Today's economy is confusing and difficult to manage. Sales might be going up, but many dealers are seeing unnecessary costs rising, which lowers their profits.
In this article, we'll cover common sources of revenue leakage and strategies to plug the holes.
Table of Contents
Reliance on Internal Benchmarks
Set an Aggressive Profit Objective
Staff Your Purchasing Function
What Causes Revenue Leaks
There are many contributors to profit erosion in an organization. Most involve overlooking indirect expense behavior. Without keeping an eye on what things like office supplies and uniforms are costing you, they can easily get out of control. Although it may seem like a small expense, it adds up over time.
- Supplier Price Creep
Many suppliers are pushing through price increases. Most are honest enough to give you some warning beforehand, but others don't mention an increase and hope you won’t notice. Some don't increase pricing at all but reduce package quantities while charging the same price. So, you end up getting less bang for your buck.
- Firefighting Mode
Many organizations don't have the time or resources to spare shopping around for the best deals. Tactical purchases focus on short-term pricing with a "take what you can get" attitude. We like to call this “firefighting".
Click here to learn more about tactical and strategic approaches.
Firefighting may solve the problem for now, but unless prices and terms are locked, the growing flames of price increases will come back. This can result in a waste of time and money.
- Supply Base Explosion
Thousands of eager suppliers offer competitive prices for the next big product.
If your organization frequently adds new suppliers for slight cost savings, your supply base is likely expanding. This increases the number of invoices and checks, reducing back-office efficiency and costing more than the initial savings.
Your AP staff may be overwhelmed, creating a supply base explosion. With only about 120 expense categories, you don't need 400 suppliers. Adding more suppliers for minor savings becomes difficult to manage.
- Partneritus
Suppliers who are partners to your organization can be a great asset to your business. They understand your needs, service you when you need it, provide high-quality products and services, and charge you a fair price. As purchasing professionals, we respect suppliers and the partnership approach that many enjoy.
But this sweet partnership can turn sour if the supplier starts raising prices because of convenience. Don’t let your company suffer from partneritus! We know severing those relationships might be uncomfortable, but it can be worth it if you’re not getting a fair price.
It’s important to consider those relationships logically and with suppliers you trust. Otherwise, pricing can climb to 20-30% higher than average. To prevent this, create a purchasing strategy with your team to manage spending.
Click here to learn more about the ultimate guide to a purchasing strategy.
- Supplier Duplication
How many suppliers do you pay for the same service? Look at your dealer merchant service (DMS) and you'll likely find over-lap in the services you're buying. A detailed review of your marketing suppliers will produce the same result.
There are roughly 40-50 expense categories on the marketing side of a dealership business. If you have 50-60 suppliers, which is common, you're likely losing money due to duplication. Regularly investigate and eliminate duplicate suppliers with your management team.
- Contracts
Dealers often say they don’t enter into contracts, and they don’t have any to manage. In most cases, the truth is much different.
Contracts do exist and we would say most organizations have as many as 20 supplier contracts. If not managed effectively these contracts will auto-renew and come with an unwanted price increase.
This could also lock you into a three-to-five-year agreement that prevents you from finding a better deal. Gathering up contracts, and tracking them against expiration dates is important, but not thrilling. But learning that a contract just auto-renewed for five years with an increase of 5% per year is not what you want to hear. It's worth the time to comb through.
Check out our ContractTracker to keep all your contracts in one place!
- Reliance on Internal Benchmarks
Many well-meaning managers want to renegotiate with suppliers but often lack the necessary skills. They typically renegotiate when the contract ends and start with the old agreement to lower current prices or reduce increases.
Relying only on internal benchmarks in negotiations often leads to overpaying. Good benchmarks are available for every expense category but finding them requires effort and creativity. The best approach is to get quotes from multiple suppliers. If that's impossible, using a wide range of external benchmarks is far better than relying on internal prices.
Click here to learn more about benchmarking.
How to Stop Revenue Leaks
There are plenty of opportunities to stop revenue leaks and improve your profitability. The question centers around how important the issue is to you and your management team. If your team is ready to add money back to your bottom line, try implementing these methods in your management strategy.
Find out how much you can save with our Savings Calculator.
- Set an Aggressive Profit Objective
A written objective has meaning, and it has even more meaning when you share, communicate, and track them with your team. Set the objective in dollars, percentage improvement, cost reductions achieved, etc.
- Audit Your Invoices
Look at your invoices regularly and compare current and previous invoices. This will stop the bleeding that can occur with supplier price creep. Auditing high-cost expense categories should be a regular part of your management strategy. Once suppliers know you are auditing and holding them accountable, problems seem to diminish quickly.
- Staff Your Purchasing Function
If you're spending 4% or more of your annual sales on supplies and services that's too much!
Assigning the responsibility of purchasing to undertrained and busy personnel is like doing the same with your Human Resources or Legal functions. You would never assign those tasks to untrained personnel because of the potential risk and cost to your organization.
The same is true with your purchasing responsibilities. An effective internal purchasing resource should pay for themselves and much more. A low-risk proposition that will also reduce your organizational risk and quickly add to your profitability.
- Quote, Quote, Quote!
Quoting your categories regularly will bring organization, simplicity, and improved profits where chaos, confusion, and increased expenses reigned.
Develop partnerships where possible but check and verify against the market every so often. Quoting reflects “truth” in the marketplace and your improved results will also show up on your bottom line.
- Manage Your Contracts
Some suppliers hope you remain disorganized and miss your auto-renewal dates. That's why they insert those requirements into agreements in the first place! Suppliers aren't going to come to you and say the contract is up for renewal and want to begin discussions.
The reality is they hope you forget about the agreement and become tied in for another extended period.
Only your willingness to organize, track, and manage your agreements will plug the holes in leaking revenue.
Final Thoughts
If you're looking to improve your profitability, do the calculations. The result can be an impressive contribution to your bottom line.
Look at it this way, how many vehicles and parts do you need to sell? How many vehicles do you need to service to add that same amount to your bottom line?
We get it. Undertaking this effort to get your spend management function set up and running correctly can be overwhelming. But you don't have to do it alone. StrategicSource’s Profit Improvement Program helps you identify areas for improvement long term.
