Now is the perfect time to begin planning for expense reductions in 2011 if you haven’t already done so. From the supplier and expense side of your business, if you are like most dealers, you have the following facts to contend with:
- Active management of expense categories through properly applied purchasing techniques will yield 15-25% cost savings.
- There are 100-plus expense categories to manage (office supplies, merchant processing, waste and more).
- Dealers average 350-450 suppliers or more supporting those 100 expense categories.
- Annualized spend in those categories can reach $1.250M to $5.0M, or 3.5% – 6.6% of top line sales revenues.
In order to set meaningful 2011 objectives, the following information needs to come out of your DMS system or from your CFO/Controller:
- Previous spend for 12 months by supplier name
- Category name or G/L code with each supplier for the purpose of grouping suppliers by common expense categories
Developing SMAART objectives
With the opportunities and obstacles known, planning for 2011 becomes somewhat easier. Management now needs to set an objective or develop a set of objectives that can and should be achieved across the enterprise.
SMAART objectives as a technique, have been around for years. In my experience, the use of this technique will lead to better results if an objective is written using the SMAART criteria.
SMAART objectives are designed to bring more focus, clarity and accountability throughout the objective and tracking process. As a refresher, SMAART objectives should contain the following components in each objective:
- S – Specific the objective must be specific in nature
- M- Measurable – the objective must be measurable
- A – Action Oriented – the objective must require a specific action to complete
- A- Attainable – The objective must be realistic in light of the business
- R – Results Oriented – The desired result or end must be articulated
- T- Time – The objective must have a start and end date
Example: The controller will reduce indirect supply costs over current costs by 20%, or $50,000 by March 2011, through benchmarking and sourcing activities. Supply costs will consist of office supplies, print, shop supplies, janitorial supplies and detail supplies.
Setting organizational objectives for 2011
Senior management should set an aggressive but realistic organization objective that will be delegated to the staff available. In order to set meaningful business objectives around the 100+ categories to contend with, I would recommend the following:
- Cost reduction objective for supplies (define supplies by category and annual spend).
- Cost reduction objective for services (define the services by category and annual spend).
- Determine a supplier reduction objective for each group of categories, as too many suppliers cost your enterprise money in lost leverage and back office processing.
- Determine potential quality or service level improvements that might be obtained through the process.
Assignment and development
With spend by category known, it is now time to assign those expense categories to a few key people within the organization. The staff should be assigned objectives in expense categories known to them to expedite the process. However, one can argue that assigning a category unknown to an individual might reveal some interesting, out of the box thinking.
Once assigned, staff should write their SMAART objectives and submit them for final approval by management. Once approved, it is time to execute.
Execution, measurement, and communication
- Management should check in on the progress of 2011 objectives every 30 days or 90 days at a minimum, depending upon the due date. Having a regularly scheduled monthly review can improve success as personnel can plan their work accordingly.
- Individuals should be prepared to provide enough hard data(spend, old pricing, new pricing) to validate their progress against the plan. The objective should stand up to an independent audit if one was conducted.
- Finally, successful completion of those objectives need to be communicated throughout the organization to give credit to the employee and to notify the broader group of the new supplier arrangements.
Planning now for improved supplier management and expense reductions will pay big dividends in 2011. Organizations that actively manage the purchasing process will typically enjoy cost savings of 15-25% of the indirect spend. Using the SMAART criteria to formulate and develop objectives will ensure that real, tangible results are achieved throughout the year to make this process a success.
For more information (Excel template) on the development of purchasing specific objectives, contact Doug Austin at 952-567-7979 or via e-mail at: email@example.com.