There are many competing initiatives that leadership faces in the business world every single day. The recent NADA show in San Francisco presented many new and interesting opportunities to drive top line sales. There were new businesses designed to prove the ROI of those initiatives with a set of compelling analytics. There are proven and unproven marketing services that vie for your attention promising to drive top line sales.
When push comes to shove, management has to make decisions on what to attack, and what to prioritize with the limited time and dollars left to them, and given the limited time left to their time strapped management teams. Eventually, smart management teams look at the ROI of the project and balance that against the ROI of competing projects.
2. Spend Management Initiatives – Your Opportunity Cost
There are a number of spend management initiatives that can generate considerable bottom line impact that can be measured, audited and proven. Spend Management initiatives can have impact in the following ways across an organization:
Spend Management Initiatives to consider:
A. Development of a Sourcing Plan – A deliberate plan to source(quote- analyze – implement) all expense categories in a methodical, scheduled manner. Objective here is to install high performing suppliers that will provide measurable, sustainable cost savings that will flow to the bottom line.
B. Preferred Supplier Program – A proactive effort to qualify and select the highest performing, most competitive suppliers in each expense category with a defined set of benefits available to those designated as Preferred Suppliers. The objective here is to maximize your leverage. More dollars flowing to fewer suppliers should result in better pricing, but also, far fewer suppliers driving down administrative costs. Suppliers cost money…..time to meet, trials, negotiation, management, invoice review, check origination, mailing, tax reporting and much more. Fewer suppliers will improve back office efficiencies, let alone have the potential to reduce your costs.
C. Supplier Payment Strategy – The management of the supplier payment process is another opportunity to manage costs and drive improved profit to the bottom line. Many businesses today use ACH bank transfers or some form of on-line payment strategies to pay suppliers which is an efficient way to handle supplier payments. Another proven strategy is to pay suppliers with a credit card program that returns cash in the form of cash discounts. That cash flows to the bottom line as increased profit. While many Dealers take points when paying by credit card, cash discounts is the better approach and can mount up to some interesting cash flow depending upon your use.
D. Tighten up Infrastructure – A few well considered administrative changes and policies can tighten up processes that will ultimately improve control, limit poor decisions, and create visibility to opportunities and help you avoid problems. Managing supplier contracts by due dates, limiting purchasing authority, altering the new supplier processes, tweaking the supplier payment processes to head off fraud will all lead to more efficient back-office efficiencies and if managed correctly, improve the bottom line with new cost savings.
3. How to Analyze ROI Opportunities and Opportunity Costs
The ultimate objective is to drive efficiencies into the organization and drive more dollars to the bottom line, either through cost savings or through improved gross profit, both of which can be driven with a deliberate, well executed Sourcing Plan and strategy on a sustainable basis. Short term or tactical sourcing approaches will produce just that – short term results with a limited shelf life. A more reasoned, deliberate and strategic approach will deliver results on a sustainable basis that will deliver results for multiple years.
ROI and Opportunity Cost Examples and Assumptions:
Listed below are Dealerships with five(5) revenue bands
Indirect spend is based on extensive experience, typically larger than 5% represented
Savings opportunity at 10% is quite conservative, our 2014 results were 25%
This assumes that a dealership has implemented some or all of the initiatives listed above and implemented cost savings solutions in a number of expense categories
Bottom line impact is portrayed for a number of points including monthly through 36 months
Annual Dealership Revenues
Indirect Spend as % Revs.
Annual Indirect Spend- Supplies / Services
Annual Savings Opportunity at 10%
Once solutions are implemented
Savings – 1 month
Savings – 3 months
Savings – 6 months
Savings – 9 months
Savings – 12 months
Savings – 18 months
Savings – 24 months
Savings – 36 months
4. Your Opportunity Costs
Attacking your cost structure with the objective of driving improvements over the long-term is a good investment of your time, energy and dollars as evidenced by the chart above. The ROI of spend management initiatives can be quite impressive, and keep in mind that I am using very conservative metrics of 10% rather than 25%, which research backs up and our organization achieved last year.
The cost of doing nothing is significant as outlined above as well. Either those dollars are flowing to your bottom line as additional profits, or they are gone forever and wasted. Like any other perishable commodity, savings not realized are gone forever. This is analogous to the airline industry where I worked for many years; a seat on an airplane that is not filled is a wasted commodity. There will never be an opportunity to fill that seat on that segment again. If it is not used, it is lost. The same concept applies to managing the expense line of your business; a portion of those expense dollars might be diverted to your bottom line to benefit your organization both today and long term as new profitability. If not, those dollars are gone forever – your opportunity cost.
New found savings in an organization can be utilized in a number of ways. They obviously can flow to the bottom line as increased profits. Cost savings can also be the source of new investment for many organizations. Many organizations generate cost savings from the operations side of the business and redeploy those dollars into marketing activities to drive more top line sales or deployed into new capital improvements. In any event, the savings can be generated, they are real, and they can be audited to prove out the ROI.
5. How to Drive Bottom Line Impact in 2015
It is never too late to start a Spend Management initiative, but delaying that move will cost your organization in some pretty significant ways in terms of lost savings and profitability.
My recommendation is the following:
Develop the Sourcing Plan
Set the Strategies that apply to each expense category
Align the resources and tools needed to execute the plan
Execute the plan
Measure, Audit and Report
While this five step plan might seem simple to execute. It is not; it will take some accurate data out of your system, it will take some time to develop the plan and it will take time to execute and manage the plan. But as leaders, that is what we do, look at opportunities, prioritize them based on expected return, make decisions and then move.
As leaders, we are constantly challenged with improving the business. Driving more top line, reducing expenses, managing capital improvement projects, all with one common objective – enhancing and improving the bottom line. We know that more sales will potentially improve the bottom line, and we know too that reducing expenses will improve the bottom line by attacking both the top line and bottom line simultaneously with the right strategies. This will drive improvement even faster. The opportunities to drive sustainable bottom line performance have been outlined above and that alone should make a compelling case to pay attention to some very real, sustainable improvements.
It should also be very apparent that there is a cost of doing nothing…opportunity costs or lost savings can be significant if an organization chooses to do nothing or delays that initiative. Active management of your supplies and services function for most businesses is typically the responsibility of the Purchasing Department. If you don’t have one, think about creating one…the ROI is significant.
If you are resistant to building a new department for managing expenses, then option two is the creation of the function in a decentralized environment. Designate an executive to plan and organize this effort, identify some hard chargers on your team and execute the initiative on a decentralized basis. Another option is to employ a qualified third-party to do this work for you. Executing a spend management program well will yield significant dollars to your bottom line this year, next year and for years to come. Ignoring this opportunity will come at a steep cost, not only in wasted dollars flowing out the door, but also in untold inefficiencies and processes that are out of whack in your organization, driving up labor and administrative costs.
If you are interested in a simple process map to help you in this planning process, please feel free to contact me at: firstname.lastname@example.org. I will be happy to provide you with a simple roadmap that will help in your planning.