By Doug Austin, Founder & President, StrategicSource, Inc.
95 percent of auto dealerships in the U.S. and Canada are decentralized in their purchasing approach meaning various personnel are tasked with managing selected expenses, including periodic shopping, quoting, benchmarking and negotiation with suppliers. In contrast with businesses from other industries, you will probably find that 95 percent of those groups do have a purchasing department to manage suppliers, pricing, contracts, service levels, and more.
Dealership personnel are often involved in the following purchasing areas:
– Dealer Principal: Insurance products, warranty products, DMS, uniforms
– GMs: Marketing products & services, uniforms
– CFO/Controllers: Merchant services, insurance, small package transportation, DMS
– GSMs: Printed items, marketing services and products
– Fixed Operations/Service Managers: Uniforms, facilities expenses, shop supplies, lubricants Office
– Manager/Payables Clerks: Office supplies, copiers, postage machines, printed items
Key Questions for Dealers/Executive Management
Do the above-mentioned positions and staff…
1. Have time to seek out other qualified suppliers to quote in the categories?
2. Quote a few items (15 high usage shop supply items) or all of the frequently used (400 items) in the category?
3. Do they even quote at all or just continually shop for items on the web or Amazon?
4. Does your team use benchmarks to validate pricing before they finalize an agreement with a supplier?
5. Have they achieved locked pricing for the products and services for 12, 24, 36 months?
6. Do they quote and negotiate business terms, credit card payment terms, and service levels?
7. Have they made it through the majority of the 100+ expense categories each year or so?
8. Are they reluctant to change suppliers and just find it easier to continue working with the same suppliers?
9. Is your team throwing off cost savings or new profitability of up to 25 percent of your spend when they complete the projects?
Decentralized Purchasing Challenges
Decentralized purchasing functions result in inefficiencies, lost profit, and often the following challenges:
1. No Benchmarks. Staff performing purchasing tasks have no price benchmarks and instead rely on their negotiating skills, which has little correlation to competitive pricing.
2. Non-Competitive Pricing. Negotiating prices based on gut rather than data costs companies up to 25 percent on average.
3. Narrow Scope. Decentralized groups dont work from a financial plan of all expense categories but focus on a few lines and categories that clearly jump out on the P&L leaving many categories and suppliers totally alone and free to do what they want.
4. Little Management Direction. Decentralized groups dont think in terms of leveraging all of their spend but instead allow department heads to make the best local decisions. This results in larger supplier bases than necessary and built-in diseconomies of scale.
5. Easy to Decentralize – Hard to Manage. Lets face it, people are busy… too busy to centralize so they just allow the same thing to occur year after year. Leading and managing takes time, can be hard to do, and just isnt worth it to many.
6. Change Management. Refusal to change, unwillingness to look at serious alternatives, fear, and arrogance will stop centralization in its tracks.
How to Centralize Your Purchasing Activities or Build a Purchasing Dept.
1. Recruit a Player. Category expertise is less important than purchasing spend management process expertise. Look for a disciplined purchasing manager that believes in a comprehensive quote process and has experience executing that process with positive results.
2. Hire a Workhorse. To get through up to 25 expense categories each year (two a month) you will need someone with high energy.
3. Establish Purchasing Policies. Take away all commitment authority from anyone in the organization for purchase orders, contracts, and invoice approvals. Limit that authority to the dealer, CFO, GM, and purchasing manager.
4. Set Aggressive Objectives. Purchasing is one of the few groups where you can prove the results through audits. Granted, the way P&L statements are formed, it can be difficult to see cost savings on a statement as too many expense lines are combined to make that reduction obvious. Dealer principals should set annual objectives of $500K or $1MM for this first-year plan.
5. Communicate the Plan. Your staff will be upset that they may lose complete decision-making authority in a category. It is incumbent that executive management communicates the objectives and back up their new purchasing team.
6. Enlist Management & Employee Help. A new purchasing manager or director worth their salt will know enough to seek out the category experts and build a process around requirements and suppliers that the users need and can work with.
The purchasing manager controls the process, suggests alternatives for internal customers to consider and will make a business-focused recommendation. Internal customers will surely weigh in and have a say, but your organization should get an objective review with multiple options that could potentially break up supplier monopolies.|
7. Expect Pushback. Change is hard for some and with pride, arrogance, laziness, supplier gifts, and gratuities, running into challenges is likely, but the louder people get pushing back on change in the face of rational arguments, chances are that changes need to be made, and you are on the right track.
Expense Reduction: A Long-Term Function – Not a Project
If you want to achieve excellence in the management of your organization, you need to get expenses under control, and that will only happen effectively, through centralization.
You are always going to need suppliers to support your business. You are always going to have expenses to manage and profits to generate, so a high performing purchasing group will be a great investment.
Centralized purchasing groups, if managed properly, are much more efficient and effective than a decentralized purchasing approach. As business starts to weaken, as margins continue to shrink, there has never been a better time to approach expense management through a purchasing department.
While that strategy requires an investment, when executed properly, you can expect large ROI a benefit stream yielding anywhere from thousands to even millions in new profitability. If executive management sets aggressive objectives and is prepared to deal with pushback from those afraid of change, a centralized purchasing approach will generate more fits and long-lasting benefits for the business.
About the Author
Doug Austin is the founder and president of StrategicSource, Inc., the leading provider of spend management services for automotive and truck dealerships, and other vertical markets.