In recent years, the used truck market has witnessed dramatic fluctuations, significant price surges, and rapid declines. Accompanying these swings are escalating expenses related to parts, services, insurance, and more. While the factors that lead to these market conditions have been somewhat unique, it is also true that the market is cyclical and it is always important to understand and practice sound inventory management principles.
This article was inspired by a discussion with a dealer who shared how the SOARR appraisal app has transformed their approach to disposition routes. The dealer praised our app for its quick and accurate appraisals with diagnostic information, instant internal communication, and the simplicity of sharing detailed reports with external parties.
While many dealers have skillfully navigated market fluctuations, some may not fully recognize the hidden costs that can erode their profit margins.
During the conversation with the dealer, one pressing concern was the escalating monetary cost of inventory, specifically the daily cost of inventory. This really caught my attention.
The conversation with this dealer opened my eyes to something we at SOARR have always prioritized: the importance of quality inventory management and reducing time-to-market.
However, it made me realize that, having grown up in the industry, I might have overlooked the daily financial impact of unsold trucks. It's easy to forget the subtle ways aging inventory can affect a dealer's bottom line, especially when you're familiar with the routine. Since we often discuss inventory aging in 30-day increments, I hadn't fully considered how these costs accumulate daily or the factors that have shifted in recent years, such as the rising prime rate and its effect on floor plan.
Let's dive deeper into the hidden costs:
The Cost of Floor Plan Financing
Sample Floorplan Costs Breakdown:
- Annual: $50,000 (truck value) x 0.13 (interest rate) = $6,500
- Daily: $6,500 ÷ 365 days = $17.81
- Over Six Months: $17.81 x 180 days = $3,206
(Note: These calculations are based on average numbers. For an accurate assessment, substitute with your dealership’s specific rate. This article is intended to prompt you to perform these calculations to determine your actual expenses.)
It's easy to overlook these figures and feel they don't apply if you're not using a floor plan, perhaps because you operate with your own capital. But even then, consider the opportunity cost of tying up your money in inventory. Imagine that same $50,000 invested in a CD or Money Market Account yielding 5.5%. Alternatively, it could be directed towards a more diverse parts inventory or even a faster-selling truck model. The principle remains: every cent tied up in one place has its cost elsewhere. Even if operating with a floor plan is not your current strategy, I urge you to scrutinize these figures in the context of your dealership.
Depreciation: The Stealthy Devaluator
In the current market landscape, truck values and depreciation appear to have stagnated, hovering around 0%. Some experts are even pointing towards a slight rise in values. However, even when the rate appears minimal, it's crucial not to overlook the potential impact over a six-month period. For the sake of argument, even at a mere 1% depreciation rate, the effects over time can be substantial if not accounted for in managing inventory.
Depreciation Breakdown (Using Simplified Calculations at a 3% Rate as an Example):
- Monthly Depreciation: $50,000 x 0.03 = $1,500
- Daily Depreciation: $1,500 ÷ 30 days = $50
- Six Month Depreciation: $1,500 x 6 = $9,000
Regardless of the current pause in depreciation, knowing its potential effects is essential for any long-term financial planning.
Unplanned Maintenance & Unforeseen “Lot Rot” Costs
Idle trucks still require regular maintenance, which is an ongoing necessity. Very common maintenance needs include tires, seals, and battery replacements. Trucks can also develop issues like low battery fault codes and aging internal fluids. Additionally, routine tasks such as snow removal, washing, and other detailing are essential to keep them looking sharp and in good condition. Beyond these expected maintenance activities, unforeseen "lot rot" costs exist. As we all have experienced, vehicles can incur damage or wear just from sitting unused, leading to unexpected expenses.
What causes lot rot? Extended exposure to the outdoors subjects trucks to environmental wear and tear. Faded paint, jump starts, fault codes, cracked seat coverings or dashboards, or box roof seals are common issues. It's well-known that stationary trucks face heightened risks from elements affecting components like tires and batteries. I once stood just feet away as a truck tire blew up due to dry rot on an aged truck sitting on a paved lot on a hot summer day.
Moreover, a lot (or website) populated with aging inventory can raise eyebrows among potential buyers. Buyers might wonder about the condition or worth of unsold trucks', asking, "Why hasn't this truck sold yet?" Such concerns can influence the overall image of the inventory and the entire dealership.
Beyond depreciation and maintenance, there are insurance costs, rent, utilities, staffing, advertising, and space concerns. Every day an unsold truck remains on the lot is another day of incurred costs without a return on that investment.
When we consolidate the expenses for a single truck over a six-month period:
- Flooring Costs: The daily cost of $17.81 comes to $3,206.
- Depreciation: With the example of a 3% monthly rate on a $50,000 truck, the approximate value decrease is $9,000, though this can vary based on the current market conditions.
- Unanticipated “Lot Rot” Costs: These can average $800.
Simplified Calculation: In the simplified calculation for the impact on 10 trucks, we are excluding the potential depreciation to focus on the more stable costs that accrue regardless of market conditions. Depreciation can vary significantly based on market trends and other external factors, and by excluding it, we provide a conservative estimate of the costs you can more directly control or predict. So, without considering the $9,000 depreciation per truck, the total direct costs for ten trucks (flooring and lot rot only) add up to approximately $40,000 over six months.
Easy Math - 10 trucks total impact = ($40,000)
So, how streamlined is your inventory strategy? Recognizing these challenges early and devising responsive strategies can be the difference between thriving and losing money in the used truck department. One last challenge is remembering the core philosophy of SOARR, which is dictated by sound truck management practices: the disposition route should be determined before you purchase a unit. Determining the disposition route before purchasing a unit is crucial for optimizing inventory aging and ensuring maximum profitability. Considering various routes such as retail, wholesale, auction, export, and salvage allows for flexibility in adapting to market conditions and maximizing returns on investment. Remember that a mix of these on a package deal can offer strategic advantages, maximize inventory turn, reduce floor plan expenses, and boost profitability. Future articles will explore these in more detail.
Connect with the experts at SOARR today. Our 29-year legacy of tech solutions can help you communicate more effectively, decrease time-to-market, boost inventory turnover, widen your marketing reach, and manage inventory aging.
Ask us how our appraisal app and advanced inventory system can help you gain the unprecedented ability to view appraisal, trade-in, and off-lease inventory well before the trucks hit your books. This functionality can move the time to market to a negative number, allowing sales teams time to identify potential buyers and begin marketing the truck even before it's officially in inventory! Experience the difference with SOARR - Sold On ARRival!
With the experts at SOARR, you can confidently navigate the used truck market. Call us at 740-587-1695 or email sales@soarr.com.
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