My business has been supporting all types of businesses and non- profits for over 25 years with spend management strategies. This isn’t to brag, but it is to say that we have worked with many businesses and learned something from them.
One thing I have learned working with dealerships: many of them are stepping over dollars.
What does that mean?
We have worked with some teams that generate a decent, consistent profit year after year. We have also worked with management teams that can generate strong top-line revenue consistently, but profitability is challenged. Some teams are so effective at generating strong revenues that it “masks” the operational inefficiencies and poor supplier decisions that are made routinely.
One dealer called us in and said to me: ”I am tired of stepping over dollars on the floor of my business…..it is time to take control and make better decisions to earn more profits.”
Are you “stepping over dollars” in your own operation? Are you allowing questionable practices, processes and inefficiencies to run through your business because you don’t want to “fight that battle”, or are afraid of “breaking some eggs” by hurting some feelings along the way?
That sentiment has never left me and I think it is worth exploring the reasons for those dollars being left on the dealership floor, and how dealerships can improve their expense management.
How Dealerships Lose Money in Purchasing Supplies
Let’s explore why dollars are frequently left on the floor:
- Decentralized Purchasing – When everyone is in charge of Purchasing and Spend Management, nobody is. Specialization of the purchasing function, or centralization provides a positive ROI, new profitability and leads to greater organizational efficiencies throughout the organization.
- Too Many Competing Priorities – Many management teams overlook obvious cost reduction, profit enhancing opportunities because of competing priorities – there is no time. I get that. Make it a priority or delegate it to someone you trust. A sourcing agency can step in to fill this vital role so you and your employees can focus on what matters.
- Incented on Profitability – Management teams incented on profitability often times receive a pass on driving new operational efficiencies. If they turn a profit because they can continue to drive top-line sales, yet run an inefficient purchasing operation, they are given the freedom to do what they want, even though that decision sub-optimizes leverage, resulting in higher prices and larger supplier bases.
- Misplaced Supplier Trust – Believing that you have a true partnership with a supplier because you have used them for a long period of time is potentially naïve and costly to your organization, yet many leaders fall for this sales trap over and over again. This is why it’s important to trust, but verify.
- Department Focus rather than Company Focus – Larger groups have distinct departments that take on their own personalities at times. There are times though that your staff’s personal preferences, resistance to change, pride, or arrogance gets in the way of making the best economic decision for the organization in favor of a decision that preserves their pride or unwillingness to change.
- Inappropriate Supplier Relationships – Some long-standing supplier relationships need to be challenged. Some Management teams get too close to suppliers, spend too much time socializing with suppliers over frequent, expensive lunches, dinners, trips, and probably need to be challenged.
Now you know why money is left on the floor, so the question becomes: how can a dealership stop this from happening?
6 Ways Dealerships Can Improve Their Expense Management
Luckily, the solutions are simple: you need to re-imagine your spend management function going forward.
1. Centralize Purchasing Control
Expense category ownership should be controlled by senior management. That includes the sourcing of the categories on a scheduled basis, requirements definition, coordination of quoting and supplier selection. This function should make supplier recommendations with analysis to the C-Suite laying out the options, the costs and the savings associated with each option. Generate your previous 12 month supplier spend to serve as a guide for this year.
2. Set Expectations
A sourcing plan which spells out when each of your 100+ expense categories will be reviewed and sourced will ensure that you have a methodical plan to manage and improve your expense structure in the most efficient manner. Set aggressive objectives for your team and manage to it.
3. Implement Purchasing Policies
Written guidelines are the best approach to centralization as you will taking purchasing authority away from some and vesting it with a far more limited group. Purchasing policies are guardrails that let your team know what they can do and what they cannot do.
There are three ways to commit limited financial resources to suppliers: through a contract, a purchase order, and an invoice approval. Commitment authority should be limited to those spelled out in your purchasing policies.
5. Develop Your Purchasing Process
This process should be used uniformly over all sourcing events and should start with an accurate understanding of annual spend and end with an audit of the supplier(s) to ensure compliance and validation of results.
6. Manage, Report and Celebrate
Reducing costs across 100+ expense categories is a marathon, not a sprint. If you approach this effort as a short-term project, you will be doing this again at some point in the near future. Fix it right…..this time….and for good. Measure results each month and celebrate positive results. You may even incent your team with some of the savings generated to drive the desired results.
Given the current environment, are you still willing to step over dollars on your dealership floor? Are you still willing to throw away $1 for every $4 paid to suppliers?
Without centralized control, that is what you have experienced and will continue to experience going forward.
This change doesn’t happen unless leadership leads the charge, and then stays involved. You are not going to create sustainable change in an organization by delegating a major structural change like centralization and then checking in again to see how it is going in 6 months – active leadership is required. Many on your team won’t support this change……they will find every reason under the sun to avoid changing “favored” suppliers.
It’s up to you to listen, weigh that argument against the need to enhance profitability. Change is hard, but that is needed now more than ever.
If you are planning to undertake this effort to get your spend management function set up and running correctly, you do not have to go it alone.If you are planning to undertake this effort to get your spend management function set up and running correctly, you do not have to go it alone. StrategicSource’s Profit Improvement program help you identify areas for improvement long-term.
The above blog comes from Doug Austin of StrategicSource, Inc., which is a leading provider of purchasing services to automotive dealerships, as well as manufacturing and retail. Austin has acquired over 28 years of Purchasing & Supply Chain management experience in multiple business sectors as a corporate executive, trainer, speaker and consultant.
StrategicSource offers procurement solutions, business spend management, and tactical sourcing to help businesses reduce costs. We understand the difficulties of choosing suppliers and managing vendors. Whether your business needs self-service digital solutions or complete spend management, StrategicSource can help. We deploy a wealth of experience and support for less than the cost of maintaining a purchasing organization.