“Can anyone tell me why I need 16 towing companies?” “Why do I need 68 advertising and marketing vendors for this operation?” These were just a couple of the questions that were asked by a frustrated COO of his management team after reviewing a spend map and analysis of their previous 12 months.
Is this situation unusual? Does this situation occur at other dealerships and groups? No, this is not unusual and yes, it happens every day…..and it is costing dealerships in more ways than they know, or care to admit.
As a spend management provider, we have an opportunity to look deep inside many organizations every day to see how organizations spend their money and with whom. One common denominator among the auto and truck dealerships, schools, manufacturing and hospitality concerns that we work with and see every day is this: too many suppliers are being utilized within a given expense category. A broad supplier base was not unique to the dealership we presented to that day and it happens in many businesses, private and public every day.
Why does this happen?
High performing suppliers are an indispensable part of your business. In most cases, you need the unique expertise, unique capabilities, supplies, parts and services your vendors provide to support your business in a profitable manner, and to keep you customers happy.
I can’t think of many organizations who intentionally set out to hire 16 towing companies, or engage 68 different advertising and marketing vendors, or utilize five office supply companies, yet it happens all the time. When performing a spend analysis, we identify each supplier, categorize those suppliers by expense categories and in that exercise, can easily see whether a company is strategic or tactical in their spend management approach. This is accomplished by simply counting the suppliers in each expense category.
Three observations for large supplier bases
- Culture – Senior management leaves supplier strategies to front line management and they are reluctant to get involved in those decisions.
- Time – The staff doesn’t have the time to leverage the best performing suppliers.
- Leadership – Senior management is not willing or able to set the correct expectations.
Net, net…..it is up to senior management to repair this problem. Unless management sets the expectation, communicates those expectations and manages to them, this problem, the waste and the additional expense will continue unabated.
What are the costs?
Large supply bases cost an organization in many ways. Most of the costs are invisible to management but are certainly felt by the support levels of your organization. The cost to manage a supplier annually easily exceeds $1,000 for most organizations, and higher than that for many more. Most dealerships have 300+ suppliers to manage over 100 expense categories…much more than is required. Costs incurred from having too many suppliers include the following:
1. Lost leverage – Spreading your total “spend” among many suppliers reduces your leverage with a single supplier and often results in higher costs. The opportunity cost of using too many suppliers may impact the following:
- Service levels
2. Increased administrative costs – Managing suppliers has a cost. Managing extra suppliers is an example of additional costs you shouldn’t incur…or waste.
- Supplier set-up in system
- Year end 1099 reporting
- PO creation
- Invoice approval by management
- Invoice matching
- Generation of a check
- Signing of a check
- Postage and mailing
3. Redundancy – Using more than one supplier to provide a product or a service, and potentially paying for more capabilities than you are using.
- Competing functionality – Are you using all the DMS or advertising functionality that you pay for?
- Redundant suppliers – Do you really need all of the suppliers you have on a service agreement currently?
4. Lost management time – Every supplier that you work with has probably met with a member of your management team a number of times in order to sell into your group. Consider the following costs for each supplier:
- Initial interview time with the supplier
- Supplier vetting and qualification
- Quoting and analysis
- On-going relationship building
Managing suppliers has a cost. It is best to utilize the fewest suppliers required to support that category to drive efficiencies and lower your costs.
The following expense categories seem to have the largest supply bases most often, reducing leverage, adding redundancy and adding additional administrative costs:
- Advertising and marketing
- Printed materials
- Shop supplies
- Aftermarket accessories
- Office supplies
- Facility maintenance
Improvement strategy and benefit
To avoid these problems and reduce your direct and indirect costs, you will need to take a few important steps:
- Develop a spend map for previous 12 months.
- Determine your spend and supplier count by expense category.
- Determine potential overlap and redundancy of suppliers by expense category.
- Set your supply base objectives by category.
- Designate a Preferred Supplier for each category.
- Reduce and eliminate extra suppliers.
- Implement policies to control the sourcing process going forward.
If your organization can reduce your supplier base by 30% or 100 suppliers, your organization could save an additional $100K annually, which can be used by re-deploying your staff to new tasks or holding off on new hires due to your new-found efficiencies.
The management of your supplier base is a critical function throughout your organization. Your organization probably has a supplier base of over 350-plus suppliers supporting 100 categories of supplies and services and each of those suppliers has a cost. That cost is evident in management time, administrative time, lost leverage and redundancy….all having a negative impact on your efficiency and bottom line.
If you want to eliminate the waste that occurs every day in your business, and improve your overall efficiency and profitability, it might be a good time to step back and review how you manage your spend. The development of a spend map, conducting a supplier review and a fresh look at your purchasing policies can be the starting point to driving new levels of efficiency, excellence and profitability into your organization.
To obtain a copy of an expense planning tool, used to identify supplier counts by expense category, please contact me via e-mail at: firstname.lastname@example.org.