All dealerships have the opportunity this month to shape a better and more profitable 2012 by taking some decisive action. For the past few months these articles have focused on reducing costs, checking in on your profitability, identifying a strategy to accelerate cost reduction results and playing aggressive defense on spend management.
The focus of our articles have centered on purchasing, audits, planning, process management….or said another way, “spend management.” Spend management encompasses sound expense planning, a methodical approach to sourcing and contracting, process improvements, execution and an effective back end supplier audit process. Spend management is what your Operations team does everyday. Some teams are more effective at spend management than others. Effective spend management directly contributes to your profitability. As we enter December and close the books on 2011, you have an opportunity to improve results in 2012, if you choose to take action.
Are you satisfied with your 2011 results?
There are many moving parts to profitability as you know. New and used vehicle sales, parts, service, and F&I and related products are primary drivers of top line revenue which contribute to profitability. Expenses such as manpower, rent, insurance and a large bucket of supplies and services that typically represent 4% to 6% of revenues, are contributors to expense and ultimately erode profitability.
Dealers who have survived these past few turbulent years have obviously done a lot of things right to be standing as viable businesses today. Dealers have created and managed profitable operations, but are those profit levels satisfactory? Has the dealer management team wrung out all waste, all excess costs, reduced risk and maximized profitability of the dealership? If the answer to that is “yes,” then you should probably keep your eye on expenses, but shift your focus to top line revenue creation. If the answer is “no,” now might be the perfect time to set new, aggressive profitability objectives for 2012.
Significant opportunities for 2012
Most dealerships spend between 4% to 6.5% of their top line revenues for 100+ categories of supplies and services, from office supplies, to credit card processing, insurance, to shop supplies and much more. For even the smallest of dealerships, that annual spend is usually north of $1.0MM to $1.5MM, and typically much more. Successful dealers can plan to shave 15% to 20% off of that spend over time with the right approach. Aggressive dealers have an opportunity to manage their spend much more effectively to reduce costs and drop those dollars to the bottom line, enhancing profitability. To take advantage of this opportunity, there has to be a desire to be more effective and drive greater levels of profitability. A “strategic approach” to spend management is now required.
Your 2011 spend – Information needed for your 2012 spend plan
In order to develop an effective 2012 spend management plan, one first needs to understand your own historical spend and the suppliers you have utilized. The correct approach is to generate a 12 month spend report from your DMS system as a first step. A common report that most dealerships have access to is a 1099 report. This report can be extracted to include vendor names, vendor spend totals and vendor address information. Once that information is extracted and coded by spend category, the true picture of your spend and the size of your supplier base becomes very apparent. When the total spend is massaged and cleansed, you will arrive at a total 12 months spend that will become the basis for your 2012 SMAART objectives.
Setting SMAART objectives for 2012
SMAART objectives have been around a long time. I have yet to find a more effective tool for building meaningful objectives across an organization. As a review, SMAART objectives should be written with the following components:
- S – Specific – Objectives must be written with a high degree of specifics.
- M – Measurable – Objectives must be measurable at all points in their duration.
- A – Attainable – The objective should be a stretch, but attainable.
- A – Action Oriented – Objectives must be achieved through direct action, not by accident.
- R – Realistic – The objective must be realistic and can actually be achieved in the stated time.
- T – Time Phased – There must be a definitive start and end time to the objective.
Example #1 – Beginning in January, we will reduce our supply and services spend by $250,000 over current spend levels and this will be achieved by December 2012. We will achieve this spend reduction through spend planning, sourcing, requests for quotes and selection of the best supplier partners available.
(Specific = spend planning, sourcing, quoting, measurable = $250K over current spend levels, attainable = a modest objective is certainly attainable, action oriented = spend planning, sourcing etc, realistic = this objective should be easily accomplished in 12 months and time phased = start in January and completion by December)
SMAART objectives can be set around the following areas to reduce your spend, reduce waste and improve profitability:
- Spend reductions
- Supplier reductions
- Long term price protection
- Supplier price compliance
- Rebate generation based on dealership spend and leverage
- Contract visibility and management
Planning and executing for success
Success is not an accidental event. Your dealership(s) has survived a difficult period of time and is obviously well run. While you may be profitable, you, like most other dealerships, have opportunities to drive additional waste and inefficiencies out of your business and in the process, enhance your profitability. A strategic spend plan or spend map is a required first step.
If you seek to improve profitability in 2012, engage your management team and set some aggressive objectives. Go on offense, develop a strategic mindset, set a handful of SMAART objectives that you can reasonably attain in 2012 and drive excess waste out of your spend. A bit of spend planning, spend analysis, objective setting and management can provide you with improved results and a more successful and profitable 2012.
If you are interested in receiving a set of tools to assist in your 2012 spend management planning, contact Doug Austin via e-mail at: email@example.com. I would be happy to send you these tools to help you drive new profitability in 2012.