Most business owners review their financial performance monthly, reviewing a complete set of financial documents that paint a picture of the health and vitality of the business. Sometimes those financial results paint a different picture and might suggest that the business is not producing the kind of results that were expected or required by the business.
Dealership organizations that seek to improve their bottom-line performance can achieve that end result in a couple of ways:
- Generate additional top-line sales to enhance the bottom-line
- Reduce expenses to improve the bottom line
As spend management practitioners, our job is to help our clients reduce expenses, and drive efficiencies that save time and ultimately reduce risk. We source expense categories continuously, so we have a pretty good idea where the best opportunities are to reduce costs and drive new profitability in a dealership.
Dealership Expense Categories
There are almost 130 different expense categories that can be found in a car or truck dealership. Most dealerships are regularly spending money in about 90 expense categories.
So…think about that. There are 90 or so expense categories that your organization is currently spending money on regularly. Some questions to consider:
- What are the categories used in your organization?
- Who are the category owners – the person making supplier decisions, negotiating price?
- When was the last time those categories were sourced, quoted or renegotiated?
- Which categories represent the best bottom-line improvement opportunities?
Best Dealership Opportunities
Spend Management research says that centralizing the purchasing function and quoting the categories regularly will usually result in an average cost savings of 25%. Our own results are very close to that average so we know the research is accurate. Each expense category is different however, with their own characteristics, with their own unique supplier base and corresponding opportunities.
Spend Management organizations are typically very process and data driven. That is important to know because for each sourcing event (renegotiations, RFQ, RFP) the result can be boiled down to data that can be collected, analyzed and utilized in various strategies and initiatives.
Category results can change periodically based on changes in the industry such as supplier consolidation, or technology breakthroughs, or plain old competition.
Listed below are some of the best category opportunities to reduce costs for expense categories with sizable annual spend amounts. We have many more category results, but the spend levels may be insignificant. The categories listed below should help you “move the needle” on company profitability as the annual spend is usually quite sizable and the results can be quite compelling.
|Item||Category Description||Opportunity %|
|2||Insurance, Work Comp||50%|
|6||Telecom – Cell||42%|
|10||Uniforms & Laundry||23%|
|11||Telecom – Local and Long Distance||23%|
|12||Transportation – Small Package||20%|
|13||Marketing Services – New/Used Car Listings||16%|
|14||Auto Parts – Non OE||11%|
|15||Dealer Management Systems (DMS)||7%|
Strategy to Reduce Costs
The opportunities as outlined above to reduce costs and improve profitability are real. Cost reductions flow directly to your bottom line as increased profits.
What should an organization do to realize these cost savings?
- Gather annual spend for each expense category – this data is in your DMS system. Remember to check your ACH records and credit card records to capture all applicable spend.
- Define the Category Owner – who in your organization makes supplier decisions in this category? Bring that person in to discuss business requirements, specifications, suppliers and terms desired.
- Build a RFQ – building a RFQ is the best way to determine “truth in the marketplace.” You will want to ensure that all of the items or services currently being used by your organization is articulated in the quote.
- Define Your Suppliers – Contact and pre-qualify suppliers who will participate in the quote process.
- Manage the Quote Process – Send the RFQ’s out and manage the questions with suppliers that will come up.
- Analyze & Negotiate – When responses come back from suppliers, rationalize the data and narrow the pool down to the top two suppliers if possible. Then review the pricing data and go back to the suppliers to renegotiate high cost, high usage items if possible.
- Finalize the Data and Make a Supplier Decision – A supplier decision will be pretty obvious when you review your business requirements and your pricing. Now is a good time to advise the suppliers of your decision and thank them for their participation.
- Implementation – Now is also the time to implement the solution to make sure all initial requirements are in place. A follow-on audit of pricing and terms should also occur in 45-60 days.
Caution: Many organizations will cut corners and move directly to step #6(Analyze and negotiate) thinking they can simplify the process and move the process along quicker. I will tell you that no amount of personal experience can replace the solid intelligence that comes from a well-executed RFQ. I am sure your organization has “Grinders” that know how to negotiate great deals with suppliers and maybe they do…but they will rarely outperform the results that can be achieved with a RFQ. Execute the process sequentially.
If your organization has not centralized your procurement function and developed a sourcing plan, you are leaving significant dollars on the table…or better said…you are leaving significant dollars in your suppliers’ pockets. Remember, research says 25% is available in terms of potential cost savings. Remember too…that cost savings generated here will flow directly to your bottom-line and become new profitability.
The 15 expense categories listed above are all productive categories to pursue. If you want to set a cost savings target, use the % provided or something close to that…and then begin to follow the eight steps outlined to realize your cost reductions. If you do, your bottom-line profitability will be much better than it is today!