In one of my recent articles, I offered up a vision of what an effective spend management function looks like in an organization and the benefits that will result, including new profitability, improved efficiencies, improved controls, and more.

Automotive News recently published an article mentioning a decline in profits for dealerships, while expenses increased, and that proactive dealers are taking action. The article quoted a number of dealers who are conducting vendor reviews to determine if the supplier was needed and if the ROI was there to justify keeping them on, primarily in the digital marketing space, but also across all expense categories, as well. The article cited examples of dealers trying to“centralize or standardize their suppliers to increase purchasing leverage and reduce the costs of doing business with too many suppliers. These new car dealers are doing this to stem their increased level of expense, driving more profits back to their bottom line. Some dealers are undertaking the hard work of “managing,” by conducting vendor reviews and moving toward centralization to drive more profitable operations.

Most U.S. Businesses – Centralization & the Purchasing Department

I would submit that almost 90 percent of the businesses in the U.S. have some formalized spend management or purchasing function to support the acquisition of supplies, equipment, and services within their organizations. Almost all organizations have a dedicated purchasing function that manages company spend. This could be a department or even just a full-time resource, whose job it is to manage and plan spend, source qualified suppliers, quote the suppliers, analyze the results, implement suppliers, and then audit and manage the supplier base.

Purchasing departments will typically provide a purchase order on the front end of a commitment to a supplier. Then, the transaction is managed all the way through until the product has arrived and is inventoried and the supplier is paid. Cost savings, inventory performance, and supplier performance are but a few of the performance measures used to manage a purchasing department. The key strategy behind the purchasing department is centralization. The authority and responsibility to source, quote, commit, contract, and manage suppliers’ rests with this function. The scope of authority varies from one organization to another; typically, the purchasing or spend management function manages all sourcing and supplier commitments.

Most New Car Dealerships & Groups

When you dig deep into the new car space, those numbers are almost the reverse. Based on my experience, I estimate less than 5% of new car dealerships have a formal spend management or purchasing function to help the organization manage spend and procure supplies, services, and equipment. The large publics tend to have a purchasing function in some limited instances, but the scope of responsibility can be quite constrained. Some private automotive groups are beginning to build their own purchasing functions, as well. When I do see a purchasing department functioning in a private group, the scope is usually quite constricted (a few supply categories), and the staff are usually folks from within that are “promoted” to this new role. They are expected to know the ins and outs of spend management on day one. As one would expect, throwing an untrained resource into the task of managing millions of dollars in spend and thousands of suppliers is not a recipe for success.

The Facts

The following is true for most dealerships and dealership groups:

• 95 percent of dealerships operate in a decentralized spend management environment
• Annual spending for supplies and services will account for roughly five percent of total sales ($100MM in sales = $5MM in supplier spend)
• 130+ expense categories for staff to plan, quote, negotiate, and manage annually
• Most dealerships have too many suppliers (40 percent more suppliers than are needed)
• Most dealerships are paying suppliers 25 percent more than they should (ref: Aberdeen purchasing research and SSI results)

Typical Dealership Approach to Spend Management or Purchasing

Most dealers and groups execute their spend management strategy in a decentralized environment. This means that a lot of managers are expected to continually shop suppliers for the “best price” and bring that back to the dealership. Decentralized purchasing environments are characterized by the following:

• Limited executive involvement – trusting that management is incented to “buy profitably”
• No formal purchasing or spend management structure (vision, staff, policies, processes)
• Limited expense category scope (few categories rather than all categories)
• No written objectives-or if so-objectives that are not measurable or quantifiable
• No methodical sourcing plan to attack all high value expense categories
• No understanding of annual or multi-year spend and leverage potential with suppliers
• Limited staff expertise – shopping for the best price and running a thorough and comprehensive quote (RFQ) are not the same
• No price benchmarks to inform and validate pricing received from suppliers
• No measurement of results and reporting
• Infrequent and limited supplier audits to keep suppliers honest and validate results

Is Increasing Profitability really a Priority? Five Potential Excuses

Why is that? How can successful businesses continue to operate and even grow without a dedicated function or strategy to manage the considerable expenditure of company funds? Why do new-car dealerships operate in a “decentralized spend management or purchasing” environment? What projects are so important that effective spend management doesn’t get the attention of executive management?

1. Trust – Some organizations have the philosophy that their GM’s are profit-oriented. Therefore, they are not going to interfere with their day-to-day operations and try to standardize or centralize spend management or purchasing.

2. Time – Some executives know they should centralize, and they’re aware of what the benefits to the organization will be. However, they are too strapped for time and wrapped up in other initiatives to focus on spend management.

3. Priorities – Some teams have a multitude of priorities on their plate and intend to sort out their Spend Management systems, but other priorities end up being placed first on their list

4. Pride – There are some who have such high confidence in their own “negotiating” skills that they refuse to change or alter their approach, relying on gut instinct versus data that comes from a well-managed quote process.

5. Relationships – Some supplier relationships are appropriate and others are not. When a supplier relationship benefits the individual more than the organization that he or she represents, then it is time for a change in staff and suppliers.

Is Increasing Profitability really a Priority for Your Organization?

Business is good, but the numbers are telling operators that it is becoming difficult to make the desired levels of profit that they were used to. Expenses are increasing, supplier mix is constantly changing, while marketing moves toward the digital realm. Additionally, interest rates and floor plan expenses are challenging profit levels like never before. As a result, your profitability is under attack. Your profitability, however, is your “war chest” and reflects your ability to thrive and grow today or survive tomorrow.

If you are serious about taking steps to increase your bottom line, the opportunities are there. You can realize 25% of your annual spend in new bottom line profits if you’re interested in improving profitability. There are numerous other benefits that will be realized as well. Smaller supply bases result in fewer invoices to review and approve, with smaller payable staffs, etc.

Your staff may resist your efforts to centralize purchasing or spend management, confronting you with various excuses. If you choose to overcome those excuses and embark on “centralizing” your spend management function, then the work is just beginning. Executives and staff alike may claim, “The work is too hard,” “It takes too much time,” “I can find better prices on Amazon, if you would just let me surf the internet more,” “My situation is unique,” “My supplier is really special”…and so on.

Leadership is required to paint the picture and articulate the vision of what a disciplined, spend management function will look like in your organization. Leadership and management skills will be required to navigate the change successfully and to defeat the naysayers that are resistant to change. But a successful spend management strategy will provide:

• Fewer, but better performing suppliers
• Reduced expenses
• Improved profitability
• Less confusion
• Peace of mind knowing that you are managing your expenses methodically and professionally

If improving profitability is a priority for your organization, and you’re willing to tackle your spend management challenges, then congratulations! For a set of tools that can help you with this initiative, email [email protected]. Best wishes, as you navigate change management and new levels of profitability!