Is it time to innovate yet?

The market is changing. Profitability is being challenged once again. Dealers are quickly exploring all options to shave costs and improve profitability. OEMs are also under pressure to help their dealers improve profitability and some are exploring unique approaches to partner with their dealers to drive out costs and improve the bottom line.

As dealers start to examine their P&Ls and look for options to improve profitability, they are going to find once again that their statements don’t yield a lot of obvious cost reduction opportunities. So, the typical approach is to look at headcount, inventory, floor plan, and then…punt and hope for the best. As we all know, hope is not a strategy.

A methodical and prioritized approach to cost reduction has proven to yield sustainable results, and it might be time now for some big, outside-the-box thinking, and one idea is the development of a company-based revenue center. More on that in a few minutes.

Failed Dealership Cost Reduction Approaches

In our experience, tactical cost reduction approaches do not yield sustainable bottom-line benefits. These approaches are normally ad hoc, are short on data, short on management direction, and short on expectations. These efforts are characterized by a monthly management meeting where rising expenses are a hot topic and various managers are tasked with going away and looking for opportunities to either eliminate suppliers and/or negotiate with selected suppliers to generate better pricing than they currently have.

Problems with the typical approaches:

Poor Planning: Without a data-based plan, management may be spending time with low spend categories that will yield insignificant results.

Wrong philosophy: If the focus is on obtaining only on a short-term price reduction, the buyer may be missing many other opportunities to take down costs. Additionally, unless the pricing is locked for an extended period of time (12 – 24 months), the suppliers are likely to begin raising prices within weeks, maybe months of the negotiation. Audits are necessary to verify pricing.

Lack of Benchmarks: If the buyer doesn’t have access to benchmarks that represent ‘best-in-class’ pricing for the supplies or services they are negotiating, they really don’t know how much they are leaving on the table with the supplier when they conclude a negotiation. Request for Quotes (RFQ’s) determine truth in the marketplace, but that process is rarely if ever used by dealer personnel.

Lack of Management Expectations/ Attention: If management doesn’t have an organized, long-term approach to this initiative with a big objective in mind, the initiative will fail. Sustainable, long-term results will not be obtained if there isn’t a regular focus (bi-weekly) on the folks assigned to this work and measurable results posted against a plan.

Repurposing Human Assets: Some organizations will undoubtedly redeploy certain employees from their current position to full-time work on expense reduction projects. This approach can work but rarely produces material results to the bottom line. Lack of data, lack of experience, and lack of direction and tools will normally doom this effort to a short-term initiative with minimal results.

So, what will work? What strategies will yield measurable, sustainable, and even material cost reduction, or new revenue results?

Outside-the-Box Thinking – developing a Revenue Center

The purchase of supplies and services are absolutely necessary to the effective operation of any business. The purchase of those supplies and services are expenses which show up on our P&Ls and reduce our profitability. There are some executives and management teams that throw up their hands and feel there is nothing they can do in any significant way to reduce expenses. We all know that the act of reducing expense dollars will flow directly to the bottom line as new profitability…new revenues.

We also know that over-paying suppliers and service providers happens occasionally, and if those dollars can be minimized or recovered…expenses go down, and new revenues or profits will increase.

Stay with me here…what would happen if we took a big step and decided to create a new function in the organization where the primary purpose is new revenue generation? This revenue center is not the generation of revenue in the traditional sense of selling vehicles, servicing vehicles or parts…but in the on-going generation of new revenues (profits) through improved management, reducing everyday expenses, improving processes, driving new efficiencies, and the recovery of supplier overcharges throughout the organization.

The revenue center would be organized as follows:

• Typical cost center number assigned for budget purposes
• Staffed with one innovative, credible management FTE to lead, manage, and execute this initiative
• Function would report to the CEO/dealer principal or CFO
• Annual objective – achieve a minimum of five to seven times salary (new FTE) or $500k annually or more depending upon the size of the group
• This individual would have authority to cross organization boundaries to generate reasonable recommendations that generate significant savings or new organization revenues
• Opportunities for New Revenues

The opportunities are endless, but a starting point would be the following:

1. Requoting (not just negotiating) high spend expense categories with a selection of a new supplier that will reduce costs over a 12-24 month period.

2. Requoting categories that can increase gross profits (buy for less and increase your margins), which includes parts, lubricants, tires, towing, body shop supplies/materials, and more.

3. Recovery Audits to recover supplier overcharges in areas such as utilities, healthcare, transportation, warranty labor, parts, F&I insurance, unemployment insurance, and much more.

4. Digital Marketing Audit to eliminate redundant suppliers, ineffective suppliers, and drive costs out of the business.

5. Process Improvements – Ensuring that credit card transactions are processed correctly to drive down rates, ensuring credit bureau pulls are not excessive, paying suppliers with the most cost-effective methods, etc.

6. Supply Base
Optimization – Reducing excess suppliers to reduce back-office costs, management costs, and to increase pricing leverage with suppliers.

7. Elimination of supplier spend – There are categories of expense going on in your business today that can be completely eliminated without significant impact on your CSI scores, employee morale, and overall efficiency and effectiveness.

8. New Management Consulting Approaches – There’s a myriad of specialized consultants that can alter your property tax, improve your depreciation schedules, help you with the management of your aircraft operation, and much more.

Reputable purchasing research reports that companies that centralize procurement can generate 25% cost savings of their annual spend…or brand new revenues! Our work experience proves that… and more.

Quick Dealership Facts

• Dealers spend roughly 5% of total annual sales on suppliers for supplies and services
• Centralizing procurement can reduce costs – improve profits by 25%
• There are over 130 expense categories that dealers have to source and manage regularly
• Most dealers can reduce their supplier bases by 40% or more
• Even the smallest of dealerships should be able to generate $100K per year from the revenue center
• Multi-location groups should target $500K to $1MM in new revenue from their revenue center

Summary

Many dealers report that their business results are challenging, and not what they want or expect. So, what do you do if you are in the same situation? Nibble around the edges and hope for the best? Or do you start upsetting the status quo and begin to break some eggs in your organization? Maybe the time is right to think about your business differently. Maybe it is time to admit there are inefficiencies built into the organization that can be rectified and in the process, bring new dollars to the bottom line.

Maybe now is the time to put a full-court press on waste, inefficiency, redundancy, over-payment, low margins and the like, and think differently about your own opportunities. Maybe now is the time to build your own revenue center and claw back those dollars that are yours, but are ending up in somebody else’s pocket. The choice is yours. The answers are right there in your dealership…you just have to be willing to think a bit differently and take action. A revenue center for 2019…is the idea worth exploring?