Whether you are a single-point dealership, small group, mid-sized group or mega group of dealerships, the opportunity to add $1,000,000 to your bottom line is absolutely achievable. For smaller groups, the profit improvement may span a couple of years, for larger groups the profit improvement can be annually, and for mega groups, the profit improvement opportunity can be multiplied by a factor and achieved much quicker.
Thin Profit Margins
Most organizations were formed to sell a product or perform a service and do so at a profit. Auto dealerships are no different. Profitability is key to maintaining the business and achieving growth and expansion objectives. The more efficient and effective a business is, the more profitable they will be. Auto dealerships operate in a challenging environment as we all know. The way cars are researched and purchased today is changing dramatically.
Most dealers are quickly adapting to the new realities of vehicle sales. In spite of all of the new strategies, tactics, and approaches employed by dealerships, most dealerships are operating on very thin 2-3% profit margins. For most organizations, 2-3% profit margins are too thin. The profits generated are not producing the returns expected given the investment in the business. So naturally, dealers are searching for processes, strategies, and approaches that will enhance their profitability, not only now, but on a sustainable basis. As many dealers anticipate a slow-down in business at some point in the future, strategies to improve profits are both defensive and offensive in nature by maximizing profitability today (offense) and by protecting their bottom line (defense) when challenges come again.
Complicating the Simple
Again, if organizations are designed to be profit-generating enterprises, it just makes sense to explore options that will, in fact, improve the bottom line and increase profits. Increasing margins, improving gross profits, reducing expenses, and wringing costs out of an organization is not easy, but those savings dollars will flow to the bottom line as new profits.
Most financial statements hide obvious opportunities to reduce costs and increase profits due to the summary nature of the documents themselves. Profit and loss (P&L) statements usually contain 25-30 lines that reflect revenue and expenses and ultimately, retained income or net profit for the enterprise. In short, the P&L for most organizations can complicate the simple. Reviewing a typical P&L to look for hints at reducing costs and increasing profitability can be a daunting exercise given the complexities of the business and the summary nature of the documents.
Dealership Facts
- Most dealerships spend money in up to 130 expense categories.
- Most dealerships will spend 4-6% of total revenues on those categories of supplies/services.
- Most dealerships can reduce their spend by 25%, adding to their bottom line as new profits.
What is the Opportunity?
I think it is fair to say that most owners and executive management teams are all interested in improving profitability. The strategies employed to reduce/contain costs and sustain those reductions can vary greatly. Organizations with $100MM in annual sales should have at least 5% or $5MM in annual purchases for supplies and services to support their organization based on our extensive benchmarks.
Reputable research firms suggest that organizations can realize up to 25% in bottom-line cost savings with a centralized, controlled, systematic purchasing approach. Our experience suggests that the 25% target is realistic and achievable.
Where do you find your $1.0MM?
Your new profits are hiding in the 130 expense categories that you spend 5% of your revenues on. Think about it for a minute…$5.0MM in spend, at 25% savings = $1.250MM in new profits. If your dealership is smaller, the math is the same, it just takes longer to get to the $1.0MM in savings.
Your cost savings opportunity depends on your overall annual revenues and annual spend and how well you have sourced your categories to date. If you want to know where to start and how to identify potential savings, build a spend map.
A spend map is a tool that contains the previous 12-month spend for all of your expense categories and becomes a planning, scheduling, management, and tracking tool to help your organization.
If you are interested in uncovering your $1,000,000 in profit improvement opportunity, determine your annual spend in each of the 130 categories.
Profit Improvement Opportunity for Your Group
Chart 2 (see above), depicts potential profit improvement opportunities based on data we have.
Realization of $1.0MM in New Profits – Next Steps
How does an organization proceed with a strategy to increase their profits by $1.0MM? Following the steps listed below would be an ideal place to start.
- Review your 12-month spend from your DMS (on-demand checks and accounts payable), credit card payments and ACH
- Develop a spend map (categories, annual spend, and supplier count) for your business
- Set your profit improvement objectives
- Develop a sourcing plan from the spend map
- Assemble your team
- Execute the plan by sourcing each category with three to four suppliers
- Measure, manage and report
- Enjoy new levels of profitability
Summary
This process is not quick…it takes time and requires management focus. Those committed to driving new profits are doing so. The benefit stream is both short term and long term, because as categories are sourced and new pricing is “locked”…the benefits will be sustainable year over year, ensuring improved profitability long term.
$1.0MM in new profitability is out there for you and your organization. Even more profitability, shorter term is available for larger groups. It becomes a question of how bad do you want those new profits and what are you prepared to do to achieve those levels?
If you’re a dealer interested in beginning this process, email [email protected] for a spend map template to get started.
