Smart business owners and management teams know that there is value in learning from the best operators in their industry and also know that there is value in learning from those that are continuously lagging behind.
The employment of Best Practices in an organization is a quick and effective way of accelerating your learning, and improving the effectiveness of your processes, controls and procedures. Best Practices are a time-tested method of replicating processes that produce consistently superior results in a functional discipline or business model. In our Spend Management practice, we regularly look to industry best practices, industry benchmarks and our own client experience to advise us on what works most effectively and what doesn’t work in managing expenses across an enterprise. Best Practices usually apply across different vertical markets, meaning their applicability pertains to for profit organizations as well as non-profit organizations.
As a practitioner in Purchasing, Warehousing, Distribution, Logistics and Spend Management for over 35 years, I can say that as the world changes, as management philosophies change, as technology changes…Best Practices are changing too.
Refresher – What is Spend Management
Spend Management for any organization including auto dealerships includes the following areas within an organization:
- Management of spend data – spend data from your DMS, Credit Card and ACH spend
- Spend management – from your data, understanding how much you spend, how you spend and with whom (expense categories, dollars spent and suppliers utilized)
- Spend planning – having a deliberate plan and methodology to addressing your repeatable routine spend
- Sourcing – defining your objectives and requirement and finding the best, more competitive supplier partner to satisfy those needs and the commitment of company funds to acquire those items. The “procure to pay” process is included here…finding the supplier, committing funds to the transaction and payment to the supplier
- Implementation – implementing the solution as intended and ensuring your organization follows the program
- Management – managing expectations, performance and communication with the supplier base supporting your organization
- Audits – auditing supplier price and term compliance is important but so is auditing internal user compliance to ensure the right suppliers and right items or services are being used.
Reminder – Financial Commitment Devices
There are three methods to commit company funds or dollars to a supplier. These include the following:
- Purchase Order – a device normally used on the front end of a supplier transaction defining what is to be purchased, the dollar amount of the purchase, expectations for timing and terms and conditions related to the purchase.
- Contract – usually a long-term commitment that spells our everything included in a purchase order, but articulates in more details the services rendered and the responsibilities of each party in the contract period.
- Invoice Approval – typically an informal process where the invoice serves as evidence that a product or service was received and payment is due to a supplier.
All of the services and supplies your organization receives should fall under one of the three commitment devices outlined above. By far the riskier of all three methods is a simple invoice approval with no purchase order or contract first driving the transaction. Contracts limit flexibility of the buyer and should be avoided whenever possible, but are required in many supplier industries and cannot be avoided entirely. Thus, conducting most of your business on a purchase order is the best most effective way to conduct business.
Spend Management Best Practices
The following Best Practices are a mix of Spend Management Best Practices and those we have witnessed and memorialized through our work with the most effective businesses and dealerships over the years.
|1||Spend Objectives||A measurable cost reduction and supply base objective is in place and tracked regularly.|
|2||Spend Resources||Trained resources are available to execute the sourcing plan to include sourcing, quoting, analysis and implementations.|
|3||Spend Data||Annual spend for direct and indirect services and supplies is known in total and by expense category and supplier.|
|4||Spend Map-Plan||A spend map or sourcing plan has been developed and a systematic sourcing plan for all categories is in place and being executed.|
|5||Price Comparison Data||Access to “best-in-class pricing” is available at category level to assist the sourcing team achieve competitive pricing.|
|6||Sourcing Capabilities||A proven process to source, qualify, quote, analyze and recommend suppliers and solutions is in place.|
|7||Contract Management||Supplier contracts are identified and centrally located and accessible.|
|8||Contract Tracker||A contract tracker is in place to monitor contract due dates to mitigate risk.|
|9||Purchasing & Approval Policies||Purchasing policies and approval levels are in place to maximize control and reduce risk|
|10||Purchase Order Controls||A purchase order is used to commit company funds for services and supplies.|
|11||Terms & Conditions||Purchase order contains terms and conditions to protect the buyer(s) for all elements of the commitment.|
|12||Payment Process Controls||A three-way match process (P.O., invoice, packing slip) is in place to maximize control of supplier payments.|
|13||Implementation Skills||Expertise is available to implement sourcing solutions across all locations.|
|14||Supplier Compliance Audits||An audit and review process is in place track and measure supplier compliance with price and business terms and internal user compliance.|
|15||Management Review Process||Regular review of spend managed, cost savings achieved, contract management, audits and the supply base is conducted.|
Why Should Your Organization Implement Spend Management Best Practices?
In our experience, the organizations that have the above mentioned Best Practices in place will realize the following benefits:
- Improved Performance – understanding of expectations and limits that employees have within an organization
- Reduction in Surprises – eliminate auto renewing contracts, risks with under-performing suppliers
- Improved Communications – less confusion and stress when everyone understand the sourcing plan
- Increased Efficiency – Deliberate planning and execution of the plan will eliminate many wasted steps in an organization
- Smaller Supplier Base – Nothing wastes more time and money than a bloated supplier base which drives back office staffing and sub-optimizes leverage and pricing
- Less Risk – Managing risk is inherent in all management positions – having a well-defined plan with the right tools and controls in place will reduce risk
- Reduced Costs – Improved Profitability – Fewer suppliers, with better pricing, combined with the best, high performing suppliers will reduce costs. Fewer costs will drive bottom line profitability, the fuel that allows businesses to grow and expand.
Managing an organization effectively is hard work…not because the tasks challenge us intellectually, but because most of us that wear a leadership and management hat have such limited time and we find that we have to pick our battles. What initiatives can I focus my limited time on? Where can I spend my time most effectively to increase profitability? These are questions we all deal with every day.
I don’t know your priorities…but I do know this based on our benchmarks and our experience. If you implement the Best Practices as outlined above, your organization will run better, more efficiently, more effectively and certainly more profitably. If you don’t implement the Best Practices…your organization will continue to run but you will incur far more soft costs (back office support) and hard costs (higher prices) and incur more risk than is necessary. Your organization will spend between 4% and 9% of your annual sales on supplies and services across 130 expense categories. If you implement the practices above, expect to reduce those costs by 25%…if not, expect to pay 25% more than is necessary to support your business. The choice is yours…will this initiative make it to your priority list in 2017?
If you are a dealer and would like a copy of the Best Practices assessment for use in your own dealership please email me at: email@example.com, I will be happy to forward one to you.
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.