As a specialist in spend management and operations, I have developed a respect, a trust and a reliance on well-conceived and well developed performance metrics. Performance metrics allow us to check in on performance levels and quickly know where we stand. While performance metrics certainly don’t tell the whole story, they are a vital part of effective management strategies for successful companies.

While dealerships utilize an impressive array of financial metrics to identify and measure the health of their business and their investments, it is rare to see any performance metrics that deals with up to 8% of their business expenses…and that poses a risk.

Performance metrics have one common purpose. They quantify performance levels to help the user better understand current levels of performance. The metrics in and of themselves have value, but the value increases as the metrics are used for comparison purposes. Comparing one batting average to another, comparing production levels from last week to last month, profitability levels from this year to last year, all are extremely valuable exercises. The ability to compare performance among people, teams and activities over time allows for the development of strategies that improve performance. The right performance metrics increase the chances of success in any endeavor.

Five key benefits of performance metrics

1. Performance metrics unlock the value of data in transactional systems.
2. Performance metrics help companies analyze, manage and leverage information for competitive advantage.
3. Performance metrics help management accelerate decisions and improve results.
4. The right performance metrics empowers employees to become smarter, more productive and more effective.
5. Performance metrics help leverage intelligence across an organization.

Seven characteristics of effective metrics

It can be challenging to develop the right metrics at times, but good metrics seem to share the following characteristics.

1. Quantitative – can be expressed as an objective value.
2. Linked to an objective – linked to mission, strategies and objectives.
3. Easy to understand – conveys at a glance what is measured and why.
4. Auditable – data can be tracked for accuracy and reliability.
5. Encourages the right behavior – rewards productive behavior and avoids game playing.
6. Visible – the results and effects are readily known to others.
7. Measure what is important – results reflect a key indicator that is important to success.

Spend management metrics – Why is this important?

Spend management, supply chain and procurement related performance metrics are quite common in most companies today and have been for years. Auto dealerships have not adopted spend management metrics as a rule and I suspect the reason for that is 95% of dealerships do not have a formal spend management of procurement staff. The scope of the controllable spend is not well understood, the scope of the categories are not clear, business objectives may not have been developed, so performance metrics have not been established. Even more so in a de-centralized purchasing function, spend management performance metrics are critical information that can advise management on key achievements, risks and gaps.

Importance

Based on our latest spend data, between 4.5% and 8% of a dealership’s total sales (new, used, service and parts) is typically spent on indirect supplies and services. The smaller the dealership, the larger the percentage of top line sales consumed, the larger the store or group, the smaller the percentage of top-line.

Key question – Are there any functions within your business that consume between $2.0M and $8.0M annually that you don’t actively measure or manage today?

If you aren’t actively managing this spend activity today, you might want to consider doing so as you begin planning for year end and 2013.

Eight key spend management performance metrics – dealerships

Implementation of the above metrics are simply the basics that every organization should have in place. Organizations with formal purchasing or supply chain groups will have these and many more metrics to manage their supply base.

How to utilize spend performance metrics

Once the metrics are established, it is time build them into a tool for tracking the performance. Tracking of these metrics should be accomplished monthly or quarterly at a minimum. Each year, as new objectives are established, metrics should be compared to year over year activity and objectives adjusted to create stretch goals.

Because most of the recommended metrics are financial-operations data related, it would make sense to have these metrics developed and reported from either the office manager, controller or CFO.

Interpreting the metrics and potential benefits

The metrics once in place and in operation for a few months (data cleansing will occur) will provide a wealth of actionable information to the management team to drive improvements.

1. Total spend – The magnitude of your indirect spend should help you and your team realize that management of same requires a coordinated effort to reduce costs, reduce risk and improve profitability.
2. Suppliers – Most dealerships have a minimum of 350-400 suppliers being used in 130 expense categories. Lost leverage and increased processing and administrative costs will occur from too many suppliers. Reducing that supplier base has many cost related benefits.
3. Categories under management – Of the 130 expense categories, there should be some high level action (sourcing, negotiating, quoting) once every year or two years in each category. This metric tells you how much is being planned, worked and completed.
4. Spend under management – Similar to the category above, this metric is focused on spend under management. If only 10% of your spend is being actively managed, you will want to know that metric to increase attention on the balance of spend.
5. Supplier contracts managed – One of the biggest challenges in a dealership is to get control of supplier commitments. Gather the agreements, track the renewal dates and manage the process to prevent surprises.
6. Cost savings forecast – This estimate should be the savings estimated or forecast at the category level and then rolled up. Ultimately, the objective is to reduce costs and budgets accordingly to drive efficiency.
7. Cost savings realized – This is a quick internal audit to validate whether those forecasted savings have actually been achieved. If they haven’t, you need to begin looking at your internal team…are they using the designated supplier? If not, why not?
8. Supplier compliance audits – Simple metric tracks two indicators……whether an audit occurred and how accurate were the results.

Summary

Indirect spend within most dealerships is typically 4.5% to 8% of top line sales based on size. The sheer magnitude of this expense requires focused and regular management attention if you hope to improve the results. Performance metrics are proven tools to identify, measure and improve business results. It has been said that “what gets measured, gets improved”. I am sure you know that to be true as well. Most dealerships do not have the basic spend management performance metrics in place today…doing so will provide a good baseline of activity and equip your organization with the tools to improve spend performance and profitability.

If you would like to receive a set of Spend Management Performance Metrics, please contact me via e-mail at: [email protected]. I would be happy to assist.