To survive 2009, you probably cut costs by eliminating positions and reducing salaries and benefits, curtailing spending on supplies and services while renegotiating pricing and terms with vendors.
But is that effort organized in a way that will yield sustainable benefits over the long term?
An organized, strategic approach to purchasing will yield sustainable savings and improved bottom line performance for your organization today and for years to come.
First, consider a revision to your current strategy. A centralized, strategic purchasing function will help you realize bottom line improvements on a sustainable basis.
As we work with dealerships, we find that roughly 4% to 6% of a dealership top line revenues typically are paid to suppliers for a wide range of services and supplies needed to support the business. Obviously, any cost savings you can squeeze from supplies and services will flow directly to your bottom line and improve your profitability.
Let’s review some of the opportunities you have.
- Scope of opportunity – Typical automotive dealerships purchase supplies and services in over 100 expense categories on a repetitive basis.
- Cost savings opportunity – Purchasing research and our own experience suggests that a centralized strategic purchasing approach can reduce direct costs by up to 25%. If your annual revenues are $25 million, your annual spend for supplies and services is approximately $1.250 million ($25 million x 5%). If your organization is successful in capturing even 20% of that amount, annual savings of $250,000 is possible once your solutions are in place. Over four years, that savings will amount to well over $1 million, all of which falls directly to your bottom line.
- Supply base – Most automotive dealerships have 400-plus suppliers to support 100 indirect expense categories which result in more invoice approvals, more checks initiated and more suppliers to manage than are necessary, creating additional indirect costs.
Step one – Centralize the purchasing function to improve the bottom line
1. Assign senior level responsibility to a member of your management team who has strategic perspective to lead this initiative. If no obvious candidate is available, a purchasing manager can be hired or a Purchasing Services Provider(PSP) should be selected. This leader will be responsible for the planning, setting of annual cost related objectives, developing an effective purchasing policy, execution of the plan and measuring performance to plan regularly.
2. Set the annual cost reduction objectives – Based on the metrics established above, a set of annual cost reduction objectives should be developed. Objectives should be centered around the following:
- Measurable cost reductions
- Measurable supply base reductions
- % of spend committed to your preferred suppliers
3. Develop the annual purchasing plan – With over 100 expense categories to manage, you should prioritize category choices. Create a list of all expense categories, the annual spend in each category (from your DMS system, ACH and P-Card activities) and identify those categories that are controlled by a contract with a supplier.
Your annual purchasing plan should consist of the following information for approximately 10-15 prioritized expense categories in a 12-month period:
- Category name
- Annual category spend for the expense category
- Month you plan to start category sourcing activities
- # of current suppliers in the expense category
- Your estimated % savings for each category.
4. Establish new policies – To centralize the purchasing function, you need to update policies and ensure that all employees understand and observe the new policies. Your new purchasing policies should address the following at a minimum:
- Setting commitment authority for purchase orders, contracts and invoice approval by title and by dollar amount – removing authority from those not specifically authorized to commit company funds.
- Delegating authority to selected managers for specific categories to source, qualify suppliers, quote and negotiate within the guidelines of the established purchasing policies.
5. Communicate the revised strategy, policies and annual plan – Make sure management and employees understand the new Purchasing policies are endorsed and supported by ownership and senior management.
- Hold employee meetings to review the new policies and require a simple sign-off from each manager and employee.
- Review the annual purchasing plan to create buy-in and understanding of the plan
- Set the expectation that existing supplier relationships will be challenged to produce competitive pricing, business terms and performance
It likely will require 4-6 weeks to set up the new initiative, but the benefit will last for years if you execute it properly.
Next month we will begin to discuss the process of sourcing, supplier qualification, developing competitive quotes and the negotiation and commitment process used for each category.
For a copy of an expense category planning template to assist in your centralization efforts, contact Pam Gabor at 952-746-9021 or by e-mail at: firstname.lastname@example.org.