There is no question that dealerships are focused on cutting costs in 2018. We see it in our business, we heard it at NADA, and we talked with suppliers who were honing in on that message as well. Cut costs and track the reductions…a great objective for any business or nonprofit.
So how are dealerships going after cost reductions? What is the prevailing cost reduction strategy used by dealerships? And is the strategy effective?
Most Common Dealership Cost Reduction Strategies
The dealership approach to cost reduction initiatives is often informal and not very organized. This is probably due to the fact that they are operating with little information and the resources they have are already taxed. The approaches we see most often include the following:
- Senior management will advise managers that costs are too high and give them the freedom to figure out how best to approach the problem.
- Management will encourage managers to call in the largest suppliers for new negotiation session and new pricing
- Aggressive managers will call in other suppliers to “Grind them down” for new price concessions
- Hope…hope that someone in the organization will make a dent in expenses because they are paid on profitability
- Increase Sales – Increasing sales can hide a lot of operational sins (expenses)
Top 5 Reasons Many Cost Reduction Strategies Fail
Some cost reduction efforts succeed and move the needle on expenses. Others never really get off the ground and can fail for the following reasons:
- Lack of organized effort – purely tactical approach going after a few select categories
- Lack of Time/Patience – nobody has the time or desire to organize the effort and/or they lack the patience to see it through if an effort is created
- Lack of expertise – even if they did have the time, most management teams don’t know where to start with an effective cost reduction strategy
- Wrong Philosophy – If the objective is to obtain a cost decrease today, with no eye toward the future locked in pricing to control costs, the effort will provide negligible results
- Senior Management – Management has failed because they have not developed a plan, have not defined the objectives, there are no metrics defined and no follow-up mechanism in place to measure success.
The Dealership Opportunity
Based on research and our 2017 metrics, you can reasonably plan that you are overspending by a minimum of 26% of your supplier payables! Where did this data come from? Purchasing research and our benchmarks.
Imagine…if you are spending $2.0MM a year with suppliers, what kind of effort would you put forth to reduce those costs by 26% and watch those expenses turn into new profitability. What kind of effort would be worth $500K per year to your organization?
Review your 2017 total year-end sales…you can reasonably plan that you will spend 5-6% of total sales on supplies and services…across 130 expense categories.
Why Are Dealers Spending Too Much on Supplies and Services?
- Tactical Pricing – negotiating a price that is great today, but does not have long-term protection is a tactical price. You don’t know when it will increase, but you know it will. A strategic or long-term approach will preclude those price increases and lock down your savings long term.
- Lack of Purchasing Control – When everyone in the dealership has authority to buy or contract with suppliers, you have lost control of the commitment process and inefficiencies will occur. Purchasing policies and approval levels are needed to lock down that process and limit activity.
- Redundancies – In the marketing category alone, many dealers are paying for the same functionality with multiple suppliers, creating redundancies and wasting money. A review of the supplier base with your sales team will flesh that out…or should. Eliminate redundancies and you will reduce costs considerably.
- Lack of Spend Management – Dealers manage sales and spend a considerable effort driving sales, but there is not a comparable effort in organizing and managing expenses. Yet effective management of expenses can increase profits at a faster rate than new sales. So why doesn’t management spend the time managing their spend? They either don’t know how, don’t have the resources, or don’t have the interest or patience.
- Too Many Suppliers – If there are 130 expense categories that you can spend money in for supplies and services, then why do you need 500 – 600 suppliers? The short answer is that nobody is minding the store. Too many suppliers result in less leverage and higher prices. Too many suppliers result in the back office team managing and paying more suppliers than are needed. Too many suppliers mean your managers are having more supplier meetings/lunches than are needed to effectively manage the business.
There are some dealers out there that are really dialed in on expense management. They devote the time, have engaged resources managing their spend, and have the infrastructure surrounding the team to help them become successful and profitable. More often than not however…management just is not paying enough attention to supplier spend. If that trend continues costs will continue to run 26% higher than they have to be.
Now might be the time to take a fresh approach to your spend management. The benefits can be quite compelling if you are willing to take a new approach. A 15%- 20% -25% reduction in spend will certainly help your bottom line. Is it worth it?
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.