How to Avoid 7 Deadly Sins in Used Equipment

Your Used Equipment Business Can Be Profitable

If you have been losing money or just breaking even when you sell your used equipment now is the time to audit your operations. Selling trade-ins or former rentals can be a big profit challenge.

If you have more than fifteen rental units that have either a poor rental utilization rate or total monthly cost (depreciation + maintenance + interest) that exceeds monthly revenue, then you should pay close attention to the “Seven Deadly Sins.” You are in the Used Equipment business whether you want to be or not. And, used equipment can be a very profitable opportunity for your dealership.

For many years we have been working with dealers across North America on issues related to running a profitable used equipment business. The following guidelines are the principles and best practices of some of the most successful used equipment dealers we’ve met in the U.S. and Canada.

Good Reasons for Paying Attention to Used Equipment

Besides making more money for your dealership, a strong used equipment business can greatly assist your new machinery market penetration efforts. A strong used equipment business can “pull” new machinery sales because of additional customer traffic. Aggressive used equipment sales greatly improve the residual values of your primary new machinery lines. Accurate knowledge of used equipment values enables more aggressive purchases of customer trade-ins. And, as you expand your used equipment business, you build aftermarket parts and service revenues.

In addition to providing rental revenue units, used trucks at your facility can be utilized to demonstrate competitive comparisons between your primary lines and others. As you expand both your used equipment business and your regional or national “network of contacts,” you will be in a much stronger position to handle large trade packages. Because of your used equipment market knowledge and reconditioning expertise, you can offer top dollar for customer trades and further support the “total customer satisfaction” image of your dealership.

DEADLY SIN #1: Failure to Manage the Used Equipment Business as a Revenue Center
Very simply, a used truck business plan helps ensure bottom-line results. A creative used equipment business plan should cover how to buy right, control reconditioning cost, target market niches, how to monitor values, and how to merchandise. By assigning someone to map out a direction for the used equipment business, you have taken the first step toward responsibility and accountability for profitable operations. Your plan should provide a Road Map: where are we going, why, and how. It enables you to measure progress and monitor performance. A good plan allows you to define the resources needed to operate the business as a business. The used machinery business demands a different set of management skills and technical knowledge than your new equipment or rental businesses.

In our experience, the most profitable used equipment dealers have an assigned used equipment sales specialist or “bus driver.” This person is responsible for making it happen.

We found that management focus is the single most important step. Unless someone is assigned to focus on the issues, and develop expertise, the dealership will probably not be a profitable player.

Successful dealers with profitable used machinery operations treat their Used Equipment Department with the same rigors and disciplines as new machinery, rentals, parts, service, and finance/insurance. Used machinery must not be a loss leader to help sell new trucks, bury over allowances or a method for disposing of units coming off rental.

A simple five-page used truck business plan is a good start. Conduct a thorough market assessment. Who is selling what at what price? Do a SWOT analysis (strengths, weaknesses, opportunities, threats). Develop a Vision Statement. Structure an Operations Plan that yields at least 15% Operating Income. Establish policies to prevent “over-building” reconditioning costs by Service for customer trade-ins or auction purchases. By establishing a budget with profit goals, you can control expenses (especially reconditioning) and implement a formal used truck sales strategy.

DEADLY SIN #2: Failure to Manage the Inventory
During a recent field trip, we found several dealers with used equipment inventories (including customer trades and rental fleet cast- offs) older than twelve to fifteen months. Many of the units had not been reconditioned and were far from “front line ready.” Numerous units were over-valued because of “over allowances” on new machinery sales. And, their retail prices were totally out of sync with the realities of local market conditions. Some of the Dealer Principals were reluctant to clean out the inventory and take the loss. In addition, several had pledged these assets against bank loans. Much of the profits and lots of the cash gained from recent machinery sales for the year were sitting out on the lot getting old and rusty.

Unlike fine wine, Used Machinery Values DO NOT improve with age!

Proper used equipment inventory management includes the following essential steps.

1. Establish a 90 and Out Policy.
   Dealers who have conducted a “trading analysis” on margins on used trucks have found the longer a truck sits in inventory after the “sell” disposition is made, the lower the average margin. The highest margins are made if the unit is sold within the first 60 to 90 days of arrival in inventory. Once a unit ages beyond 120 dDEADLY SINays, the odds of making money become very slim.
2. Make an Early Disposition Decision
   Successful used equipment dealers make the Disposition Decision before the unit is purchased and brought into inventory. Will the unit be sold at retail? Will it go into the rental fleet? Sold at wholesale or at auction? Will it be used for parts? Or, scrapped? The Disposition Decision is implemented the first day the unit arrives.
3. Establish a Firm Reconditioning Strategy
   If the unit is to be sold at retail, it should be scheduled for reconditioning immediately. The level of reconditioning investment should generally not exceed 20% of wholesale value. Heavy mechanical work should be done immediately based on a firm quote and work order from Service. Get a commitment from the Service Manager not to do extras without your approval. The reconditioned unit should be available for display and sale in five working days or less. If the unit is not reconditioned for 60 – 90 days, the odds of selling it at a profit are greatly diminished.
4. Maintain an Accurate Over/Under Report
   If you have more than 12 or 15 used equipment units, an Over/Under Report will help you monitor book values against realistic wholesale values. It is essential to understand the meaning and difference between wholesale value and book value.
   Book Value is Acquisition Cost + Inbound Freight + Reconditioning Cost.
   Wholesale Value is the cash amount you can get from another dealer in 48 hours.
   If your total Book Value greatly exceeds current Wholesale Market value, you can expect major difficulty achieving profitable disposition of the used unit.
   
   Here are the column headings for your “Over/Under Report.”
   Used Equipment Over/Under Report

This unit has additional invoices coming from the shop that will increase book value. The unit is currently over-valued by $1,100, and, unless it is given special attention, it will probably sit in inventory for a very long time.

5. Maintain a “Balanced” Inventory
   Successful dealers maintain the types of used machinery units in stock that are most in demand for both high-utilization rentals as well as for purchase. Proper inventory balancing often requires the dealer to purchase units at auction or buy them at wholesale
6. Purchase “Blenders.”
   Blenders help move over-valued units. Good low-cost units can be purchased at wholesale from other dealers or at auctions. These units, if merchandised properly, can bring in gross margins of 35 – 40%. Sell higher-margin “blenders” together with “over-valued” units (perhaps even at a loss) to clean out your junk.
7. Closely Monitor an Aging Report of Used Equipment Inventory.
   The goal is to achieve 6 to 8 turns a year, with no more than two months of inventory on hand. At least 50% of units should be under 30 days. And, zero over 180.

DEADLY SIN #3 Failure to Identify Niche Markets for Used Equipment

Most used equipment buyers are quite different than new truck buyers. Their motivations are different. They have different financing requirements. The purchase cycle can be much shorter. And, the used equipment buyers are often repeat customers. A study of your historical used truck buyers could provide some insight into the niches available in your local market. What are their applications? What is their replacement cycle? How do they do maintenance? What are their financing requirements?

DEADLY SIN #4 Failure to Properly Manage the Used Equipment Sales Effort

Used truck sales compensation should be based on gross profit rather than sales volume. Many dealers find that a used truck sales specialist is necessary, especially if you are moving more than 75-80 used units per year. New truck sales reps often don’t get very enthusiastic about working with old, dirty equipment. It seems less prestigious. The used equipment specialist can dig in and greatly help manage the subtleties of the business.

DEADLY SIN #5 Failure to Accurately Track Wholesale and Retail Values

Rather than look at a manufacturer’s price list to determine values, the used equipment specialist knows he/she must check with the “network” and attend auctions to accurately track values. He/she builds a regional or national network of industry contacts, identifies niche markets, and measures progress.

A regional network of five-six used equipment managers selling competitive lines is the key to monitoring used equipment values. If you bring in a used brand X unit, you can easily determine cash or wholesale value from your network contacts. A very large, highly successful dealer calls his network every Monday to update his valuations.

Remember, Wholesale Value is the price that can be obtained for a used truck in cash from another dealer in one or two days. Retail Value is defined as the amount that can be obtained from an end-user in about 30 days. Unless accurate wholesale and retail values are known, serious mistakes can be made at the time of appraisal and your “purchase” of the trade from your customer.

Unless accurate wholesale and retail values are known, serious mistakes can be made at the time of appraisal and your “purchase” of the trade from your customer.

DEADLY SIN #6 Failure to Achieve BENCHMARK Operating Standards

A profitable dealership’s used equipment operations typically achieve all of these Benchmark Performance Operating Standards:

• Zero inventory of “For Sale” units aged over 180 days.
• ŸMix of used equipment “retail to wholesale” is about 80% to 20%. (Retail earns much higher margins than wholesale and contributes significantly to the success of the operation.)
• ŸUsed equipment sales are approximately 7 – 10% of total dealer sales.
• ŸRetail used equipment achieves Gross Profit Margin of at least 34-35%.
• ŸUsed equipment department Operating Income is 14-15% of used equipment sales.
• ŸUsed equipment department purchases about 50% of units and takes 50% in on trade to ensure a balanced inventory.

DEADLY SIN #7 Failure to Appoint a Used Equipment Specialist/Manager

By now you should see the magnitude of the responsibility to manage a profitable Used Equipment Business Unit in your dealership. Effective used equipment management clearly requires a highly- motivated and knowledgeable specialist who is focused on profitable market penetration. Simply appointing a super used truck sales rep is not enough to be successful in this complex business.

For example, an astute used equipment specialist, through his/her “national network” contacts, can profitably move excess “seasonal” units that would otherwise sit idle in the dealership for four or five more months.

By avoiding the “Seven Deadly Sins” you will make stronger margins at each step: New Machinery Sales as well as Used Machinery Sales. Rejoice!

To discuss any aspect of this article, please contact me: Walt@mcdonaldgroupinc.com. For more in-depth coverage of Successful Used Equipment Management, please see:

Achieving Excellence in Dealer Distributor Performance, “Revenue Centers in Focus,” Chapter 6, Managing Rentals and Used Equipment Operations by Walter J. McDonald

Strategies, Tactics, Operations for Achieving Dealer Excellence , Chapter 12, “Used Machinery Management” by Walter J. McDonald

25 Profit Building Tools for Machinery Dealers, “Decrease Cost of Sales,” Chapter 12, Contain Used Equipment Reconditioning Cost and Over-Valuating Trades by Walter J. McDonald

The full set is now on sale and available at: www.mcdonaldgroupinc.com/masters-program.