With less than two months away from the new year, the time is probably right for executive management to ask a few key questions about current results and future direction:
- How much in sustainable costs savings were actually generated in 2012?
- What will your organization spend for supplies and services in 2013?
- How many active suppliers does your organization have?
- How much in sustainable cost savings will your organization generate in 2013?
Why is this important?
Real, measurable cost savings flow to the bottom line and enhance profitability. Astute leaders realize that profitability is the key to re-investing in the organization…whether those investments go into new technology, new marketing, new facilities…profits are the fuel for those investments. Either sales margins have to grow, overall sales levels have to grow, or expenses need to be reduced to create the profitability to grow the business.
Knowing your metrics
If you have a handle on the key spend metrics in your organization, you are probably in good shape and ahead of your peers. For those organizations that do not know the key spend metrics, the general benchmarks provided below will be a good starting point.
- Annual spend (supplies and services) generally 6.8% of total annual sales.
- Supplier base (single point) 413 suppliers on average.
- Expense categories – 136 categories of supplies and services.
- Suppliers under contract – 14 categories and 14 suppliers on average.
- Expense categories with no firm or locked pricing – 122 expense categories.
Understanding your opportunity for improvement
Dealerships have the opportunity to drive significant cost and efficiency improvements as well as mitigating risk in their operations utilizing a well-developed spend management strategy.
- Annual cost savings potential – 18% of your supply and services spend (price, terms process).
- Supply base reduction potential – 25%+ of current supplier base.
- Annual process improvement potential – 1.2% of total spend (internal efficiency).
Key question: What cost savings did your organization accomplish in 2012?
Achieving “sustainable cost savings” should be the objective of your organization. Sustainable cost savings can only be achieved through the following strategies:
- Achieving “competitive pricing” that is locked for extended periods of time (contracts not required)(the alternative is to shop continuously).
- Securing favorable business terms for that period of time.
- Controlling selection.
- Controlling usage.
- Measuring the results.
Key question – What will your organization spend for supplies and services in 2013?
If you don’t know the spend totals for the organization and the category sub-totals, how do you realistically expect that you can improve the results? Consider the following objectives:
- Example A – We will reduce our annual costs by 10% in 2013. Can this objective be achieved? I don’t believe this objective has a chance of being achieved given the lack of specificity. What are the costs? What would 10% represent? What are the actions? How will this be measured?
- Example B -We will reduce our annual office supply costs of $50,000 by 10% by February 2013 through sourcing, selection and implementing new controls. Can this objective be achieved? Yes. What would 10% represent? $5,000.00 annually. What actions are required? An RFQ and some proven controls over selection and consumption.
- In order to get specific and plan the year with some precision, you need information. You will need to extract the spend information from your DMS system by supplier name and total 12 month expenditures. Then you will have concrete, reliable information that is actionable and will help you build a “Spend Map”. A spend map for your dealership will be a listing of all 136 expense categories, total expenditures by category and a count of suppliers by category. The Spend Map will answer the questions – What did you spend in 2012, and will likely be a good indicator of what you will spend and can save in 2013.
Planning for success in 2013
Your business results in 2013 from a cost structure can be infinitely better than they were in 2012. This won’t happen by itself as you know…it won’t happen with poor information and it won’t happen without a well-conceived plan. By taking the time to generate your 2012 spend information, and building a future plan around that information, you will increase your odds of achieving the objectives you have established.
Key ingredients for success – Reduced costs and improved profitability in 2013
- Need or desire to improve performance – determination.
- Willingness to devote the time to become successful – focus.
- Creation of a spend map for all expense categories with reasonably accurate spend data.
- A schedule to attack each expense category over time.
- Estimated cost reductions by category and in total – to formulate the objective with metrics.
- Management process.
- Measurement process.
Operational excellence and improved performance can be achieved by most teams with focus, patience and management. Improved performance can be achieved by any management team that is aligned around the same objectives, is open to new approaches and one that is armed with solid data and finally…a team that has the patience to manage the process for the long term. Strategic efforts will yield sustainable results and pay big dividends…tactical efforts typically provide short term benefits but won’t pay dividends long term. Which approach is right for your organization?
If you are interested in creating your “Spend Map” for 2013 and improving your operational performance, contact me via e-mail at: email@example.com for a set of tools to assist in that process.