expects $1,500 in gross profit, the dealer should determine whether the vehicle will appeal to buyers at a $12,150 retail price point. If it doesn’t, the dealer should look to find the vehicle at a lower wholesale purchase price, look for ways to lower reconditioning/related costs or adjust gross profit expectations to meet the market. If this vehicle doesn’t pencil out, there’s a better-than-good chance the dealer should be looking to acquire a different unit.

3. Where can I find the vehicle? This is unquestionably the most challenging element of provisioning used vehicle inventory, given the scarcity of supply and the greater numbers of dealers focusing on used vehicles to maintain vitality at their stores. These days, the most sophisticated dealers and used vehicle managers spend little time at physical auctions because they’ve learned today’s technology and tools offer more efficient ways and means to find the vehicles they want for their stores. In fact, at the most successful used vehicle departments, the used vehicle manager rarely leaves the office and spends the bulk of his/her time evaluating auction run lists, placing bids and purchasing wholesale vehicles from a computer. In some cases, the technology and tools do these tasks automatically, using purchase parameters the used vehicle manager established after evaluating the “what vehicles should I acquire?” and “what should I pay?” components of a provisioning strategy. This level of automation is a big time-saver for used vehicle managers, allowing them to spend less time finding vehicles and more time selling them to customers.

In my next column, I’ll drill down more into provisioning and share the “Seven Market-Based Vital Signs of a Winning Used Vehicle.”