Dealers that are preparing for future tough or leaner times are looking at all options to dial down their cost structure. They are looking at headcount, floor plan, compensation structures…the usual approaches.
While I am a big proponent of managing your spend effectively, one of the areas we don’t address very often is the cost of your supplier base. We’ve had the good fortune to be engaged by dealer groups of all sizes…small single points, to small groups to large groups to mega groups. In these engagements, there are a few common denominators that I would like to call out:
There are roughly 130 different expense categories in a dealership – a finite number
Dealerships can have an infinite number of suppliers supporting their dealerships
Less than 10% of the dealerships manage their supply base well…250 – 325 suppliers on average
90% of the dealerships manage their supply base poorly – 325 suppliers to 6,000 suppliers across a big group
Suppliers are a necessary part of doing business. We hire those suppliers that can perform certain tasks more efficiently and more effectively than we can. We hire those suppliers that can provide the supplies and capabilities we need. But how many suppliers are enough? What does the optimal supply base look like?
What are the costs of a large supply base? Who makes these decisions?
Top Five Reasons for Large Supplier Bases
- Decentralized Purchasing Structure – too many buyers or decision-makers making supplier decisions.
- Lack of Purchasing policies – No standard supplier selection process, lack of internal controls
- Lack of Strategic Perspective – Tactical approach to purchasing – get-it-done mentality
- Continuous Price Shopping – Tactical approach to purchasing, constant internet shopping for the cheapest item regardless of how many suppliers and cost is added
- Management Turnover – New management brings new suppliers aboard resulting in further dilution of the spend and loss of leverage.
Who is in charge?
“When everyone is in charge…nobody is in charge.” This is particularly true in spend management and the purchasing space. If you allow your managers to shop continuously and bring every new supplier on because they have a killer deal on brake clean or paper or wheel weights…your supply base will grow. If every new marketing company can visit your sales department and sell them a new service, that you might already have and are already paying for, your supply base will grow. If you have management turnover, as all companies do, rest assured the new management will bring on their supplier friends…and your supplier base will grow.
Unless your organization has a well thought out process about supplier management, defining who is in charge of supplier additions, the process to bring new suppliers aboard, you will be overseeing chaos and increased expense. And suppliers will love you for it…they want just a piece of your business…hoping that that piece will grow over time to a bigger piece. You can control this process with a well-defined set of purchasing and approval policies that limits supplier decisions to a selected few in the organization.
What Are the Hidden Costs of a Large Supplier Base
For every supplier in your system, the following will occur:
- A meeting with one of your managers to understand the supplier value proposition
- The initial purchase order to process the transaction
- Set-up of the supplier in the system
- Completion of a 1099 or W2
- An invoice to review, sign and code for accounts payable
- Expense posted to the system
- A check cut to the supplier
- A manager/owner to sign each check
- Stuffing the check into a pre-printed envelope
- Postage to mail the check
Now…let’s assume this internal process costs your organization $75.00 per check ($75 to $125 is common).
Now repeat that process each month, twelve times per year.
500 suppliers checks per month x $75.00 per = $37,500 per month
500 suppliers per month x 12 months = 6,000 transactions or $450,000 per year
Optimized Example: 250 suppliers checks per month x $75.00 per = $18,750 per month
250 suppliers per month x 12 months = 3,000 transactions or $225,000 per year
If you are adding office staff, payables staff, and management to deal with an increased supplier base…you are wasting a lot of money.
How Many Suppliers Are Enough?
Do the math…if you have 130 expense categories…having a primary supplier in each expense category and a backup supplier in each category would tell you that 260 active suppliers in your supply base is optimal. If you have a bigger group, there may be some rationale for having more suppliers in a particular category (towing or HVAC maintenance) given the geography and suppliers’ capability.
Other Costs of Large Supplier Base
There are other significant costs of a large supplier base…those too are difficult to quantify, but you know they exist.
Loss of leverage – spreading $100K in spend among five suppliers will generate less aggressive pricing than leveraging that spend with one supplier…which increases your prices and your costs at the unit level.
More risk – more suppliers equals more contracts, more agreements, certificates of insurance, bonds to manage
More chaos – too many suppliers result in employees uncertain which suppliers to use
Eight Steps to Optimize Your Supplier Base and Reduce Costs
If you are interested in getting a handle on this problem, these eight simple steps will help you optimize your supplier base.
- Pull a vendor spend report out of your system
- Code each of your suppliers according to the 130 expense categories
- Count up each individual supplier per category and total by category
- Implement purchasing policies that limit the ability of others to add suppliers and define a process
- Set supply base objectives for the year– two suppliers per category with few exceptions
- Develop a preferred supplier program– two suppliers in each category (preferred and approved)
- Reduce your suppliers to those most competitive, reliable and service-oriented suppliers in each category
- Measure and report the changes, and then enjoy your new profitability
Large supplier bases are costly and inefficient. Management time, back office support time, executive review and signing of checks all add up to waste and extra costs. Large supplier bases also sub-optimize your purchasing power – your leverage to obtain the best pricing, terms and service levels in each expense category. You have thousands of dollars, maybe millions of dollars depending upon the size of your organization that is being wasted every day due to out of control supply bases. It is the responsibility of executive management to get their arms around this issue and lead the organization to a more efficient solution. The benefit will be increased efficiency, less cost, and greater profitability.
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.