The economy over the past few years have presented some pretty significant challenges to the sales and profitability side of the dealership business. Most dealerships responded to the 2008-2009 recession with an array of effective headcount reductions, new sales and marketing strategies, consolidations and other efforts to reduce costs.
If you are following the markets, unemployment statistics and other political events, you know that another recession or economic blip may be a very real possibility in the near term. As unsettling as that possibility is, we need to be prepared for it with a well thought out plan for some aggressive actions. If a slowdown of the economy does not occur, we will then be well positioned to improve profitability in a growing economy. So….what can you do this time around to reduce costs and improve profitability that you didn’t execute the last time our economy slowed down?
- Does your organization need an improvement in profitability?
- Does your organization require a rapid improvement in sustainable profitability?
Strategy – Proactive or reactive…the choice is yours
I am sure that most of you have now concluded that management of your expenses can be either a proactive or reactive process. In the last recession management teams that took a proactive approach to their expenses…developed a plan…and executed the plan are the ones that ultimately survived and prospered. Those with a less aggressive approach are probably still struggling today.
On the expense side of the business, the largest expense is typically salaries. After that, there is rent, DMS costs, utilities and over 100 expense categories that consume anywhere from 4% to 6.6% of your total annual sales. A great opportunity to craft a strategy that has meaningful impact to your bottom line.
Common expense reduction strategies – Tactical approach
Most organizations have a decentralized purchasing structure. Various managers throughout the dealership have responsibility for determining business requirements, selecting suppliers, setting pricing and contracting with suppliers. This job is usually a small part of larger responsibilities that consume the majority of their time. This tactical cost reduction approach was used to a great extent by many dealers in the past few years and even today, and it involves tasking the management team with securing price reductions from suppliers and the elimination of unnecessary services. This approach if effectively executed, can yield price reductions that can have an immediate impact on the business. The problem with this approach is that it is typically not well organized, oftentimes focused on the wrong expenses, not well executed and the benefits tend to have a short term benefit vs. a long term benefit.
RISP – ‘rapid improvement in sustainable profits’ – Strategic approach
Our extensive experience in spend mapping and sourcing over the years has demonstrated that there are a number of ways to attack your expense structure, but only a few approaches to secure improvements expeditiously. RISP is a strategy we have developed to achieve rapid improvements in profitability. If you are interested in making rapid improvements to profits, and interested in improving profitability on a sustainable basis, a new approach, a new strategy is required.
Step 1 – Understanding your spend
Your spend information is not easy to uncover. DMS suppliers have made it difficult in most cases to extract supplier spend information. The difficulty of uncovering spend information combined with new and diverse payment methods can make this process even more difficult. Payments to suppliers can be made using on demand checks, through accounts payable, through a credit card and through ACH bank transactions. The combination of the spend data from these sources make up your total supplier spend, the first step in developing your strategy. Make sure your data includes:
- On-demand checks
- Accounts payable information
- Credit card payments
- ACH transactions
Getting this information extracted and into a common format(Excel is suggested) is the key to aggregating your organization spend by supplier name. Sometimes a 1099 supplier report can be an effective tool to identify the majority of your spend, then filling in the missing pieces as defined above.
Step 2 – Developing a top down plan and strategy
With your spend developed by supplier, the next critical step is to sort this list in a dollar descending order, largest spend to smallest. This is the most important distinction between a strategic and tactical approach to spend management, focusing on the largest opportunities first. Your largest spend categories will probably include health insurance, DMS, garage keepers insurance, advertising, auto parts and much more as you work your way down the list of suppliers. Total your spend now and set an aggressive objective….a 10%, 15% or 20% reduction in costs……achieved in 90-120-180 days or whatever timeframe you establish.
Step 3 – Organizing for success – key to RISP
You now have some powerful data, data that can help guide you to varying levels of financial success, depending upon how you choose to use it. Now you must organize your efforts with respect to the priorities you have established. The pace at which you proceed will be dependent upon the resources, the qualified resources you assign to this project and your expectations. As you review your expense categories, be aggressive in your assignments, your due dates and be aggressive in terms of your cost reduction expectations. Key decisions are as follows:
- Resource assigned to the category
- Expected cost reduction % achieved at the category level
- Expected due date of new solution and savings
Step 4 – Communication of RISP plan
Your plan should have a known and quantifiable metric that everyone in the organization will understand. In order to defuse the expected resistance to change that occurs in some quarters, everyone from management to the porters should be clear about your objectives, your timing and your plan.
Step 5 – Execution of the RISP plan
In order to achieve meaningful, sustainable cost reductions in your largest expense categories, it would be a good idea to bring your management team together to brainstorm opportunities and new options to reduce costs. Refer back to the June 2011 Dealer magazine article, “Five Levers of Expense Management,” to help you explore tactical options and alternatives to achieve your objectives. Obvious options include using fewer suppliers, new suppliers, altering the service levels, new technologies, audits and much more. All expense categories are different, so your creativity will be required to maximize your options and cost reduction potential.
Ultimately a set of strategies should be developed for each expense category, explored, executed and implemented. This is where the rubber meets the road. If nothing happens here, this initiative will fall flat and you will have wasted a lot of time and considerable opportunity. If executed well, your costs will decrease and your profitability improved.
Step 6 – Measuring RISP
Once your management team or those assigned have completed their category actions, analyze the impact, quantify the annualized results the best you can and publish the results. Since everyone in the organization knows about the initiative and the purpose, they should now be aware of the results. This is a good time to begin thinking about a celebration and reward for those key individuals that have contributed to this effort. Communication of the RISP progress on a monthly basis is probably the best timing. Then you must ensure that the results flow through to the financial statement. In some categories this will be easy to see, in others where consumption varies, it may be more difficult.
Most dealer organizations have a minimum of $1.5MM in controllable expenses and most have much larger opportunities. Research indicates that a strategic approach to cost management can yield 20% savings and more…while that is an impressive number for most organizations…the key question is how long does it take to achieve meaningful results? By applying the RISP strategy explained in this article, you should be able to identify, prioritize and achieve sustainable cost reductions that impact your profitability quickly.
We have compiled a list of dealership expense categories in dollar descending order based on our extensive benchmarks. This list will be helpful if you embark on the RISP strategy, and can be used to populate your spend to add some heft to your plan. For a copy of the RISP list, please contact me via e-mail at: email@example.com.