There is a renewed interest in effective cost reduction strategies across the country. Dealerships are not only interested in reducing costs, but doing so aggressively. Increased competition, further industry consolidation and flattening of sales seems to be the explanation we hear most often about this desire to attack expenses in an aggressive manner.
Most dealerships will spend somewhere north of $2.0MM 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+ expense categories and will often include up to 10,000 different items or services within a dealership operation. It seems most buying decisions are made on two primary factors……price and relationship of the suppliers to the dealers.
When Dealerships move beyond “tactical-short term thinking” about cost reductions and move into “Strategic-long term” strategies, good things can happen and sustained profitability will occur. Too many dealerships are still looking to cut the “low hanging fruit” and view cost reduction work as a short-term project. That thinking is analogous to thinking that you will embark on a “Human Resources” activity on a project basis, solve a few problems and then revert to everyone performing HR the way they want. The better operators, the strategic operators realize that managing expenses is not a part time endeavor or project, but rather requires a long-term commitment to reduce costs and improve profitability.
Eight Proven Strategies to Reduce Costs
The following strategies should be employed in your dealership operation. They can be implemented piece-meal but the better approach would be to implement all eight strategies at one time across the enterprise. Recommended strategies include:
1. Develop a comprehensive spend map – A spend map is a strategic planning document that lists the 130 expense categories in a dealership business. This is a much more granular look at expenses than will come from your financial statements. Once populated with spend information and supplier data, the spend map becomes a planning and management tool.
2. Develop your 2018 Sourcing Plan – With a spend map completed, you can prioritize categories by month and assign resources to quote or re-negotiate those categories.
3. Implement Policies and Approval Levels – The objective here is to limit commitment authority (contracts, purchase orders, invoices) to only those you have identified. Publish your revised policies and approval levels to your management team and ensure they understand the purpose and on-going policies and related processes.
4. Sourcing – The “RFQ or Request for Quote” is a great tool to establish your target pricing and guide decision-making. 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. Request for Quotes(RFQ’s) are still the best way to find out “truth” in the marketplace relative to pricing and terms.
5. Reduce Your Supplier Base – Most expense categories have too many suppliers involved in them today, reducing leverage and adding back office costs. Designate a “Preferred Supplier” in each of your expense categories. This supplier should be the most competitive supplier in terms of price and service and meet your service and product quality requirements. Once your Preferred Suppliers are designated, communicate this information and expectations to your team.
6. Supplier Payments – Paying suppliers is an absolute, but using the correct strategies, can also reduce your costs by generating cash-back. Suppliers should be paid once per month and ACH transactions and credit card payments can be both efficient and cost effective way to conduct supplier payments.
7. Supplier Audits – Suppliers make billing mistakes. Periodic audits should be conducted for all high expense categories, comparing agreed to pricing against actual pricing.
8. Contract Management – Supplier contracts need to be identified, gathered up, stored in a central location and tracked by expiration date. Ignoring contract management will expose your organization to automatic price increases and extended terms.
Using any or all of the above strategies will reduce your costs. Using the strategies consistently will reduce your costs consistently and improve profitability. Most businesses in this country have dedicated Purchasing groups to help them manage their bottom line…. dealers should strongly consider than approach as well given the tremendous opportunities available. The strategies identified above are usually present in established Purchasing groups. These strategies have proven themselves over time and will benefit your organization if you adopt them as your own.
Most organizations make a conscious choice to either manage their expense line and profit line directly or indirectly. The indirect approach is to talk about expenses with your management team from time to time, go after selected suppliers on occasions for discounts and hope for the best. Remembering that Hope is not a strategy, it is best to consider a different approach. A strategic, direct approach involves thinking, planning, organization and management. The pay-off from a well thought-out and executed approach is less expense, less worry and greater profitability.
Author: Doug Austin
Doug Austin is the founder and President of StrategicSource, Inc., the leading provider of Spend Management Services (strategy, spend mapping, sourcing, process improvement and audit) for the automotive and truck dealerships, and various other vertical markets. Doug is a veteran of the U.S. Marine Corps, a graduate of the University of St. Thomas, and a speaker at various conferences and 20 Groups. Doug has acquired over 30 years of line, staff and executive experience in Spend Management and Supply Chain Management in various vertical markets, and is also a trainer, speaker, consultant and business owner.