Management is a challenging endeavor in any business, but especially so in an auto dealership. Dealers need to manage a large staff, facilities, new and used car sales, service business, a parts business, the supplier base, the I.T. support structure, compliance, finance, be responsive to their manufacturers, HR functions, and of course the purchasing function across a broad group of expense categories.
The purchasing function, the selection of suppliers, the quoting process, analysis, the commitment process, management of suppliers, the occasional audit of a supplier and the management of the people managing this process can be complex…but it doesn’t have to be.
Top 10 indicators that your purchasing function needs some attention
In my experience 95% of the auto and truck dealerships have a decentralized purchasing model, meaning that multiple people, usually managers are executing the purchasing functions across the organization on a daily basis. This is normally accomplished by employees that have little training, little data from which to base decisions, few processes and policies to guide employees in their responsibilities and most of the time, without a plan. The net results to the organization is the following:
- Supplier contracts that cannot be found
- Contracts that auto renew with price escalators
- A growing list of suppliers that Accounts Payable must set up, manage and pay
- Managers spending an inordinate amount of time taking supplier calls and having supplier meetings
- Organizational uncertainty about who the preferred suppliers are for a given expense category
- Prices that seem to be increasing
- Costs that seem to be rising
- Employees that are constantly in “shopping mode” looking for the best price on post-it notes or some other supply item
- Management uncertainty about the efficiency or effectiveness of the purchasing function
- Profitability not meeting expectations
Decentralized purchasing functions can work…they are working in your organization right now. Products and services are being purchased, suppliers are being paid…everything is working, right? The answer is most likely, yes, everything is working, but at what cost to the organization? The purchasing function can be organized in a decentralized environment that achieves three key objectives…save money (new profits), save time (increased efficiencies) and reduce risks (fewer surprises).
Most organizations are running lean…they don’t have the luxury of wasting time, duplicating efforts and repeating tasks. People are expensive so improving efficiency and effectiveness can reduce labor costs across an organization.
- Implement a Sourcing Plan – You have roughly 100 expense categories to manage across your organization out of 130 options. Develop a sourcing plan that plans to work one or two categories each month until all categories are complete. Benefit: Working on an expense category once every two years, utilizing one supplier and doing the work right is much more efficient and a better use of your labor than shopping items every day, adding new suppliers and adding complexity and cost to the organization.
- Assign Category Responsibilities – Put a name or title next to each of those expense categories in your plan with a due date for an expected recommendation with all of the support to make a decision. Benefit: Sourcing a category full of multiple items (shop supplies = 450 high frequency items) is much more efficient that shopping, quoting, talking to suppliers and adding new suppliers for single items. Add a supplier that handles all shop supplies rather than five suppliers that support only parts of the category is the most efficient approach.
- Implement Preferred Supplier Program – Utilizing one trusted, competitive supplier will be much more efficient and cost effective than using multiple suppliers. Benefit: Fewer suppliers in an expense category will give you greater pricing leverage, lower prices and costs. Fewer suppliers will result in fewer supplier meetings and fewer invoices that need to be routed for signature, and fewer suppliers that need to be managed and paid.
The commitment of limited company funds occurs through three methods…a purchase order, a contract or an invoice approval. To reduce financial and legal risks associated with purchasing activities, I suggest you consider the following:
- Implement Purchasing Policies – A simple set of purchasing policies implemented across an organization will reduce risks associated with the commitment of funds, selection of suppliers and payment processes. Benefit: Purchasing policies provide a much-needed guide to acceptable employee actions and supplier interactions. Well drafted purchasing policies can be used to get out of bad supplier agreements signed by “unauthorized employees.”
- Centralize Contracts – All supplier contracts should be minimized first and foremost. But when they are necessary, all original contracts should reside with the CFO or controller so there is a “go to place” to find contracts and agreements when needed. Benefit: Having all contracts and agreements in one central location will simplify the management of this important process and allow for a tracking process to ensure proactive management.
- Track Contracts – Once all of the contracts are centrally located, it is time to create a tracking device to manage all of the documents. This can be done easily in Excel or setting up due dates n Outlook for automatic reminders. You will want to ensure that you give yourself 90-120 days before the expiration date so you have time to manage the process effectively. Benefit: Tracking contract due dates and being proactive with next steps will prevent auto-renewals which some suppliers bank on. Auto-renewals not only lock you into agreements long term, but frequently have built in price escalators that raise prices and raise your costs.
Reduce Costs – Increase Profits
A key component of purchasing is the commitment to a supplier for the purchase of a good or a service. While it is fair to expect the supplier to make a profit so that they can stay in business, you can’t afford to overpay because you need to make a profit to stay in business too.
- Implement Fixed Pricing Strategy – To use your time wisely, and to manage your limited dollars effectively, be sure to adopt the policy of securing fixed pricing on supplies and services for a minimum of 12 to 24 months if possible. In most cases the supplier will agree to those terms without a contract. Benefit: Working with multiple suppliers to obtain quotes is a time-consuming process. When you finally make a supplier selection, you will have expended many hours of time in the process. It is imperative to reap the benefits of those labor hours over the long term, and achieve cost savings on a sustainable basis, so the most efficient and effective approach is to secure long-term pricing.
- Purchase at the Category Level not the Item Level – The most efficient use of time and money is to quote large groups of items, rather than single items. Suppliers can provide usage report or sales report that list every item they sell you. Ask your suppliers for that report which will become the basis of your RFQ (request for quote). Secure multiple quotes for the category, then analyze the results, negotiate high expense items and make a supplier decision. Benefit: Quoting and negotiating at the category level will ensure that the time spent on this task is the most efficient. Securing competitive pricing that is locked for a wide range of items or services will provide the greatest economic benefit near term and long term.
- Negotiate Terms and Payment Methods – The price you pay for an item is usually the only component that gets attention in a purchase decision. Be sure to request early payment terms, free delivery, delivered pricing, warranty protection, ability to pay the supplier with a credit card and any other business requirement that could have an economic benefit. Benefit: The combination of a broad group of items at the category level, competitive pricing, use of a single supplier, well-constructed business terms will provide economic advantages that can be measured and…those benefits will drop to the bottom line as new profits…something all businesses need for sustainability.
Now is the time to begin planning for a more profitable, more efficient and less stressful 2018. A bit of organizing and planning as outlined above can create sustainable benefits for your organization. By implementing the steps above, you will generate soft cost savings (labor costs) and hard dollar saving (dollars expended), improve your profitability and certainly mitigate your level of financial and legal risk.
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.