How effective is my team? How well are we doing on expense management? Are we leaving anything on the table? These questions are asked by every business, in every industry…especially when profitability is challenged or running lower than targeted levels.
Most auto dealerships have a decentralized Purchasing structure which is very different than most businesses. Most organized business of any significant size will have a dedicated Purchasing staff to source, quote, negotiate and manage the suppliers for a vast array of supplies and services. Those Purchasing Departments can run from a single employee to more than 1,000 depending upon the organization and the core business they are in. The primary responsibilities of the Purchasing team in most organizations is the following:
- Buy the right item
- Buy the right quality level
- Have the product or service delivered to the right location
- Pay the right price
Purchasing groups can range from the strategic (focus on leverage, best long term solutions) to the tactical ( what do I need today?). Purchasing groups are typically, but not always, staffed with Purchasing or Supply Chain personnel that have solid understanding of sourcing, supplier financials, the sourcing process, inventory implications, warehousing, distribution, quoting, analysis and negotiation. Buyers or Procurement personnel more often than not, are certified by professional organizations, such as the Institute of Supply Management(ISM) or American Production Inventory Control Association(APICS) to ensure maximum effectiveness of the individual, and on-going professional development.
Decentralized Buying Functions
Decentralized Purchasing in any organization exists when there is no dedicated Purchasing function or staff to support organization needs. Executive management may delegate certain purchasing decisions to trusted managers for the supplies and services required. These managers have other primary responsibilities and take on Purchasing or Sourcing as part of their overall responsibilities.
While Auto Dealerships are unique in many ways, the decentralized purchasing approach they use for Purchasing is also found in many other vertical markets too. I have seen this approach in trucking companies, retailers, property management companies, non-profits and more. Advantages of Decentralized Purchasing structures include the following:
- Avoid the need for dedicated headcount to lead and manage
- Avoid the salary and benefit expense associated with a dedicated Purchasing resource
- Existing staff may have time available to fill those Purchasing responsibilities
- Managers making buying decisions are motivated to get the right product/service/price since their supplier decisions will impact them directly
Centralized Purchasing Functions
Most large organizations, or those with large spend and leverage, that are focused on bottom line efficiencies and overall optimization, will develop their own Purchasing functions in house. Advantages of centralized Purchasing functions include the following:
- A full time effort is dedicated to sourcing and buying effectively and efficiently
- Results can and should be measured routinely
- Employees are held accountable for their contributions and results
- Allows a focused effort without the interference of competing priorities
- ROI is easily calculated
The Dealership Challenge
With 14 years of experience now in auto dealerships, the challenges of operating a decentralized Purchasing operation in the dealership environment are the following:
- Limited financial or spend information relative to supplier spend
- Limited resources available to source, quote and negotiate
- Lack of a sourcing plan in most cases to address 100+ expense categories
- Limited market expertise (what is available, who provides and what should it cost?)
- Short term thinking – little time or patience, want results today, attacks something else tomorrow
- Focus on short term price only – ignoring long term price opportunities, terms and more
Many Managers in dealerships are quick to tell you that they are a “grinder” and have little mercy on suppliers. They take pride in their ability to out-negotiate the supplier and win the battle with a great price today, but what about in six months? Here are some key questions to ask when negotiating with suppliers:
- How do you know you have a great price?
- How do you know that you aren’t paying for something that could be free or no-charge?
- How do you know if you have achieved the best service options or products for the price?
- How do you know if you have secured the best business terms available?
- Was your overall strategy the right one?
- How do you know you aren’t leaving money on the table?
Typical Answer: If you have a decentralized Purchasing operation, you don’t know. You won’t know, unless you go through a detailed request for quote (RFQ) on the category.
Reasons for Lost Savings in Dealerships
Our business continues to generate 23-25% cost savings across all categories on average each year. A large portion of our business is auto dealerships, so we have a unique perspective on why savings opportunities continue to be available. So why are these savings still being generated at the dealership level?
- Lack of Time – Those assigned to the sourcing task may have no time or limited time, so they cut corners and take what they think is an effective competitive offer, be it price or terms. This is the primary cause of lost savings in a dealership; poor execution of the data gathering and negotiation process. Most groups don’t bother to go out for a quote at all.
- Relationships – Long term relationships are great, but they should be tested periodically. Remember Ronald Reagan’s perspective ”trust…but verify.” Challenging supplier pricing with a market-based quote provides truth. Plus some of those relationships may benefit the employee more than they do the dealership. Supplier relationships can produce “price creep” when suppliers feel the customer isn’t paying attention.
- Lack of Data – When you are quoting or negotiating with suppliers, it is hard to know you have a good offer or price unless you have completed a full-blown quote or have some reliable benchmarks. Pricing benchmarks can be obtained from stores within your group, 20 Groups, internet searches, experts in the field, and of course through the best method quoting. With benchmarks, you now have the ability to make a legitimate comparison and know whether you have secured “good” pricing.
- Weak Negotiations – Long term suppliers become comfortable and sometimes managers responsible for those relationships take the easy way out when negotiating. They tell the supplier what they need: no price increase, a maximum of 2% increase, or a 4% decrease without knowing what the marketplace and the supplier is really capable of. The result is leaving dollars on the table. Negotiations backed up by an effective strategy and good data allow you to optimize results leaving profit for the supplier and a good result for you.
- Pride – Some people are blessed in life and just know it all. There are some who are quite convinced that they have the best deal out there and can’t be told anything different, and will not consider anything different. Usually this is symptomatic of covering up for something else, including the fear of change, exposure of inappropriate relationships, and sometimes lack of time or just plain laziness. The result is getting stuck in the old days and the old ways of doing things, which may be costing you more than it should.
The Cost of Poor Purchasing Management in Your Dealerships
Most of you that read my articles probably know the metrics as well as I do. We are updating spend benchmarks in our group as we speak, but this is what I know to be true:
- Annual spend for supplies and services for most dealerships – 6% of total sales
- Expense categories – 100+
- Average savings opportunities – 25% of annual spend
Translated: Dealerships doing $50MM in sales, should have $3.0MM in supplies and services spend with a 25% opportunity or $750K in bottom line opportunity. A more conservative estimate at 10% savings rather than 25% would suggest a $300K opportunity annually.
Question: Is $300K in annual savings “material” enough to warrant your attention? In some groups, with a number of competing priorities on their plate, it might not be. But chances are that the opportunity is there and those dollars can be diverted to your bottom line.
Four Solutions or Options to Consider to Maximize Effectiveness and Efficiency
- Centralize Purchasing with Dedicated Purchasing Staff – Hire someone that is dedicated to that role, then create a plan and have them execute the plan with periodic updates on results.
- Decentralize Purchasing but have a well conceived, organized plan and then train your resources. Execute the plan with periodic progress updates.
- Outsource the Purchasing effort (to individuals or companies that specialize) and put the burden on them to execute and generate results.
- Do Nothing
Other Internal Initiatives
- Schedule each expense category for attention
- Assign the category to a trained or at least a trainable and trusted resource
- Set a target or an objective for each expense category
- Obtain pricing benchmarks if possible for that category, or go out to quote
- Best solution is to develop a comprehensive quote to test the “marketplace.” Your customers are quite adept at shopping before they even walk into your store, why should you do business any differently?
Your Dealership is probably like many others and is asking the following questions: How effective is my team? How well are we doing on expense management? Are we leaving anything on the table?
A decentralized purchasing approach is easy to manage and offers some benefits as outlined earlier, but it has a cost roughly 25% of your annual supply and services spend as backed up by research. The benefits of a centralized purchasing approach using a well developed plan, good data, and trained resources will enhance your bottom line and begin to answer the questions above. A well developed sourcing plan, with proper execution(RFQ’s and/or benchmarks) and frequent updates of results will answer the questions above and begin to provide some peace of mind. Large companies use dedicated sourcing teams for a reason. They realize that their costs will be significantly higher if they don’t have someone or some group focused on the bottom line. You can accomplish the same results with a modified approach.