There are many costs to running a successful dealership. To name a few: rent, labor, benefits, DMS systems, services and supplies to keep the operation running and finally…your suppliers. Yes, while suppliers play a key role in your success as a business, they also represent a significant cost to your organization.
Most single point dealerships will have an average of 400+ suppliers that support roughly 125 expense categories. There are probably many more suppliers in your system, but many of those suppliers are other dealerships, government agencies, charitable contributions and more. In our experience, the 400+ supplier number seems to be a pretty good average for a single point dealership relative to typical supplies and services required.
Why is the size of the supplier base important? What are the costs?
Suppliers play an integral role in the success of all businesses and organizations. None of us are so vertically integrated that we can do without the support of high performing suppliers to provide a supply or service that we need. But, how many suppliers do we really need to produce an effective and efficient operation?
“Can anyone here tell me why I need 16 towing companies?” —Question asked by the COO of his staff at a profitable import dealership.
Top five reasons for large supplier bases
If there are only 125 expense categories in a dealership, why would the average dealership have 400+ suppliers? The most common reasons for large supplier bases are as follows:
- Decentralized purchasing structure – too many buyers or decision-makers making supplier decisions.
- Lack of purchasing policies – No supplier selection process, lack of internal controls
- Lack of strategic perspective – Fire fighting mentality, no time to manage, just get the cheapest price and move on
- 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 tends to introduce new suppliers to an organization resulting in further dilution of the spend and loss of leverage.
Too many buyers in a dealership
Most dealerships are decentralized, meaning many high paid managers are developing, managing and vetting suppliers across multiple expense categories. Those decision makers and categories they typically purchase are represented below:
- Dealer principals – High ticket purchases
- CFO’s – controllers – Insurance, finance products, credit bureaus, DMS
- Office managers – Office supplies, print, etc.
- General manager – Any of the above plus marketing, advertising, vehicle history
- Director fixed operations – Uniforms, parts, supplies, janitorial
- Service manager – Facility repairs, uniforms, supplies
- Parts manager – Shop supplies, parts, lubricants
- Sales manager – Advertising, marketing, forms
- I.T. manager – Equipment, software, supplies
- Used car manager – Glass, tires, reconditioning supplies and services
With much of your staff making supplier selections and purchasing decisions, a simple supplier selection or vetting process needs to be implemented to control the size and effectiveness of the supplier base.
Costs of a large supplier base
The primary cost impact of a large supplier base to a dealership is the following:
- Lost management time – vetting suppliers, meetings, constant shopping.
- Lost support staff time – invoice processing, check processing.
- More risk – more contracts, more agreements, certificates of insurance, bonds to manage.
- Lost leverage – multiple suppliers in a category results in lost leverage, higher prices.
- More chaos – employees uncertain which suppliers to use.
The annual costs to manage an active supplier can easily total $2,385 when considering all of the tasks involved in managing the supplier base. For a typical dealership that has 400+ suppliers in their system, a single dealership can realize $900,000 per year in costs from management time, support time, check processing, invoice reviews and more to manage their supplier base. The largest cost to a dealership however, is the lost leverage, higher prices that result from too many suppliers. Do you really need 16 towing companies, five office supply companies, seven printers? What is your opportunity cost in terms of price? Management time? Staff time? These supplier costs all add up pretty significantly and are usually hidden from your management team.
Hidden costs of your supplier base
The process of managing suppliers represents an internal(soft) and external(hard) cost. Suppliers cost your dealership money in terms of staff time, invoice review, check processing and much more. Many of the cost driven tasks involved in managing your suppliers are found below:
- Supplier meetings – updates – lunches – events – relationship building
- Quoting – comparison shopping – analysis
- Problem resolution
- Invoice review and approval
- Supplier audits
- Posting, check processing and signing
- Supplier maintenance – 1099 reporting – system updates
Solution – Optimizing your supplier base to reduce costs and improve efficiency
Dealerships, or any business for that matter, have two options regarding the management of their supplier base. Option # 1 says you can fix the problem and enjoy the various benefits of increased effectiveness and efficiency and reduced costs…or you can ignore the problem and continue to waste dollars this year and years to come. Engaged leaders will typically lead the charge and execute the following steps to manage their supply base efficiently and effectively:
- Commitment – Managing the supplier base is not a short-term project…it is a repetitive process and philosophy and an on-going management responsibility.
- Review current supplier base – Develop a spend map that outlines your 125 expense categories, the spend for each category and your supplier count by category (This step is key to understanding your challenge and opportunity).
- Implement purchasing policies – Limit authority of individuals to add suppliers to your organization and ensure a proper vetting process has been accomplished with policies.
- Develop preferred supplier program – Recognize high performing suppliers by designating them with preferred supplier status. Direct the majority of your purchases to these suppliers to maximize leverage and reduce the non-preferred suppliers.
- Set supply base objectives – Once you know your supplier base size, set an objective (25%) to reduce the supplier base in year one of your effort. Build your plan and execute the plan.
- Measure and report – Measure your progress and report the results to your team. Expect efficiencies in your staff, increase expectations and redeploy internal resources where possible to realize your internal savings.
Your suppliers are an integral part of your operation and your success. Leveraging your supplier base by rewarding your best suppliers with more business and cutting the underperforming suppliers will ultimately reduce your costs, increase your focus on the customer experience and improve your internal efficiencies. Lost savings, higher prices and internal inefficiencies result from supplier bases that have grown out of control. Take control of your internal processes today and realize the benefits of a finely tuned operation for years to come.
If you are interested in supply base management tools to assist in your efforts, please feel free to contact me via e-mail at: email@example.com, we will be happy to assist.