Most dealerships will spend somewhere north of $1.5MM this year on the supplies and services needed to support their businesses depending upon the size of their business. Those expenses are spread across 130-plus expense categories and will often include up to 5,000 different items or services within a dealership operation. Most of those buying decisions will be made by between 8-12 individuals who are owners, managers and employees in the dealership. Most of the buying decisions will typically be made on one or two factors…price and relationship.
If you want to get serious about managing better in 2013, reducing your costs, improving your margins and improving profitability, the 10 tips listed below will help you achieve improved performance, simplify your business model and help you sleep better knowing you are using commonly accepted “best practices” to manage your spend.
- Develop a spend map – A spend map is a strategic planning document that lists the 130 expense categories in a business. Once populated with spend information and supplier data, the spend map becomes a planning and management tool.
- Develop your 2013 plan – With a spend map completed, now is time to prioritize categories by month and assign resources to quote or re-negotiate those categories
- Conduct a supplier and service review – Using a list of all suppliers in your system, sit down with your management team and determine which suppliers provide overlapping services and can be reduced or eliminated. Identify suppliers that provide services that have marginal impact or no impact and cut those from your operation.
- Reduce your supplier base – Designate a “preferred supplier” in each of your expense categories. This supplier should be the most competitive in terms of price and service and also meet your service and product quality requirements. Once your Preferred Suppliers are designated, communicate this information and expectations to your team.
- Implement policies and approval levels – Limit the addition of new suppliers to selected individuals in the organization that will support the preferred supplier program and incorporate into your purchasing policies. Limit commitment authority (contracts, purchase orders, invoices) to those you have identified only. Publish your revised policies and approval levels to your management team and ensure they understand the purpose and ongoing process.
- Consumption reviews – Identify those expense categories that are tied to sales…units, services, parts, etc. In most cases an item/service is used whenever something is sold (credit card processing, credit bureaus, forms, vehicle history report, etc). With those categories identified, challenge the processes behind each service. Are you processing credit cards correctly? If not, your costs go up. Are you pulling three credit bureaus for every sale when one will do? If so, your costs go up. Consumption and process reviews will oftentimes reduce your costs more than the negotiation of new pricing.
- Sourcing – Nothing is more effective than a good old fashioned “RFQ or Request for Quote” to identify the highs and lows of the marketplace, and identifying your target pricing. Buying groups add a fee to every item they represent and make it difficult to find the best price, so don’t become complacent when using buying groups or consortiums. Well constructed and executed quotes are still the best way to find out “truth” in the marketplace.
- Supplier payments – The way in which you pay your supplier can add to your costs or provide opportunities to reduce costs. Suppliers expecting multiple checks per month should be altered to one payment monthly. ACH transactions can be more cost efficient than checks. Credit card payments can be even more effective from a cost perspective.
- Supplier audits – Roughly 7% of your total sales are spent with suppliers for supplies and services to support your business. If you pay every invoice without a periodic spot or planned audit, you are being overcharged. Suppliers increase prices and alter terms. Many times they may have a legitimate right to do so, and in some cases those increases are not authorized and should be stopped. You will never know the scope of the problem unless you conduct periodic audits of your suppliers for price and term compliance.
- Contract management – Your organization has supplier contracts and you may or may not know about them. The key question is, do you and your management team know where they are, with whom and are they managed? Chances are that contracts are scattered among your management team and there is not a process to manage those agreements to prevent automatic renewals or automatic price increases. Contracts need to be identified, gathered up, stored in a central location and tracked by expiration date.
What is the opportunity or the cost?
Most organizations will spend at least $1.5MM in 2013 in supplies and services to support their organization. Seven (7%) percent of total annual sales is usually a good indicator of your likely spend.
In our experience taking an active role in managing your spend will produce the following:
- Price reductions through sourcing/quoting – 15%.
- Supplier – service review – 2%.
- Supply base reduction – 1%.
- Consumption review – 2%.
- Supplier payment processes – 1.5%.
- Supplier audits – 1%.
Total opportunity – 22.5% of spend
Based on the above, even the smallest of organizations can probably shave a minimum of $300K out of their expenses. Or said another way, doing nothing with your indirect spend is costing you a minimum of $300K per year. If you decide to tackle these expenses as outlined, the reduced costs will flow to the bottom line as new profits or improved gross margins.
Is the management of expenses a short-term project?
For many organizations, expense management boils down to price. Getting the cheapest pad of post it notes, or the cheapest shop towel or the least expensive service option is the objective…today. Tomorrow they may have to shop for that post-it note again as prices change…but for today, they secured a good deal and feel victorious.
What many “buyers of shoppers” fail to consider in their rush for a quick fix are the following factors that add significant costs to an organization:
- Lack of price locks.
- Lack of attractive payment terms.
- Number of suppliers providing the product or service.
- Supplier reputation.
- Quality of supplies and services.
- Implication of payment options.
- Shipping costs.
- Additional invoices to process and checks to cut.
- Time involved in continuously shopping for the best price.
Management of indirect spend is not a short term project…at least not for successful organizations. Like any other part of the business, the management of expenses will get out of control unless managed and measured. Employing the Ten Tips approach in 2013 will yield one time benefits for sure. But, if you walk away from the diet after losing 30 lbs. and stop exercising, you will probably gain the weight (expenses) right back. The better long term play is to adopt these Top 10 Tips as a regular part of your management structure and your spend management process to keep the costs down…keep the weight off, for the long term.