Because we are a spend management practice, we have the opportunity to review a lot of expense data and have a number of conversations with Dealerships in the auto and truck space. Those conversations often reinforce information that we are already aware of, but many times, they reflect new themes, new challenges and new issues, which if common among the industry, require new or modified strategies.
Feedback from Dealerships and from our clients over the past few months have indicated a common theme for small dealerships, small groups and even mega-groups.
Common Theme: Traffic and sales are strong, but maintaining profitability or improving profitability is becoming a challenge for a number of reasons.
- Traffic is comparable to 2014, but sales are down due to increased competition
- Buyers are much more informed on price, so Dealerships have to become more competitive on price
- Profitability for car sales is slipping over 2014 levels in some geographic areas
- Expense reduction efforts would normally target headcount, but that strategy presents challenges too if the headcount considered impacts CSI scores
- If CSI scores are not maintained, factory reimbursement falls, further challenging profitability
- Dealerships are concluding that new thinking regarding the purchase of supplies and services is required and one of the few options they have left to attack expenses and improve bottom line profitability.
You Objectives Dictate Your Strategy
All Dealerships should be aware of the potential benefits of centralizing their purchasing function across the dealership group by now. Most dealerships can reduce costs anywhere from 15-25% of their supplies and services by taking a more strategic approach to purchasing. The results are there. Purchasing research suggests a 25% cost reduction opportunity and we have averaged 21% to 25% in each of the last 8 years of our practice. It matters little where the dealership is located but we do tend to see that the smaller dealerships, the one and two store groups, generally have better pricing and smaller supply bases….which translates to lower costs and higher profitability. But all dealerships will benefit from a centralized purchasing strategy and control when the strategy is applied to all categories.
Purchasing Strategies Available to Dealerships
- Tactical approach – Weak Results – Companies using this approach attack categories as opportunities present themselves. Maybe a new supplier comes in with a great offer, which prompts a review of a few items and a change of suppliers with new pricing. This approach usually provides some benefit over a short time-span because the pricing is focused on just a few items. Pricing however is typically not locked or protected for any extended period of time, so the results are weak. Long term impact is generally not very good using this approach and has no material impact on the bottom line.
- Large Vendor Approach – Good Results – Some dealerships do a good job attacking categories that are under contract on a regular basis…uniforms, credit cards, insurance, telecom, DMS, etc. While this modified approach is still tactical to a large extent, it can be successful, though the scope is typically too narrow to have a big impact on the bottom line. And, since contracts are involved, the impact may not be immediate as most contracts are only negotiated just prior to expiration. So results here are better than the tactical approach, but still not really impactful in the short term.
- Strategic Category Approach – Better Results – Most dealerships purchase supplies and services in over 100 expense categories, suggesting that a narrow purchasing scope is probably leaving a lot of dollars on the table. This approach is focused on addressing all 100 of the categories over a period of time, but in a methodical way that may or may not be driven on cost reduction potential alone. There may be service issues for low opportunity categories that push them to the top of the list, edging out a category with big cost reduction potential. The intent however is to find the best solution for every expense category over a defined period of time and realize material benefit over an extended period of time.
- Strategic Cost Reduction Approach – Best Results – This is a strategic approach looking at all expense categories, but attacking the categories with an eye toward attacking the largest spend and savings opportunity working down to the smallest…attempting to free up as much cash as quickly as possible. This approach requires having some good internal information and intelligence in order to know where to focus and then to know what the strategies might look like. The objective here is to attack the largest category opportunities to the smallest in the shortest period of time, to drive maximum cost savings to the bottom line as soon as possible. The benefit stream here is extended predicated on securing locked pricing for 12-24-36 months.
Expedite Your Results using the Strategic Cost Reduction Approach – If your objective is to attack your expenses in order to generate maximum potential cost savings, as quickly as possible, you need a plan. I have reviewed a number of client engagements completed this year. Based on our client data the following expense categories represent the largest spend in most of the organizations we work with and therefore, offer the best opportunities to impact the bottom line with material savings.
Your Category Focus – Your dealership or group likely has the same opportunities as the list depicts below. The savings opportunity is a conservative estimate of the results we have seen in the past year. The % of total spend is simply that…the % of total spend that the category typically represents. The larger %’s represent the largest spend in dealership organizations.
|Savings||% of Total|
|7||Marketing Services – Used Car Ad||4.00%||3.33%|
|8||Information Systems and Other||10.00%||3.19%|
|12||Body Shop Supplies||8.00%||2.23%|
|14||Telecommunication – Local, LD, Data||15.00%||2.07%|
|15||Transportation – Auto||14.00%||1.94%|
|16||Auto Body Repair||10.00%||1.75%|
|17||Lubricants & Fluids||5.00%||1.70%|
|18||Maintenance – Other||8.00%||1.69%|
|19||Food & Beverage Services||12.00%||1.65%|
|20||Credit Card Processing Services||15.00%||1.61%|
|23||Marketing Services – New Car Leads||6.00%||1.51%|
|24||Insurance, Workers Comp.||8.00%||1.41%|
|25||Marketing Services – Web||6.00%||1.10%|
|28||Insurance, Property & Casualty||4.00%||1.04%|
|29||Marketing Services – Owner Marketing||8.00%||1.00%|
|30||Marketing Services – Lead Response||10.00%||0.99%|
|Top 30 Expense Categories in Typical Dealerships||78.785 of total spend|
Next Steps and Your Expectations
This information tells us that 30 expense categories represent almost 80% of your spend on supplies and services. Again, there are a total of 98+ expense categories out there, but these 30 should be your focus to rapidly impact bottom line savings. The best place to start is to develop a spend map so you know exactly what you spend and what your top priorities should be. Absent a spend map, follow the priorities listed above to focus on dealership averages.
With Priorities Established – Next Steps for Each Expense Category
- Validate your annual spend
- Identify your suppliers in each category
- Develop your specific category requirements and objectives
- Develop 4-5 interested and qualified supplier sources
- Develop your RFQ’s with detailed back-up of items/services purchased and current pricing
- Send out your RFQ’s
- Analyze the results, negotiate further and develop your preferred solution
- Decide on your supplier, communicate results internally and then communicate results to your supplier participants
- Implement the solution
- Measure, audit the supplier for compliance and report results
Developing and implementing 30 new category solutions will not happen quickly. The more resources you can muster for this task the better, but expect nine to 12 months or more to get through these categories depending upon resources and supplier responses. If you lock pricing for 12-24 months or longer, your benefit stream will become significant.
Managing your expenses well is a full time job and more. The result of your efforts will depend upon the quality of your plan, your available resources and your patience. If you set expectations appropriately, organize, and manage for results…you will reap the benefits, this year, next year and beyond with much improved bottom line results.
The key to this effort is to have a plan…best accomplished with an updated spend map. Once that spend map is developed, your priorities will become obvious and the plan can be finalized. Then you are ready to begin the 10 sourcing steps identified above. Remember…this process takes time, but the benefits will provide better internal efficiencies, improved profitability and peace of mind knowing that you have wrung excess costs out of your organization.
If you would like a spend map template to assist you in your planning, please contact me at: email@example.com, I would be happy to provide. Good luck!