If you keep up on the recent automotive news you have probably come to the conclusion that new car sales in 2017 are forecasted to plateau. Sales will flatten out and margins are likely to continue on the same trajectory – flat or shrinking. These realities will challenge most of the dealerships who try to improve profits only by selling more new vehicles as their primary profit driver. That top line sales strategy has worked well for many dealers since the downturn, but many have successfully focused on working both sales and expenses to enhance profitability issues when sales flatten out. In fact, many Dealers have realized the untapped potential for big profits right in their own dealerships that are available today.
In the spend management space we are accustomed to working with dealership spend data, supplier pricing for supplies and services and multitudes of benchmarks. The following was true eight years ago and is still true today though the data has changed slightly:
- Dealerships spend money in up to 130 expense categories every month
- Single point Dealerships average 400+ suppliers to support those 130 expense categories
- Multiple point Dealerships can have 800+ suppliers supporting the organization
- Dealerships will spend between 4.5% of sales to 9% of annual sales on services and supplies
- 94% of Dealerships do not have a formal Purchasing Department
- Aberdeen Group (Procurement authority) says if you centralize Sourcing – Purchasing, you can save up to 25% of your spend in new found savings through leverage and focus.
- Our internal metrics demonstrate 23% cost savings to validate Aberdeen research in the Dealer space
- Supplier reductions of 45% of total suppliers is quite common – reducing back office support
What does this all mean?
- Dealerships are spending too much on supplies and services
- Supplier pricing is generally too high which accounts for the 23% savings opportunity year after year
- Dealers are using too many suppliers – impacting price and back office administrative costs
- The de-centralized Purchasing strategy(using Managers to fill the role of Purchasing) is not working
- Unless Dealerships re-think and alter their current Purchasing strategy, they will continue to pour money down the drain every day, and losing a great source of new profitability
New Profit Opportunities
Based on the data and benchmarks available, dealerships can get a pretty good idea of new potential profits or…..lost savings by reviewing the data in the chart below.
Reasons for Doing Nothing
I have scratched my head over the years wondering why only 5% of dealerships centralize their procurement and 95% of them still do nothing. As best as I can tell, Dealerships do not change their approach for the following reasons:
- Ownership and management do not realize the potential benefits in changing their approach
- Not enough time to attack their expenses in a methodical manner
- Unsure of where to begin – expense management can be complex with many moving parts
- Too focused on top line sales to drive profits….sales driven companies are not comfortable in the operations space
- Perceived internal threat – if new savings are generated, those responsible might appear as they had not been managing effectively
Reasons for Taking Action – Now
- Margins are being compressed, profits are or will be shrinking, therefore it is the obligation of management to be proactive and move
- Taking action today will protect the business when the next downturn occurs….and it will occur
- The cost savings achieved are not transitory, they can be sustainable if approached correctly
- The cost savings dollars are significant as demonstrated above and can have a positive impact on the business
Suggested Next Steps
If you and your management team are ready and serious about generating new profitability and stemming the loss of profits, consider the following actions:
- Leadership – Meeting of the Minds – Gather your management team together and get some consensus around your objective of improving profitability and how you can achieve those results(see above).
- Assess Your Spend– Identify how much you spend annually for supplies and services(see above) from your DMS data and identify who in your organization is managing that spend
- Gap Analysis – Review your processes and controls today. Do you have purchasing policies, do you track contracts, and do you have a list of preferred suppliers for each category? If not, you need those tools in place to guide the organization.
- Develop a Plan – You are not going to manage 130 expense categories effectively and generate the profit potential without a plan…..let’s be honest. You need to centralize your procurement function….either hire someone or some group to assist you or organize your internal resources so that they have matrix responsibility for generating cost savings. Assign each category to someone on your team and assign a due date to get your resources aligned and your plan established.
- Execute the Plan – Business school taught us the fundamentals of management…..Plan, Organize, Direct and Control…you do this every day in other parts of your business. Now might be a good time to do the same thing with your expenses.
It has been said that “Expense Management is the last great Goldmine available to business”. Based on the research of outside consultants and what we see in our spend management practice……that statement is true. If you are serious about driving new profitability in your business…….now might be a good time to do so. If it is not a good time……then just realize that you are pouring dollars down the drain every month and will continue to do so until you change your approach and strategy.
If you are interested in a Spend Management Best Practice assessment tool, send me an e-mail at: email@example.com and I will send you a copy to help you assess the strengths and gaps within your organization.
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.