Depreciation: Hours Matter!

Like 2017, 2018 will present similar profitability challenges. In order to have a profitable year, every seed, gallon of chemical and water, pound of fertilizer, and machine hour will need to be maximized. Profitability will hinge on how each is respectively planted, applied, harvested, and ultimately marketed. Like you will read in this flyer, machine optimization plays a fundamental role in maximizing efficiencies. With increased efficiencies come increased profits. These profits can come in the form of seed savings, not over applying chemical and fertilizer, and regulating water application based on soil type and field conditions. These material reduction play a profound role in On-Farm Income. Like seed, chemical, fertilizer, and water machine hours can be decreased as well.  This article will outline a simple way to reduce the hours of non-revenue generating machine hours.

I will use a 8370R with 906 hours as an example.  JD link is nothing new and has been a standard option on John Deere Equipment since 2012. Since JD Link is a standard option there is no additional hardware or software need. It is all part of the machine from the factory. Along with machine performance, JD Link tracks machine hours and how they are used. This illustration is the lifetime JD Link Data for hours of use.  The statistics I want to draw attention to is the number of idle hours. This tractor has 906.7 total hours of use. It has set at idle for 227.6 hours. If you do the math this tractor has idled for 25% of its life. This machine will be assed with the number of hours on the meter at the time of trade. The total working hours of the machine will be the same regardless if the machine is at idle or not. The difference in hours could easily equate to $15,000 – $20,000 in total trade difference alone. This 8370R will do the exact same amount of work but, instead would have 679.1 hours. The salability of the machine goes up and so will the trade value.  The other cost savings is $772.50 at $2.50 per gallon in fuel savings. I understand there are reasons why the machine will set at idle during the work day. The point I am making is hours matter! What would the impact be if idle hours were cut in half? It would have an effect on resale of the tractor as well as the trade value.

If you would like to hear more conversations like these tune into Moving Iron Podcast  which can be found on iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud. You can also visit my website, www.MovingIronLLC.com, where you can find recent Blog Post from the Moving Iron Blog, past and current episodes of Moving Iron Podcast, Morning Market Roundup with Chip Nellinger, and the Tax Tip of The Week with Glen Birnbaum. So until next time, let’s go move some iron.

Machine Reconditioning and its Importance

It is hard to believe that another Fall Harvest will be upon us soon and Planting Spring Crops is just around the corner. With that being said Combines, Grain Carts, Tractors, various other kinds of Harvest Support Equipment, and Drills will be resurrected once again to bring the bushels off the fields and to the Bin for Market. The importance of making sure your machine is in peak operation condition is paramount during harvest and the current economy. Every bushel of grain is equally important and none of it can be wasted or lost. If your machine is free of breakdowns your efficiencies go up and so do your profits. This means your machine is set correctly and your overall machine utilization is at its max. Grain lose is minimal so more bushels are getting in the bin. The Grain Cart Tractor and Cart are working in tandem for speedy delivery to the Semis hauling grain back to the Farm or Elevator. Time is of the essence during Harvest. Mother Nature doesn’t always cooperate and downtime doesn’t make it any easier.

Winter Service Inspections are a great time to make sure your machines are ready to go and all of the Gremlins are found and disposed of. This is the best time to have the complete attention of the service department. They aren’t slammed with Customer’s calls needing urgent attention because their machine is down. Also, Parts and Service have great specials they run to help maximize your purchasing power. When your unit comes out in the Spring it will be ready to do its part in planting and harvesting without flaw, knock on wood!!

If you are in the market for a New or New-To-You piece of equipment then Recondition will help the value of your trade in. The better condition a piece of equipment is in during the sales process the better the residual value will be. Recondition plays a key role in what a trade is worth. The less effort the dealership has to put into Recondition Process the less cost will need to be associated in buying the equipment.

Regardless, of age condition plays a key in role in the resale of the machine as well. Sales People are more likely to recommend a machine to a customer if they have the confidence it will be perform well and keep the customer running. If the Sales Person does not feel like the machine is a good machine and there will be potential issues, not accounted for during the evaluation process, then the machine will sit and subsequent trades will have a stigma attached and the machine residual value will reflect this attitude.

Future customers find solace in repair history. The more information the dealership can give a potential customer the more likely they will find comfort with the machine and thus purchase. Having past winter inspections to show what has been repaired and at what hour intervals paints a picture of a well taken care of machine. When a machine, historically, sells fast the more the machine’s residual value increases. The cost to hold goes down; thereby more residual value for the trade in.

In closing, understanding how Recondition effects machine’s performance helps better understand the machine’s ability to be efficient. The more the efficient the machine is during Planting or Harvest Seasons the more profitable the machine is. The better shape the machine is in when it comes time to sell the greater the residual value is and a greater return on investment. The machine stays profitable throughout its life cycle.

If you would like to hear more conversations like these tune into Moving Iron Podcast  which can be found on iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud. You can also visit my website, www.MovingIronLLC.com, where you can find recent Blog Post from the Moving Iron Blog, past and current episodes of Moving Iron Podcast, Morning Market Roundup with Chip Nellinger, and the Tax Tip of The Week with Glen Birnbaum. So until next time, let’s go move some iron.

The Case for a Sales Department Machine Inspector

Inaccurate Machine Reconditioning can completely wreck inventory. If the estimate during the Sales Process is to low or something was missed; the end result could be a loser for the dealership. If the Recondition Estimate is exceeded, the unit could be sold for a loss. Writing Machine Book Values down and paying interest, costing the dealership money and negative margin selling opportunities demotivate Sales Reps. On the flip side, over estimating can have the same effect. It is easy to put too much cushion and miss the deal. So instead of creating Margin, Volume, and Market Share via Aftermarket and Whole Goods the deal is gone. Having machines for Sales Reps to talk about and sell generate margin. It is easy for Reps to become demotivated by stagnate inventory they have pitched over and over again. So, how do you balance this fine line we walk? In my opinion, the sales department needs to have an inspector.

One of the questions I get when I bring this up is “Why would we hire someone to inspect possible trades when we have a shop full of Techs that can do the same thing?”

This is true and they are really good at what they do. That’s why they need to stay in the shop working on revenue producing jobs. The more time they spend looking at equipment the dealership does not own the less revenue they generate. Tech’s time is valuable and needs to be spent billing labor hours. Also, because of their nature, Techs are going to lean toward fix if something is questionable. There is nothing wrong with this. That is what they get paid to do, find billable labor hours and bill them. The residual affect is too high of Recondition Estimate and an increased trade difference. These issues will need to be notated and ultimately shared with the customer.

The Sales Inspector would be the liaison between the Sales Department and the Service Department. When a machine is going through the sale process the Inspector would inspect the machine. Once this inspection was done the evaluator would then know if the machine was meant for Retail, Wholesale or, Auction. Having a clear picture of machine during the sales process will go a long way in securing the overall machine salability and moreover, profitability. The margin of error has greatly narrowed and, like it or not, you know what the machine truly has to offer.

The other key role an Inspector would play is handling the reconditioning process once the machine has been traded. The inspector would handle approving all work orders for Used Inventory. The Machine Inspector would be held accountable for the budget put in place during the sales inspection process. As well as, hold the service department accountable for getting the machine ready in a timely manner and doing so at or under budget. If the trading location is too busy to inspect, detail, and service the Used Machine, then the Inspector would have the authority to relocate the work to another shop.

In the current economic state of the Ag Equipment Business, it hard to justify such a position. This position will more than pay for itself by decreasing overall time to sell, spending less money during the Recondition Process, and increasing parts and service sales. The customer will have more control of what to fix during the sale process. If a customer knows that the first $10,000, for example, is covered they are more likely to spend additional money in the Shop and at the Parts Counter. The dealership now has better control over the outcome of the machine’s profitability.

If you would like to hear more conversations like these tune into Moving Iron Podcast  which can be found on iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud. You can also visit my website, www.MovingIronLLC.com, where you can find recent Blog Post from the Moving Iron Blog, past and current episodes of Moving Iron Podcast, After the Bell with Chip Nellinger, and the Tax Tip of The Week with Glen Birnbaum. So until next time, let’s go move some iron.

 

 

New Tech Old Planters: The Birth of a New Industry Trend

The Planter Market has been a rollercoaster since 2014. Four years ago, if you had a planter larger than a single row you had a hard time getting rid of it. Like other equipment segments, planters were highly produced and the market was flush with inventory. Used planters had piled up on Dealer’s Lots and the Auction Market was the new place to buy Used Planters. Week after week auctions bill where loaded with planters. They were everywhere! Of all the equipment in the last 5 years, planters took the worst beating. New planter sales fell from Highs of 50-60 to even 100 per year to lows in the single digits. Planters were being rebuilt instead of trading for new. High speed technology was introduced from manufactures but “Bolt On” equipment had been available for several years at this point. Older planters started getting a face lift with new high speed technology.

As a Remarking Manager, my job is to look for trend in Used Equipment. With the current Farm Economy, Precision Planting and Retro Kits are increasing in popularity. Used Planter Inventory are at all-time lows. With that being said, the value of used planters have not changed. Used planters, pre-high speed technology, have remained the same for the past 3-4 years. Planter values, at auction or retail, have held steady with no real sign of change in the near future.

If you spend any time on “Ag Twitter” it’s not uncommon to hear the term “Precision Donor” tossed  around. End users have created a demand for old planters. The odd part is the demand has not created an uptick in price. These users are looking for a cheap planters to retrofit with new “Bolt On” High Speed Technology. End Users see the benefits of High Speed Technology. There are test plot after test plot showing the results of stand, reduced seed population, and add efficiencies in the field. All of which is driving profit to the bottom line and in the current environment every little bit counts.

Demand for the older, per 2012 planters, is real. The drawback is price. End Users are looking for a $25,000, or less, something to spend $50K plus on and have $75,000 planter that will compete in performance with a $250,000 – $300,000 planters. I am not saying that installing High Speed Technology on and older planter will give the same planter as new but, it is darn close. The landscape is ripe with shops who specialize in doing just this thing.

Aftermarket Technology, like Precision Planting, is not new to the market. Due to the down turn and higher trade differences, solutions like these have become popular. Producers are looking for bang for their buck and these solutions are providing the bang. So, with this all being said how does this effect the Used Marketplace? I think the Jury is still out. Planters have always been a one-off type of machine. Every setup is specific to each Producer. What one loves the other hates. I have to think this will carry over to the “Bolt On” Market. The investment in this technology, in my opinion, will have the value the next buyer deems it worth. What will a $50,000 investment yield after the new wears off. Only time will tell and it could be less thanks you think!

If you want to hear more topics like this tune into Moving Iron Podcast where this very topic has been has been discussed. Regina Narges, Aaron Fintel, and Myself talk about the latest trend in the Ag Equipment Marketplace. Make sure to visit MovingIronLLC.com for more about the Ag Equipment Industry. So, until next time, let’s go move some iron.

Has the Auction Market Become the New Retail Buying Market or is Supply and Demand Driving Pricing at Retirement and On Farm Auctions?

It is not a shock to anyone when I say the last five year auction activity has greatly increased. At the end of 2014, Used Equipment Inventories where at all-time highs. The Auction Market became a dumping ground for all kinds of equipment. Late model, high hour, and everything in between. There was nothing sacred. The use of the auction market is still strong today with Dealership Liquidations, Farm Retirement Sales, and Farm Liquidation. With large amounts of equipment selling on the open market; has the buyer become more retail minded at the auction? In this article, I will give some examples supporting auction activity and Retail Pricing at Dealerships.

When it comes to pricing Used Equipment everyone is wrong! You just hope you’re less wrong than the next guy. I don’t think anyone is predicting the market to the penny and the day something will sell.  That’s what makes it fun. The whole art and science approach. Some days I am scared to death when I value equipment and some days I feel like I have nailed the market. I do my fair share of price reductions, write-downs, and yes I have to use auctions. All of which I was certain I had priced correctly the first time.

With that being said, I also have equipment that is not moving or slow to move with retail pricing within a plus or minus 5%-10% range of auction values. At the end of the year I saw auction values within the expectable retail range on like equipment, especially combines, 4WDs, and Row Crop Tractors. I am still seeing the same auction values for the start of 2018. I watched an auction in Illinois in Mid-January, this was a retirement sale and it was good equipment. In this auction, a 2015 612c Corn Head, it had the necessary work done; chains, sprockets, ect. It sold for $49,000.

110 miles away sits 3, 2015 John Deere 612c Corn Heads. These heads are in good shape and have a retail advertised price of $44,900. The three heads on the dealer’s lot for $4100 less and no negotiations have taken place. I know the dealer and they are a first rate group. The heads are in good shape and should be ready to work. Why are they still there? What was it about the auction head the buyer was willing to pay $10,000 more for?

That is just one of many examples I could give with similar outcome. The auction results I am looking at are showing trends of 2015 and older model year equipment and selling as strong or stronger at auction compared to dealer sales data. I don’t think it is a supply demand thing as much as a preference of buying thing.  2015 MY and older the Retirement Auction market seems to be preferred to the dealer’s lot. Another example was of a 8400 2000 hours tractor that sold at a Retirement Sale for $100,000. I am speaking for myself but, I would be hard pressed to obtain a value this high. I not saying it couldn’t be done, just very hard to make happen. This is surprising considering all of the extras the dealer can offer. For example, low rate financing, extended warranties, and they will take trade ins. That’s not to say auctions won’t put your machine on the next auction either.

The other trend I have noticed is machines newer than 2015 are still showing a very strong retail value compared to the older machines.  For the most part these machines are not as abundant as older models and dealer used late model and low hour equipment inventories are shrinking. It is hard to find these machine at dealerships, much less auctions.

In closing, trends are all pointing to more on line purchasing. The incoming generation of decision makers have sent either half or all of their life buying and bidding purchases on line. It is very acceptable to buy a tractor or combine online sight unseen by taking the word of someone they spoke to, the description they read, and the pictures they look at. It seems these days, the interaction of the sale is done more through text and email then a face-to-face interaction. The scope of the customer is rapidly changing and the dealer will need to change as fast or faster to stay relevant to the customers wants and needs. If you would like to hear more conversations like this tune in to Moving Iron Podcast and read Moving Iron Blog. They can be found at MovingIronLLC.com. So until next time let’s go move some iron.

2013: A Paradigm Shift in the Ag Equipment Business

In 2013, the signs of a looming collapse were becoming clear. In Farm Equipment Magazine, Dr. Jim Weber had been writing a series titled, “The Business of Selling.” An article from the series “Gathering Storm Clouds” was posted July of 2013.  I am paraphrasing but, the article, Dr. Weber talks about low return on sales, dealerships dependence on volume and market share payments. Because of the low returns, dealerships should have been failing in droves. Because of record high commodity prices, record low interest rates, and record on farm income dealerships were able to spike margins with New and Used Whole Goods.

Leading up to the article, conversations had been taking place about how to handle One Year Rolls and what to do with Used Equipment piling up on lots. By this time combine rolls had become an issue. Dealerships were starting to see carryover from bigger multi-unit customers. For example, if the customer buys 6 new machine and trades in six machines, when the next round of trade-ins where coming there might be 1-2 units still on the lot. This kept happening for the next 2-3 years. This was the start of stagnant, slow moving inventories across North America. Dealerships where forced to increase trade differences to bring equipment back into line with market demand. Thus, started the decline in Large and Small Ag Whole Good Sales.

This created a bash lash in the Retail Market. Retail average advertised pricing compared to average auction value started to widen. Overnight trade difference double and in cases tripled. 2014 was first year I noticed a considerable spike in Auction activity, even more so at the end of the year. From October of 2014 until December of 2016 marked the free fall of Used Equipment Values.

To me, the SEMA Equipment Auction held on November 29th, 2016 was the turning point to stabilizing the market. From the SEMA Equipment sale through the end of 2017 auction values started to form a soft bottom. Throughout 2017, the auction market no longer had the wide swings from sale-to-sale. The values became more consistent and predictable. The average retail advertised pricing compared to average action results narrowed. At Retirement Sales and some Dealer Consignment Auctions, values were mirroring dealership retail reported selling prices. The retail Market is also showing signs of life. More dealers have reported the sale of new equipment then in past years and the late model low hour used equipment is in higher demand.

Because of higher trade differences, Producers are running their equipment longer than in the past. The Used Equipment Market is lined with 2012 – 2014 model year machines with more average hours of use per year then I have seen in my career. As the older generation retires, operations fail, and more farm ground transfer hands the same equipment has been ran across more acres. Which, in my opinion, is causing the spike in new and used equipment sales. The lack of late model and low hour equipment coupled with high reconditioning cost have the market moving into a stable condition. With more and more Producers looking for ways to protect cash flow, find better ways to manage risk, and increase efficiencies leasing and extend warranties have become a bigger part of the sales conversations. Lease Return Equipment has also filled some of the void for late model low equipment demand in the market.

In closing, 2018 will mark the fifth year of the current downturn. The positive side is it feels like a soft bottom has formed. Auction Prices are stronger and more consistent. Equipment demand is shaping the market not equipment supply. The gap between advertised retail price and auction values have tightened to a very manageable point.  Model year 2012 – 2014 machines have stabilized and are no longer creating wide rifts in auction value. These machines are now showing consistent auction values and have predictable auction outcomes. Of course, like anything there are exceptions. I can give examples of shock and awe on both sides of the spectrum. MY 2012 – 2014 have also become a commodity because the overwhelming supply in the market. This should be no surprise since this was the height of the Ag Economy Super Cycle. So, for these units to be stable or showing signs of stronger stability is a very encouraging indicator.

If you would like to read or listen to more topics like this Check out Moving Iron Blog and Moving Iron Podcast at MovingIronLLC.com. So, until next time, let’s go move some Iron!!

2018 Used Equipment Marketplace…. In My Opinion.

My outlook for the 2018 used equipment market is going to be the same as 2017 to slightly better. I think good quality used equipment will sell and condition and hours will be the main seller of this equipment. The 1-5 year old stuff will be the sweet spot.

Right now, in my opinion, producers are upgrading equipment because they have to not because they want to. They are faced with large recon bills and some still have payments to make. The recon and payments will affect cashflow and may or may not address any risk management issues the producer might have. Cashflow will be the key player in the purchase or repair of equipment.

In 2018, it will be as important to educate the customer as well as the customer’s lender on equipment and how it is going to effect cashflow and manage risk. The lender needs to know and understand the market and why the equipment is going to affect the cashflow and manage the risk.

In my opinion, the segment of equipment to watch is planters. New planter sales have been so low for so long, customers are going to want to upgrade. New planter technology, whether from the factory or bolt on, will absolutely address the cashflow and risk management the customer’s lenders will be looking for.

Decreased input cost will have a positive reflection on balance sheets. I would also like to draw attention to a podcast from Rabo Bank with Sterling Liddell, titled “A Time to Evolve.” The point of the podcast is that in 2018-19 there is a large amount of equipment that will have to be addressed due to mature leases or financed notes. If you listen to Moving Iron Podcast #38 with Machinery Pete, I talk about 2017 and 2018. Also, the upcoming Moving Iron Podcast #42 with Alan Hoskins, president and CEO of American Farm Mortgage and Financial Services in Louisville, we talk about what lenders are looking for when looking at producers’ operating lines of credit. Look for Moving Iron Podcast #42 the First week of January. Also visit MovingIronLLC.com for more topics and information concerning the Equipment Market Place.

Inventory Issues: It’s More Than Just Having Too Much.

If you ask anyone in the Equipment Business if they have any inventory issues most of the time the conversation will revolve around how they have too much inventory. The conversation will lead into the models or category causing the biggest problem and “If I could just get rid of X number of units how wonderful life would be.” Very rarely does the conversation start with “I have a big inventory problem; I don’t have enough!” In this article, I am going to talk about what happens if your inventory is to low and holes in product mix won’t allow for the washout cycle to be complete. Lack of inventory will have the same effects on Used Equipment Matrixes and Ratios as having too much. These three examples outline why.

Because of holes in your product mix turn will go down because of lack of sales. When your inventory does not have what customers want, they look elsewhere. This will affect Inventory turn because of the way it is calculated. R12 Average Cost of Goods Sold / R12 Average Inventory. If sales aren’t available to support the COGS then your turn will slowly eat itself alive! The same thing happens when Used Inventories are too high. Sales Dollars can’t outpace Inventory Dollars and Turn continues to drop month after month.

Margin can’t escape unscathed either. When inventories are too high several things happen but the biggest two are Inventory Write-downs and Inventory Liquidations. This was the norm in 2015-2016 and 2017 has had its fair share of Inventory Corrections as well. Mass reduction of inventory does come with a price, believe me I know, just like having to little inventory. The biggest pressure here comes from stagnate inventory. I am a firm believer that a machine has a 9-month self-life. Anything beyond 9-months Sales Reps begin to lose faith in the machine and sits on the lot. The margin loss comes from Interest costs, possible write-downs, good old fashion lot rot, and if it has been inventory long enough it might finds its way onto an auction.

The Washout Cycle. It’s hard to complete the Washout Cycle if you don’t have the proper inventory mix to support it. I will give you an example. Let’s say your High Horse Power Row Crop Tractor mix is made up of 15 2000-3000 hours units. That’s it, that’s all you have to work with. At this point your target customer is the 3500-5000 hours Owner. When you have exchanged the current inventory for older; higher hour machines, or a cash no trade scenario, your inventory will not service 75% or more of your customer base eager to refill your Washout Cycle. You will have to either sell a bunch new equipment to start the Washout Cycle and face the same fate just on the other end of the spectrum or, you will be forced to buy equipment at auction, wholesale, or lease returns. These actions are not bad but you are always behind the eight ball. Your customers will be forced to look elsewhere to fill their equipment needs. That means you have lost margin potential, downstream margin potential, and a machine to help complete the Washout Cycle. The last thing you want to give a customer is a reason to shop somewhere else!!

Like every Remarketing Manager, I am fighting inventory issues every day, month, quarter, and year. The only problem is this is the first-time lack of inventory is the issue. Trying to find machines to fill gaps in inventory is proving to be as hard; if not harder than trying to correct a bloated inventory. I am victim to the circumstances in this article and because of it I have had to have a paradigm shift in my thinking. This too shall pass and there will be a new issue to get handle on. Nothing stays the same and everything is relative to the current environment. I think “Those who do not know their history are doomed to repeat it” fits very well in the Remarketing Used Equipment. If you would like to hear more topics like this you can tune into my podcast, Moving Iron Podcast. You can find it at www.MovingIronLLC.com, iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud. So, until next time lets go move some iron!

If you ask anyone in the Equipment Business if they have any inventory issues most of the time the conversation will revolve around how they have too much inventory. The conversation will lead into the models or category causing the biggest problem and “If I could just get rid of X number of units how wonderful life would be.” Very rarely does the conversation start with “I have a big inventory problem; I don’t have enough!” In this article, I am going to talk about what happens if your inventory is to low and holes in product mix won’t allow for the washout cycle to be complete. Lack of inventory will have the same effects on Used Equipment Matrixes and Ratios as having too much. These three examples outline why.

Because of holes in your product mix turn will go down because of lack of sales. When your inventory does not have what customers want, they look elsewhere. This will affect Inventory turn because of the way it is calculated. R12 Average Cost of Goods Sold / R12 Average Inventory. If sales aren’t available to support the COGS then your turn will slowly eat itself alive! The same thing happens when Used Inventories are too high. Sales Dollars can’t outpace Inventory Dollars and Turn continues to drop month after month.

Margin can’t escape unscathed either. When inventories are too high several things happen but the biggest two are Inventory Write-downs and Inventory Liquidations. This was the norm in 2015-2016 and 2017 has had its fair share of Inventory Corrections as well. Mass reduction of inventory does come with a price, believe me I know, just like having to little inventory. The biggest pressure here comes from stagnate inventory. I am a firm believer that a machine has a 9-month self-life. Anything beyond 9-months Sales Reps begin to lose faith in the machine and sits on the lot. The margin loss comes from Interest costs, possible write-downs, good old fashion lot rot, and if it has been inventory long enough it might finds its way onto an auction.

The Washout Cycle. It’s hard to complete the Washout Cycle if you don’t have the proper inventory mix to support it. I will give you an example. Let’s say your High Horse Power Row Crop Tractor mix is made up of 15 2000-3000 hours units. That’s it, that’s all you have to work with. At this point your target customer is the 3500-5000 hours Owner. When you have exchanged the current inventory for older; higher hour machines, or a cash no trade scenario, your inventory will not service 75% or more of your customer base eager to refill your Washout Cycle. You will have to either sell a bunch new equipment to start the Washout Cycle and face the same fate just on the other end of the spectrum or, you will be forced to buy equipment at auction, wholesale, or lease returns. These actions are not bad but you are always behind the eight ball. Your customers will be forced to look elsewhere to fill their equipment needs. That means you have lost margin potential, downstream margin potential, and a machine to help complete the Washout Cycle. The last thing you want to give a customer is a reason to shop somewhere else!!

Like every Remarketing Manager, I am fighting inventory issues every day, month, quarter, and year. The only problem is this is the first-time lack of inventory is the issue. Trying to find machines to fill gaps in inventory is proving to be as hard; if not harder than trying to correct a bloated inventory. I am victim to the circumstances in this article and because of it I have had to have a paradigm shift in my thinking. This too shall pass and there will be a new issue to get handle on. Nothing stays the same and everything is relative to the current environment. I think “Those who do not know their history are doomed to repeat it” fits very well in the Remarketing Used Equipment. If you would like to hear more topics like this you can tune into my podcast, Moving Iron Podcast. You can find it at www.MovingIronLLC.com, iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud. So, until next time lets go move some iron!

Understanding Used Product Segment and Turn.

In my last column, I talked about the importance of understanding the Washout Cycle and how understanding time to hold and number of units to sell through, effect your future inventory. In this edition, I am going to write about the importance of segment turn and how it effects overall Used Equipment Turn. To the people reading this article it is no surprise the bulk of the Dealership’s Cash is tied up in Used Equipment. The risk of every dealership is in used equipment. So much of the Dealership’s profitability is directly tied to its ability to generate cash by selling used equipment. The faster your dealership turns used equipment the more available cash there is to move to the next machine or project. Understanding how each inventory segment effects your overall turn will greatly increase your ability to achieve your turn goals.

Every Inventory has segments which move faster than others. Knowing what those are and how to react to them are paramount for the current economic environment. Dealerships should be trying to turn used inventory as fast as possible. The biggest delay in most segments is seasonality of equipment. For example, combines or planters usually have 2-3 peak selling cycles per year and High HP Row Crop and Utility Tractors have a year around selling cycle. The turn for each segment are dynamically different and it will need to be in order to reach overall turn goal.

Let’s assume the overall turn goal for the organization is 3x-4x but the combine turn currently is at 2x or less. In most case combines will be the slowest moving and have the largest inventory dollars associated. This mean if you rely on combines alone it will be very hard to achieve the stated turn goal. Segments like tractors will have to pick up the slack left by combines. If the turn goal of the dealership is 3x-4x times tractors will have 6x-8x turn. This will create the inventory turnover to influence the overall turn.

Understanding how each segment effects turn is very important. To overcome three segments with less than 2x turns, four segments had to have a 5x turn or better to achieve 3.34x turn. If any of the high turn segments would have be under 5x turn the overall turn would have been less than 3x turn.

So, the questions you have to ask is which segments are the most important to focus on? If the Dealership focus shifts to Combines, Planters, and Tillage with less since of urgency on the tractor segments the dealership will run the risk missing the overall Turn goal. If the Dealership shifts its focus to the tractor segments it will have to increase sales to overcome the lack of Combine, Planter, and Tillage Sales. So unfortunately, there is no silver bullet. Each Segment needs to be equally as important as the next. If the Dealership lets up on one and focuses on the another, there will be ramifications effecting dealership performance.

Every machine traded for has to have a plan associated with it. Customer prospecting is the single most important element to inventory turn success. Knowing your customer base and who to call on, make and extraordinary difference in the washout cycle. The faster a trade cycle washes out, thus increasing dealership’s cash flow.

This has to be a focus of any Remarketing Manager! Not just turn but the Marketing of Equipment. Working with the Dealership’s Marketing Department and helping build campaigns. Using Customer Prospecting services, like EDA, to highlight customers with strong equity positions. Last but not least, creating a strong online presence to showcase the dealership ‘s equipment. That means clean; crisp pictures and strong story telling descriptions outlining first-hand accounts of the machine in question. Description so strong and descriptive when buyer in Iowa closes his/her eyes they can see the machine setting in Nebraska. Every machine in the Used Equipment Eco-system has its place in achieving your Dealership’s Used Inventory Turn Goals.

Where does Inventory Management Start and Why Does it Matter?

Inventory Management has become extremely important for larger dealer groups with tens of millions in inventory and millions at risk.  Auctions have grown because it’s a controlled method to reduce inventory levels and risk.  Because of the growth in auctions, the amount of inventory being sold at auctions has caused equipment values to decline.  Additionally, consumer confidence and the decline in the Ag Economy have put pressure negatively on auction values as well.  On top of this, we still have pressure to meet manufactures demands and sell new equipment… So you have to ask yourself, are you setting yourself up to repeat the not so distant past?

Inventory Management starts with the sale of New Equipment. New Market Share is important for many reasons. Future Used Machine Population helps fuel the Parts and Service Machine. This Machine is an essential revenue source for any dealership. Without strong absorption rates dealerships are relying on Whole Good Sales and during a downturn, Whole Good Sales suffer and Margin Dollars become thinner and thinner.  The other reason New Market Share is important is Mainline Manufacture’s Expectations and the Incentives tied to their Expectations.

How does Washout tie into all of this? Simply, all of the aforementioned dialogue is 100% tied to your ability to the sale the Used Equipment generated from the sale of New Equipment. The dealership has to have an understanding of the volume of Used Equipment it can digest in a given amount of time. It also has understand how this will effect Cash Flow, Used Equipment Inventory Turn, and Return on Assets.

With all of being said, I am not suggesting to stop or even slow the sale of New but to understand what you are getting yourself into. How does the Sale of New Equipment affect Current Used Inventory as well as Future Used Inventory? How does the generation of Used Equipment affect ratios and metrics at your dealership? Last but not least, what are the contingences plans in place to control these predictive outcomes.

Washout Cycles are the best way I have found to control Used Inventory.  I use this method when I look at Used Equipment Inventory, both current and future.  For the sake of these article I will use combines as an example.

For easy math lets assume we sell 25 New Combines and on average sell 125 Used Combines. We will assume there is a 4.5 – 5 unit washout to the best three words in the Equipment Business; Cash No Trade! This means if you sell 25 New Combines then you will generate 113 – 125 Used Combines. Why is this important? This helps me understand the effects this segment of Used Inventory has on the overall Cash Flow, Used Inventory Turn, and Return on Assets.

I like to take a 2-year average of Used Combines sales to set a baseline. Once the baseline is established then I make adjustments based on where the market is year-over-year. So for example, if the average Used Units sold is 125 and the market has soften by 25% I adjust my expectations of Used Combine Sales by 25%. This means the expectation of 125 Used Units will drop to 94.

What happens if you sell 25 New Combines and the Used Combine Market falls off by 25%? It’s only 6 more New combines right. What’s the big deal!!It sounds sweet and innocent but it is a bigger than it looks. These combines have the potential to set in your inventory for a prolong amount of time. These are the combines Sales People call about asking what they can sell them for since they have been in inventory for so long. You know, “Don’t you think it’s time to move these.” If you don’t believe me take a look at your inventories. I am as guilty as the next guy. The next questions I ask is what do the effects of these 27 – 30 combines have on Cash Flow, Used Equipment Turn, and Return on Assets.

Unfortunately in this business the overwhelming amount of dealership cash is tied up in Used Equipment. Now, I now that’s not a shocking revelation to anyone reading this but, what does this cost? Depending on the Floor Plan Amount these combines could be costing the dealership a $1000 per month in Interest Cost alone. This does not account for any depreciation and infamous Lot Rot. So what does it cost to hold these machines in inventory for 1 year? Look at this illustration

Buy looking at these machines it is easier to assess the risk associated with selling new when you know and understand the washout cycles for equipment segments. It allows for planning the worst case scenario and the effects the outcome will have on Used Equipment Turn, Margin, and Return on Assets. This is Risk Management and this is what Remarketing Manager’s do. Manage risk!!

I will leave you with one last thought. No matter the emotional attachment to a deal or “How good of property” a machine will be, it is an imminent object. It doesn’t understand the time value of money, margin, equipment turn or, assets return. It doesn’t care! Have a plan and move forward even when it hurts you will feel better in the long run. Thanks for taking the time to read this and this is the view from my seat on the bus.