There seems to be a very pronounced interest in getting internal expenses under control and driving new profits after 2017 was recently wrapped up. Maybe the flattening of sales, maybe disappointing profitability, but something is definitely going on within the dealership community. So it is a fair question to ask…….what is you’re your strategy for a more profitable 2018?

• Acquisitions to fuel growth
• Greater market share and sales penetration
• Increased new and used car sales
• Increased service sales
• Increased parts sales
• Reduced expenses to reduce costs and drive new profits
• All of the above
• None of the above

Dealerships all over the country have probably set their 2018 strategies and objectives in place by now. If they haven’t…..well, that is a strategy too. Dealers will be descending upon NADA 2018 in Las Vegas in a few weeks looking for the next great product or service to provide a competitive advantage on sales, hiring, compliance, digital marketing, equipment, supplies, other services and more. NADA is a great place to find the innovations that can help your business improve on any number of aspects of your business. Some of those improvements can be tactical: making adjustments to existing processes, new suppliers with slightly better pricing options, etc. The strategic options you have however, are right at your feet. You don’t have to travel thousands of miles to find the latest and greatest service or supply to materially impact your business…….you can make that distinction where you sit and alter the trajectory of your 2018 results just by thinking about your business differently.

Tactical Plans or Strategic Plans

It is important to remember the distinction that exists between tactical plans and strategies within an organization.

Tactical Plans

Tactical plans can be driven from the company or at the department or unit level, but usually involve actions that drive immediate or short term benefits. Tactical plans are usually of lessor importance and magnitude to the company than a typical business strategy

Strategic Plans

Strategic plans are generally established at the company level and even department level, often require more analysis, research and planning, can often result in potential changes to the business model itself, and certainly impacts processes and controls. Most well thought out and executed strategies are centered on long term results.

As you look at your current strategies for 2018, what you hope to achieve, It is important to distinguish between the two options and set your plans and objectives accordingly.

Tactical Approach to Expense Reduction

Over the years I have seen many “tactical initiatives” that are designed to reduce costs and improve profitability. These tactical approaches usually consist of one or more of the following:

• Requesting that a supplier renegotiates an existing contract
• Looking at new supplier options for various supplies and the comparing pricing
• Elimination of some services altogether
• Reviewing new services that might impact sales through increased lead generation

I would characterize these actions as “busy work” rather than organized “tactics” as management usually doesn’t expect too much and the team doesn’t usually deliver too much in these cases. Most of these tactical approaches to cost reduction fail to provide long-term, sustainable results to the organization for the following reasons:

• The scope is too narrow – not enough expense categories are examined or in play
• Team is not aligned – Senior management tells management to get costs in line, but there is no plan, no common objective and timing
• Staffs do not have the time and expertise to do a thorough job of understanding their spend, their current suppliers, items purchased and the opportunities available
• Expense reviews are given little attention in meetings where top line sales seem to be the primary focus

Tactical expense exercises might come up with some short term “wins” in terms of reduced costs, but provide no mechanism to measure success against objectives as there were no concrete objectives and metrics were ever established to begin with. Management comes to the conclusion that this work is “hard” and takes too much time. They will tell others they do a good job on expense control but they know in their heart of hearts they don’t have it all figured out.

Strategic Approach to Expense Reduction

Groups that take a serious, long term, strategic approach to expense management are trying to move the needle in a consistent, sustainable and auditable way. They are serious about improving performance and will set aggressive objectives in place and manage the process. Successful strategic approaches to expense reduction include the following:

• Knowing how much you spend on supplies and services each year
• Knowing how many suppliers you have in each expense category and how much you spend with each supplier
• Knowing which expense categories represent the biggest spend
• Knowing which categories represent the biggest opportunities
• The company has a well-defined business objective in place that is measurable and achievable
• The company has a team of managers aligned around the objective who have the time and desire to achieve great results
• The company has a regular management review process to check in on results and push the needle
• The company communicates the results with the larger organization to reinforce cost effective decision-making

Centralization of Purchasing is a Strategic Move

If you read my February article on diseconomies of scale you understand that operating is a decentralized purchasing environment is costing you serious dollars….up to 25% of your annual spend. Unaligned efforts operating with little data, few expectations and no organized management is a recipe for over-spending and declining profits.

To centralize your Purchasing function as a strategy and realize your economies of scale, you need the following:

1. 2018 Cost reduction objective – expressed in dollars, $100K savings, $500K savings, $1MM savings
2. Establish your team – I recommend a hand full of trusted leaders(influencers and good project managers)
3. Generate a 12 month spend report by suppliers
4. Aggregate the spend across the 130 expense categories(you now have spend by category)
5. Gather up any contracts to see what limitations/opportunities you have in terms of sourcing
6. Develop your sourcing plan for 24 months
7. Assign the category work to your team members
8. Lay out your expectations – one category recommendation(with back-up and support) from each member each month should allow you to accelerate the pace
9. Meet and report results monthly or every two weeks at the beginning – recognize results
10. Track and report and then publish your results to the organization

Summary

Tactical expense reduction efforts are typically short term, they usually nibble around the edges of expenses and generally do not create a predictable, sustainable result that you can bank on and budget on. While the short term benefits may “sound” good…….the results are normally not sustainable and will not impact profitability in any measurable way.

A strategic approach to Purchasing, if the above steps are followed, cannot help but be successful in a measurable and sustainable way. You are operating with a clear objective or outcome to measure against. You have clear expectations established, you have a time based management review approach and with good people, you will generate real cost reductions. Those reductions when quantified on an annual basis can then impact budgets and the result will be an increase to the bottom line profitability. This is not a short term approach…..this is strategic…..long term. Setting up a centralized program is one of the most effective strategies you can implement in your company. And you don’t have to go far away to find this solution. You now have it.

There is no other functional group within a dealership that impact profitability as much as Sales and Purchasing can. Inexplicably, most groups manage their Purchasing in a highly tactical way…..leaving hundreds of thousands and even millions on the table. Centralization of Purchasing is a strategy than can materially improve your profitability…..today, this year and the years beyond. Is now the time to start thinking strategically about your purchasing function?