Sourcing Solutions to Improve Your Gross

June 02, 2022

A high-performing purchasing or sourcing group can make contributions to the business in a number of ways. Most people think of purchasing groups in terms of their ability to reduce costs and improve overall profitability and that is the probably the greatest focus of most groups. Additionally, purchasing’s role in the supply chain is to also ensure that the “right goods are procured, at the right cost, at the right time, at the right quality levels and in the right quantity and delivered to the right location”.

Purchasing teams can also have an impact on the administrative impact of a business by ensuring that a narrow, high performing supplier base is in place vs. a large, bloated, inefficient supply base that reduces leverage and adds costs. High performing Purchasing groups can also impact your gross profits in a positive way…..in many more category areas than you might have first thought.

The categories that make up goods and services that are ultimately resold to your customers are many and offer some real significant opportunities to buy for less, increase your mark-ups and sell for more - improving your gross.

Category Opportunities


As a spend management provider, we know that most organizations make buying decisions or purchases in 80 to 130 categories. Of those, approximately 15 categories are of such a nature that the end product is sold back to the customer…..and can generate greater gross profit levels.

Here’s an example from a dealership – and the opportunities to reduce cost.

Item

Category Name

Cost Reduction Benchmarks

1

Aftermarket Services

20%

2

Aftermarket Accessories

18%

3

Auto Tires

8%

4

Auto Parts

15%

5

Body Shop Materials and Supplies

14%

6

Body Shop Services

3%

7

Car Wash Chemicals

6%

8

Detailing Services

9%

9

Detailing Supplies

40%

10

Glass and Installation

16%

11

Lubricants

7%

12

Specialty Lubricants – Flush Kits

22%

13

Shop Supplies

23%

14

Towing

21%

15

Waste Oil and Tires

28%

 

Average

16.6%

 

 

10 Step Category Strategy & Process for Sourcing to Improve Gross


Reducing your costs by 16% – 17% in common everyday categories should be of interest to all organizations. So, how should you go about realizing these opportunities and beginning the process?

  • Understand how much you spend annually in each category, by supplier and in total
    • This data can be obtained from your DMS system, and credit card payments to suppliers
    • Try to focus on 12 month spend so you can understand the annual impact of your solutions
  • Select a category, then define the category components, and your business requirements
    • You are trying to define every item that could go into that category quote
    • Define your desired business terms and requirements – what you want besides price
  • Build an RFQ (request for quote) for those items or services
    • Excel is a format that is highly flexible, frequently used for RFQ’s and allows you to compile and analyze results at then end
  • Send the RFQ to 3 or more qualified suppliers/providers with clearly stated assumptions
    • Don’t expect suppliers to follow your instructions and due dates, the process needs to be managed actively
  • Analyze the supplier responses
    • Using Excel, compile your quotes into an analysis and try to compare apples to apples
    • Evaluate responses to your business requirements to ensure a good fit
  • Negotiate to improve and fine tune the results
    • Armed with market driven price data, now is the time to utilize your negotiation skills to fine tune results and lower your pricing and improve terms even more with your selected supplier
  • Select the supplier(s)
    • You might want to designate a primary and a back-up supplier in your category if this is a new supplier as this can be a good insurance policy
    • Be sure to communicate the results of your quote and thank the suppliers for participating
  • Lock the pricing and terms
    • Now is the time to have the supplier lock or freeze the pricing for as long as possible…..12 months, 24 months, etc. with no price increases
    • You don’t need a contract to accomplish this, but simply a confirmation of your requested terms. If the supplier doesn’t honor your price and terms down the road….you can walk away, no harm, no foul
  • Adjust your mark-ups
    • Implement your new mark-up strategy
    • Measure the results in your monthly close
    • Initiate an audit at the 60 day post implementation mark to ensure quoted prices are actually coming through
  • Repeat with a new category
    • There are 15 opportunities to tackle…..time to get to work

Final Thoughts


Over the past number of years, we have found that 22% to 23% average cost savings can be achieved across all expense categories when a rigorous sourcing process is employed. When looking at the categories that influence your gross only, the average is slightly less, with our results in those categories averaging around 16% to 17% as seen above, but the opportunities nonetheless are real.

You are surely tweaking many parts of your parts and service operation today to minimize cost and maximize gross profits……this strategy could provide another leg of the stool that has sustainable profit benefits over the long term.

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. Strategic Source’s Profit Improvement program help you identify areas for improvement long-term.

Strategic Source 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, Strategic Source can help. We deploy a wealth of experience and support for less than the cost of maintaining a purchasing organization.

 
Image by Nattanan Kanchanaprat from Pixabay