Insourcing vs. outsourcing is one of the primary questions talented owner operators face. On the one hand, you know that doing things in-house could lead to innovation and uniqueness in your marketplace, on the other hand, outsourcing could free up your staff and help you find techniques that are best practices in other dealers on their network.
I have a simple formula that I called the S+P+a+M+ formula, SPaM+ for short, that I use to make my decisions. Let me break it down for you:
1. S+, will the insourcing and removal of a 3rd party lead to a significant SAVINGS for my dealerships?
2. P+, will the insourcing and elimination of a 3rd party result in considerable PROFIT for my dealerships?
3. a+, will insourcing help me AUTOMATE some process that would run smoother for my teams? It is a lower case “a” because I believe technology plays a smaller role than we think. An incredible process will trump tech any day of the week. I included a+ in my formula because if you can combine smart tech with an incredible process, you have a winning product.
4. M+, will insourcing and ultimate replacement of a 3rd party help me gain MARKET SHARE?
Let’s see this formula in action. In preparation for a Dealer twenty group meeting we are planning, I demonstrated the idea on our bid sale marketplace, Auction Simplified, this way:
S+ Significant Savings at my dealership?
“Will running a bid sale at my dealership be less expensive than taking cars to off-site sales?”
The average dealer takes 500 or so cars to auction per year at an average cost (seller fee) of $200 and an average shipping fee of $30
500 x (200+30) = approximate cost or $115,000
For a dealer to hold their own bid sale auction would require an auction employee to load cars, line up cars, manage inspection day and collect payment, some space, and some software.
Employee $15 per hour or $31,200 per year.
If we carve out some space on our lot or even at a holding lot, we could expense ourselves $2500 or so per month for the auction. Expensing for space you already own is optional, but CFO’s love it because it allows them to break out the actual expense of your auction.
$2,500 *12 or 30,000 per year.
Using our Auction Simplified Marketplace is free to sellers. So Zero cost for marketing and software.
Let’s do the math on Significant Savings:
Spending on 3rd parties: $115,000 minus (-) Cost to hold our own auction $61,200
Total Savings by running our own auction: $53,800
For some dealers, these savings would not be enough incentive to switch to insourcing. Remember I said “Significant Savings,” still in the right direction. Of course, larger dealer groups experience more significant savings.
Let’s move on to the next section.
P+ Significant Profit Improvement for My Dealerships?
“Will selling cars directly to wholesalers in a controlled fashion using a bid sale platform significantly improve wholesale profit?”
In a recent study of bid-sale dealers, found an average wholesale profit of $455. Part of this is because the buyers can view and drive the cars before bidding (transparency), not like a typical “RED LIGHT” sale. Part of this is because it is a real silent bid (an even playing field for buyers). Another reason for the profit is the higher sell rate experienced at bid sale auctions. Many of our Auction Simplified dealers are experiencing 90+% sell rate as compared to 60% at traditional auctions.
It is proven that higher sell-rate, lessons bidder fatigue and increases attendance which ultimately results in a higher profit.
$455 x 500 units per year $227,500 in potential profit. SIGNIFICANT!
Now we are heading in the right direction towards the SPAM+ formula.
a+, Significant Improvement in Automation for my dealerships?
“Will using Auction Simplified for my bid sale platform improve the speed in which I sell wholesale cars and or improve the processing time?”
Dale Pollak, in his best-selling book Velocity, taught us that speed to market with retail cars would significantly reduce days’ supply. The same holds true for wholesale. How long are your cars idle at auction or waiting to be transported? One day? Two or in some cases 5-10?
Placing your cars online in front of wholesale buyers the day they arrive will significantly improve wholesale days’ supply and by its nature improve profit.
With Auction Simplified, we integrate with your existing inventory software which eliminates duplicate keystrokes and speeds up the process of posting cars online.
For dealers that are already running bid sale auctions with paper bids, Auction Simplified automates the process and auto tabulates the winners, allows them to bid online and in person and even sends them an invoice.
Let’s Recap, Wholesale Cars Sold Faster, with fewer keystrokes and completely automated invoicing and tabulation. SIGNIFICANT!
M+, Significant Improvement in MARKET SHARE?
“Will holding my own auction give my dealership an advantage over the competition?”
I learned this first hand with the Dealer Group I was a part of for 17 years, they held their own weekly auction which gave them an unfair advantage (or impressive advantage from our perspective) over the competition.
It is simple really, if you can put more in every trade-in than the competition, you will gain market share by the number of extra deals you can put together.
Using CarMax as the example, they earn over $900 per wholesale car at their 98% sell rate auctions around the country. Does that give them an unfair advantage over your dealership who is spending money to sell cars with a 3rd party? You betcha!
Market Share Improvement? SIGNIFICANT!
So when is a project good enough?
If your project passes the four tests above, it is a no-brainer. But not every project will. The point of fact: even our program, Auction Simplified, from the example above, scored 3.5 out of 4.0 because the savings differential S+ was good but not significant.
My rule was this;
- If it failed the test if was not considered.
- Scores between 2-3, should be delegated to my team for further investigation, then I relied on my team’s opinion as to the project’s validity.
- Projects with 3+ score, with this many of significant improvements for my dealership, I would schedule this project to be launched with all possible haste.
I hope this helps with your decision-making process and helps improve your dealerships.
If you would like to discuss this article or have questions about our company, call my cell at 716-818-4444 or email email@example.com