How to Make Profitability a Priority

Is improved profitability really a priority for most organizations? 

In my estimation and in my experience, less than 5% of New Car Dealerships have a formalized spend management or Purchasing function to help the organization manage spend and procure supplies, services and equipment. 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 and expected to know the ins and outs of spend management on day one. This is true across other types of organizations as well.

As one would expect, throwing an untrained resource into the task of managing millions of dollars in spend and thousands of suppliers is usually not a recipe for success.

Most dealers and groups execute their spend management strategy in a decentralized environment……meaning 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 of same
• Infrequent and limited supplier audits to keep suppliers honest and validate results

When purchasing is decentralized, then profitability isn’t really a priority…you’re losing money overspending to suppliers.

➜ Read Now: 6 Ways Dealerships Can Improve Their Expense Management

The Barriers to Profitability

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?

What projects are so important that effective spend management doesn’t get the attention of executive management? These are some of the most common barriers.

1. Trust – Some organizations have the philosophy that their GM’s are profit oriented so 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, know what the benefits to the organization will be, but are too strapped for time, wrapped up in other initiatives to focus on spend management
3. Priorities – Some teams have a multitude of priorities on their plate……intend to get to spend management, but think they have to get to other higher priorities first
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 he or she represents, it is time for a change in staff and suppliers if you get my meaning.

How to Make Increasing Profitability a Priority

Business is good, but the numbers are telling operators that it is becoming more difficult to make the desired levels of profit that they were used to. Expenses are increasing, supplier mix is constantly changing as marketing moves more to digital, 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 interested in improving your profitability…..really 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 are really serious about improving profitability. There are numerous other benefits that will be realized as well.

➜ Read Now: 167 Dealership Options to Reduce Costs

Your staff may resist your efforts to centralize Purchasing or Spend Management. You will be faced with the five excuses listed above. If you choose to overcome those excuses and embark on “centralizing” your spend management function, the work is just beginning. You will face complaints from executives and staff alike………”the work is too hard”……”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”…..on and on it goes.

➜ Read Now: How to Make an Ineffective Spend Strategy an Effective One

Leadership is required to paint the picture and articulate the vision of what a disciplined well managed 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 really a priority for your organization, and you are willing to take some steps to attack your spend management challenges, congratulations! If you would like a set of tools that can help you undertake this initiative, I will be happy to provide you with some ideas and tools.

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.