How you source supplies affects whether you make money
As discussed last month, a centralized purchasing function can yield significant benefits to your organization including:
- Reduced costs and improved profitability
- Improved control and coordination of over 100 expense categories
- Risk mitigation through active management of contracts and agreements
- Average cost reductions for supplies and services of 25%
- Supply base reductions of 50% to reduce management and back-office costs
- Process improvements to reduce costs, save time and simplify operations
Centralize Your Purchasing Function
A centralized Purchasing function requires senior management to commit to and implement the following steps:
- Assign responsibility of Purchasing to a senior executive or leader from the management team
- Set a challenging annual cost reduction objective
- Develop a two year expense category Purchasing plan ( select 24 categories – one category completion per month)
- Establish updated Purchasing policies that limits contracting and purchasing authority to designated executive
- Communicate the strategy, policies and Purchasing plan to all management and internal constituents to create understanding, alignment and buy-in.
The Sourcing Process – The Key to Reduce Costs and Improved Profitability
The Sourcing process occurs in dealerships hundreds of times each year, executed by a multitude of executives, managers and employees with little or no formal training. If the sourcing process is executed correctly, the dealership will benefit long term with measurable, sustainable results.
If executed poorly, the dealership may end up with short term pricing, unqualified or disinterested suppliers, automatic price increases, and commitments that can last years. Additionally, many man-hours are spent continually sourcing some high visibility categories, but neglecting others altogether because available time becomes a constraint.
A sourcing process executed properly takes time – an average of 24 man-hours is a good estimate depending upon the expense category. More complicated categories, those that involve many line items or customization (printed materials) can take much longer.
8 Step Sourcing Sequence – Supplies, Services and Equipment
Regardless of the purchase being made, here is a guideline to source effectively. Doing so will yield results far superior to the typical approach of re-negotiating with an incumbent supplier on a few key items.
|Step||Task||Objective||Source of Information|
|1||Determine 12 month Spend||Create supplier interest and metric to measure results||DMS payables, On-demand checks and credit card statements|
|2||Set Supplier Strategy||Single source, dual source or multi-source approach||Internal Users, Influencers and Department heads|
|3||Establish Business Requirements||Identify key elements of the business relationship||(See Below)|
|4||Source Suppliers||Find qualified and interested suppliers||Incumbents, 20 Groups, referrals and internet|
|5||Build a Request for Quote||Capture high usage supplies, services and requirements for standard quote||Supplier usage reports, invoices and feedback from influencers|
|6||Execute the Quote Process||Generate multiple responses and maximize your leverage||Suppliers invited to quote|
|7||Analysis & Negotiation||Compare supplier results and improve pricing on key cost drivers||Supplier price quotes and business term responses|
|8||Decision and Commitment Process||Make a supplier decision and prepare for implementation||Executive Management|
The Secret Sauce – Developing Effective Business Requirements
Many purchasing and supply chain practitioners have elevated the RFQ and bid process to an art, building elaborate quotes and bids that address every conceivable business requirement, detailed product and service specifications and much more.
A very small percentage of dealerships have their own purchasing staff to build effective quotes and bids. As such, most dealerships tap into well intentioned Managers and Employees to execute a modified quoting approach that usually focuses on the following:
- Re-negotiation with one or two incumbent suppliers
- Securing new pricing that is equal to or better than your pricing
- Elimination of automatic renewal dates.
A detailed, comprehensive set of business requirements included in your quote or negotiation process can mean the difference between short term benefits that begin to fade away in just weeks or months, or long term, sustainable benefits that can reduce costs and will pay dividends for two or three years or more.
New Business Requirements – Include the following in your quotes and negotiations
- Fixed Pricing – Supplier provides firm pricing for all quoted items for a period of 12-24-36 months. Fixed pricing becomes the baseline for supplier audits that should also be conducted periodically.
- Early Payment Discount Terms – Typical early payment discount terms are 2%10/Net 30. If invoice is paid within 10 days, a 2% discount can be applied. If paid in 30 days, the full balance is due.
- Delivered Pricing – Quoted prices should include delivery or transportation charges in the piece price to simplify the supplier analysis and prevent onerous transportation and delivery charges tacked onto supplier invoices . If a qualified Sourcing department is in place, and if transportation costs are significant, it is advisable to source and price all supplies and equipment FOB origin, which relies on the Buyer to provide, control and negotiate transportation, but most Dealerships should utilize delivered pricing.
- Volume Rebates – Negotiate a volume rebate in addition to competitive prices you obtained in the quote. This feature will bring additional dollars to the bottom line, with pricing already set and established to prevent price creep. Additionally, volume rebates are an excellent tool to encourage management and employees to use the designated supplier(s) to the maximum extent. Volume rebates can be set-up for quarterly or annual payouts.
- Escalator Provisions – Most supplier contracts have price escalator provisions built in that may or may not be implemented by the supplier based on an array of factors. If a long term contract is negotiated, price escalators should be limited beyond the period of negotiated fixed pricing.
- Credit Card Payment – Most suppliers will accept credit card payments for the payment of routine invoices. Some low margin businesses may balk at this request, but the effective use of credit card payment for supplier invoices can reduce costs an additional 1% to 2% depending upon the card employed.
- Catalog Discounts – Chances are your team will purchase many supplies, services and equipment that was not included in the original quote. Pre-negotiated discounts off list or some other meaningful pricing benchmark will pay dividends for those infrequently used, but expensive items.
- Usage Reporting – Suppliers all have the capability of reporting exactly what you purchased by item, quantity, price and extended cost. Most suppliers can provide this information electronically and should do so at least quarterly. This information is very valuable to your organization and can help your management analyze usage patterns, review high cost purchases when lower cost items are available, will help you determine internal compliance and can help you’re A/P function perform periodic audits.
Utilizing the business requirements outlined above can easily reduce your costs another 8% or more beyond the competitive pricing obtained in the quote process.
Next month we will explore the steady growth and potential cost reduction benefits associated with the use of BPO, or business process outsourcing at the Dealership level.
For a copy of a quote template that includes the business requirements outlined above to assist in the quoting process for supplies, services and equipment, contact Doug Austin at 952-567-7979 or via e-mail: firstname.lastname@example.org.