December is here and it is time to wrap up the year and begin planning for 2018 if you haven’t already done so. As business owners, the one performance metric that is top of mind is total top-line sales by month and for the year. Every business owner of top executive will know exactly where you stand on revenue metrics. One of the other important metrics is profitability, which some would argue is even more important than the sales metric. The goal for a for profit organization is to make a profit…as much profit as possible. Profits are the lifeblood of an organization and allows the organization to survive, grow and move forward.
The spend management space is focused on the management of critical corporate resources…supporting the organization with competent and competitive suppliers, the commitment of company funds in a controlled environment, minimizing expenses, enhancing profitability and increasing cash.
As we look back in 2017 to assess our organization performance, we usually make these assessments by reviewing overall organization performance. Did we achieve our objectives? Where did we miss? We also assess performance at the functional or departmental level. How well did our operating units perform? Did they achieve their functional objectives, did they contribute to our overall success…or did they hold us back from achieving our company objectives?
In the spirit of looking back to improve what we do going forward, I thought it might be an appropriate time to take a few minutes and review the condition of your spend management function in 2017. If you have access to the right data, have the correct plans in place, are employing the correct tools and controls across an organization…you are probably throwing off a decent level of profit for the year.
If your organization is not generating the profits you needed or expected, then it is probably time to assess where you are in preparation for some focused change.
The following assessment is broken out by the significant components within spend management. Spend a few minutes to walk through this exercise to see where you are strong and no improvements are needed, and to determine where the gaps are that need to be plugged.
If your answer to many of the questions is “no” or that you “don’t know” you probably have some challenges to address near term.
The best plan of attack to get the spend management function under control is to centralize the function. By that I mean, pull back all purchasing and commitment authority that employees have. Do not allow anyone to make a supplier selection or a supplier commitment until spend management is centralized.
What Centralization Means
I would recommend that spend management be centralized under the finance department and the CFO. If your organization does not have a CFO, then I would recommend that the dealer principal or president retain full control of spend management. Authority can be delegated and should be…but controlled from a central point. Centralization of spend management should include the following:
- Planning – Sourcing of the 130 expense categories is planned from the top.
- Policies – Purchasing policies are in place and apply to all staff and all suppliers.
- Commitment authority – the ability to execute a purchase order, contract or approve an invoice is limited to only those titles outlined in the purchasing policy.
- Supplier Management – New suppliers must be vetted and only added with senior management approval and then to fill a need in the preferred supplier list.
- Objectives – An annual cost reduction objective expressed in dollars is established, implemented and measured monthly to track against the plan.
- Audits – Supplier audits are planned, executed and the compliance results are reported across the organization.
Since profits are the lifeblood of any organization, keep in mind that the spend management function can either erode your levels of profitability with too much expense…or it can enhance your level of profitability by reducing the level of expenses. Some metrics to keep in mind as you plan for 2018:
- Annual spend for supplies and services – 6% of total sales on average ($100MM in sales = $6MM in spend)
- Expense categories to manage – 130 total…most dealers managing 95 on average
- Cost reduction opportunity – 25% of spend if spend management is centralized (25% of $6MM = $1.5M)
- New Profits – $1.5MM
As year-end is approaching, it is a good time to step back and review overall company performance. Did the organization achieve all of the early objectives? If profitability levels were not met, it might be a good time to review your spend management function. The Spend Management Assessment can help you pinpoint the gaps in your policies, processes and controls and help you get those on track for 2018. Remember, centralization, taking control of the commitment process is key to regaining control across an organization. Once that control is centralized and plans are established and executed, a new source of profitability will be achieved setting you up for a better 2018.
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.