By Doug Austin, Founder & President, StrategicSource Inc.

In just a few weeks, 2020 will be here – bringing some significant opportunities and challenges for us to face. But before planning begins for 2020, let’s look back at 2019 and review the current environment and likely conditions for the year ahead.

Current Reality

•  The economy is strong, and there are no real indicators of a recession in the near future. According to multiple sources:
•  Unemployment is at the lowest levels in years
•  Dealership buy-sell activity is strong for 2019
•  Sales have been steady in 2019, but are flattening for many dealerships
•  Expenses for most dealerships are likely growing a bit faster than sales per NADA and M&A sources
•  Profit margins are narrow and continue to be a challenge for most dealers

For most businesses, including dealerships, 2019 has been a pretty good year. And 2020 seems to be shaping up to be just as good based on many economic indicators. Most are predicting a slowing in sales, however.

Your Dealership or Group – A Strategic or Top-Level Review

How has your dealership or group performed so far this year? As you begin to review 2019 and plan for 2020, you are probably gathering up key performance indicators and reviewing current performance at the strategic level of the business.

•  Are you tracking to achieve your 2019 sales objectives?
•  Are you tracking to achieve your 2019 growth objectives?
•  Are you tracking to achieve your headcount and retention objectives?
•  Are you tracking to achieve your 2019 profitability objectives?

Your Plan to Improve Profitability in 2020

Businesses are designed to produce a good or service that will return a fair profit. That profit should provide a return on investment for the significant capital and sweat equity invested, as well as client satisfaction achieved over the years.

Many factors involving dealer profitability are being significantly challenged by outside influences including vehicle sales, OEM programs, inventory levels, interest rates, and other macro-economic factors. Dealership performance is controllable and is a place to focus your attention to drive new profitability.

So how do dealers battle these external and internal factors to improve their profitability and earn the returns they were earning years ago? Where are the opportunities? What strategies do dealers embark on to improve profitability?

A Few Strategies to Consider For Improving 2020 Profitability

•  Acquisitions to fuel growth
•  New tools and strategies to gain market share
•  Increased sales – new, used, parts, service, finance
•  Improved gross to net performance
•  Inventory optimization
•  Interest rate adjustments – new lending options
•  Headcount adjustments – realignment
•  Centralization of key functions and tasks within an enterprise
•  Outsourcing of non-key roles within the enterprise
•  Comprehensive cost reduction – profit recovery strategy
•  Improved operational performance to drive out inefficiencies and cost

Five Finance Operational Strategies to Improve Profitability

The following strategies, if employed correctly, can immediately impact organization expenses and improve profitability.

•  Headcount Adjustments – All organizations should take a serious look at headcount for all of their locations. Is there duplication in positions? Are there positions that aren’t needed at all? Can certain positions be shared among locations? Can some individuals get trained to wear more than one hat so you can fill multiple roles with one full-time equivalent (FTE) rather than multiple FTE’s?

•  Centralization – Where similar tasks and activities are performed at multiple locations, there is built-in inefficiency. Do you have an accounts payable group at each location? Are managers at each location performing purchasing roles and bringing in their own suppliers – adding to the confusion? This represents wasted effort, lost purchasing leverage, higher pricing, and more complexity. Centralization of the purchasing and payables functions can lead to dramatic cost savings, staff savings, and space/equipment savings as well, reducing the need for multiple FTE’s in many cases.

•  Outsourcing of Non-Core Responsibilities – There are experts with years of functional experience that can probably perform some jobs more efficiently and most cost-effectively than your own staff can at some levels. Human resources, information technology, marketing, procurement, compliance management, and selected consultants can bring significant value at a fraction of the cost. If you excel in marketing, sales, service, and customer support, it might make sense to focus on those areas, and leverage the expertise of outside professionals to help you achieve best-in-class status in other functional areas.

•  Comprehensive Cost Reductions – five percent of total revenues are spent on services and supplies. Research says (and has been borne out by our practice) that a thorough review and implementation of new solutions of the 130 expense categories can throw off up to 25 percent of that spend number. Will all categories generate big savings? Hopefully not, but there will be enough savings opportunities to average 25 percent for most groups if you approach this correctly. 
  
  Employees like to buy and interact with suppliers for some obvious reasons. Executive management needs to insist on optimizing (reducing) the supplier base to maximize leverage, reduce pricing, costs, and inefficiency. Pushback from internal employees against these changes are often simply a reluctance to change and unwillingness to give up tasks they enjoy…and sometimes benefit from.

•  Improved Operational Performance – These operational improvements can come from many areas of a business and is often driven by the employees themselves. A simple process of soliciting new ideas from employees to drive waste out of the organization can yield significant opportunities. Top that process off with a financial reward to the employees, and you will have a way to improve morale, drive employee engagement, and reduce costs as well. Your suppliers and consultants know your business well, so tap into them before year-end, and ask them for their suggestions on how to drive costs out, and bring new profits into the business. 

Expense Management is a Discipline, a Function, Not a Project

Look at Fortune 500/Fortune 1000 organizations that have staying power and operate at high levels of efficiency. These organizations don’t approach expense management only when times are bad or when economic times are challenging. They don’t view expense management as a short-term project, but rather they organize around and build competencies to manage costs and expenses routinely.

Large organizations tend to centralize to realize economies of scale. They leverage their suppliers, partner with their suppliers to manage costs. They know that having too many suppliers increases costs, complexity, and drives inefficiencies. Dealerships do a lot of things right – managing by metrics and sharing best practices among similar businesses, but decentralized operations provide diseconomies of scale and costs the dealership money and profitability. Consider the development of a spend management group in 2020 or look at outsourcing that role for efficient and effective expense management. A Spend management function could reside in operations or report to the dealer principal as it will cross many functional lines within a business and has to have the freedom to uncover waste, regardless of the silo they are looking at. 

Summary

Dealers do a great job squeezing a small profit out of large operations. The job is becoming more challenging, not less challenging. As a result, the dealer has to arm themselves with new options, a larger arsenal of strategies and tactics to drive to the desired profit level. Many factors influencing profitability are outside of a dealer’s control. But the dealer still has almost a dozen levers that he/she can pull to drive new profit levels. The choices are not an either-or, but most of them can (and should) get implemented  simultaneously.

Is now the time to begin thinking about your 2020 profitability strategy? Starting your planning process now is a good idea so that you can stay ahead of events and in control, rather than reactive later.

If your dealership is interested in an updated expense management planning tool for 2020, email [email protected].

About the Author

Doug Austin is the founder and president of StrategicSource, Inc., the leading provider of spend management services for the automotive and truck dealerships, and various other vertical markets. Doug is a veteran of the U.S. Marine Corps, a graduate of the University of St. Thomas, and a speaker at various conferences, 20 Groups, seminars and webinars. Doug has acquired 30+ years of line, staff, and executive experience in spend management and supply chain management in various vertical markets.