Organizations will spend millions of dollars this year and next for the purchase of supplies and services to support their organization. These “indirect purchases” are typically delegated to staff within the organization to source, negotiate, implement and administer over 100 expense categories. If your organization is targeting improved profitability in 2011, the execution of a well developed purchasing plan could contribute $100K to $250K per year, and more in cost savings that will lead to improved bottom line profitability.

To manage or improve profitability, an organization must have a purchasing plan, the staff to execute the plan and the requisite process and metrics to ensure positive results.

Your 2011 purchasing plan – Building an expense reduction roadmap

The development of a purchasing plan requires data from your DMS system. This data will be turned into valuable information that will allow you to prioritize opportunities for maximum benefit and ROI.

Using an excel spreadsheet or a word document using the table feature, is probably the best approach to developing your plan.

1. Run a supplier report from your DMS system to identify all previous supplier spend for the last 12 months.
2. Assign an expense category code to each vendor name.
3. Sum up annual expenses for each expense category.
4. Insert those categories into an Excel spreadsheet as the foundation of your 2011 roadmap.
5. Assign your timing to each expense category – when you will work the category.
6. Assign staff who will be responsible for the expense category.
7. Prioritize the category work using the suggestions listed below.

Cost drivers – expense categories to attack early

In our experience, the following indirect expense categories represent significant expense and can provide significant cost savings opportunities for your organization. As such, these high cost expense categories should be planned for early in your overall purchasing plan:

Pace of the purchasing plan

If you plan to have a number of staff involved with the execution of the purchasing plan, two to three categories can be worked and managed simultaneously. Most categories can be sourced, renegotiated or quoted in 30-60 days. More complex categories that involve many purchased items (print, office supplies, shop and detail supplies) can take longer given the information that needs to be collected and the sheer number of items to deal with.

Finalizing your purchasing plan

With over 100 expense categories to address, your purchasing plan should be based on a 24-36 month cycle depending upon the staff available to execute the plan. When those categories have been all completed, it will be time to start over and re-quote or re-negotiate those categories once again to ensure that your costs are low and your results are sustainable over time.

Execution of the purchasing plan

The following components are critical to the success of your purchasing plan.

1. Staffing – Personnel must have the time to complete the work. Plan for 24 man-hours per expense category at a minimum and more time for more complex categories.

2. Communication – Assigned staff must be clear on the objectives (cost reduction, supplier reduction, process improvement, standardization) as well as your expected completion dates. Communicating the 2011 plan to the organization will create buy-in and cooperation.

3. Process – Assigned staff should follow the following key process requirements for each expense category including:

• Requirements – Define the specifications (color, size, performance attributes)
• Strategy – Renegotiate, quote or do nothing
• Business requirements – define the desired terms, conditions and service levels that are important
• Forecasted spend and usage – Annual spend and expected usage of supplies/services
• Current pricing – Define current pricing and additional costs that may be incurred
• Proposed pricing – Obtained from the quote process and compared to current
• Recommendation – Given the objectives and options available, define the option that will meet the needs and objectives of the organization.

Implementation and audit

The best purchasing plans and the best execution strategies will fail unless properly implemented. Once a decision by management is made relative to a recommendation, the solution must be implemented. The implementation is owned by the internal staff and the supplier. Any and all details, requirements, agreed upon pricing discussed and represented in the recommendation must now be finalized and memorialized either with a contract or pricing agreement. Communication of the new arrangement must be clearly made to all employees to ensure compliance with the new solution.

Once a category solution has been in place and properly implemented for 30-60 days, and a complete invoice cycle has occurred, a compliance audit should take place. A compliance audit consists of three important parts:

• Internal compliance – Used to determine if employees are using the designated solution
• Supplier compliance – Determine if the pricing quoted is actually being realized on the supplier invoices
• Measurement – A confirmation that expected cost savings results match actual results.

Communication and recognition

Managing a purchasing function requires a fair amount of time and focus as there are a number of moving parts to coordinate at any given time. When staff accomplishes positive purchasing results that reduce your costs and improve your profitability, those results should be communicated to the employee base to reinforce the behavior, reinforce the processes required to achieve those results and recognize the achievements of the personnel or team.

Summary

Indirect expenses represent between 2.5% to 6% of most dealerships top line sales. The development of a thorough purchasing plan for 100+ expense categories is the first step in a serious cost reduction effort that can reduce costs by 23%, or contribute $100K – $250K or more to bottom line profitability.

The planning process takes some time and effort, but the ROI is generally very positive and well worth the effort. Once the purchasing plan is in place, the assigned staff needs to execute the plan and follow the established processes to ensure consistency of results, and to ensure that auditing can occur post-implementation. A well developed and executed purchasing plan will provide sustainable benefits that last well beyond the actual sourcing event.

For more information, contact Doug Austin at: [email protected] or via phone at 952-567-7979 for a Purchasing Plan template that can be used by your organization that can be used by your organization to create your 2011 roadmap.