The one common denominator in my conversations with dealers and their management teams this year is that almost every group has some cost reduction initiative in place. There is a fear of flattening sales by dealers and there is a constant drumbeat from industry experts that dealers are reporting that their margins are compressing and that once again, expenses are growing faster than sales. Many dealerships and groups are taking an aggressive posture now so that when the slowdown does come, they are ready for it. In the meantime, they will maximize profits and battle back against margin compression.

Another common denominator in discussions with dealers is when I ask them how they are doing in their cost reduction initiatives, they think they are doing pretty well, but aren’t sure and can’t quote any specifics or metrics indicating the progress they have made. Measuring the results of cost reduction efforts are very important any cost reduction initiative and will lead to necessary budget adjustments and reinforcing positive employee actions.

Metrics to Measure Cost Reduction Effectiveness

There are a number of ways to measure the effectiveness of a cost reduction initiative. Typically, it is best to have some concrete objectives or targets when the initiative begins so you have something to measure against. Some commonly utilized metrics in the purchasing and spend management space are as follows:

1. Cost savings realized – this is the aggregate cost savings or total achieved from all of the projects from starting point to some point in time. These are usually best expressed in annualized (12-month savings) dollars.
2. Cost Savings recommended – this is usually a measure of cost savings for the particular project, again expressed in annualized dollars. Measure the last price paid for an item or service less the new price, and the difference is then multiplied by actual or forecasted consumption for 12 months.
3. Audited Savings – this metric is a validation of the expected outcome with new supplier pricing. If you renegotiate new rates and terms, then it is generally a good idea to audit/verify that supplier price compliance within 60 days of implementation. The audit provides credibility to the cost savings forecasts. If the results are not what is expected, then you have an opportunity to correct those problems in a timely manner.
4. Supplier base – suppliers cost your organization money, and excess suppliers reduce your purchasing leverage which usually results in higher prices. Taking a snapshot of suppliers by expense category before and after your work is a valid metric. Typically, suppliers across an organization can be reduced by 35% with little or no organizational impact. A 35% reduction in your supplier base frees up valuable back-office time and labor.
5. Spend as a % of Revenue – most dealership groups spend money in up to 130 expense categories. dealers will spend between 4.25% (largest groups) to 9% (small single point) of their top line revenues on services and supplies. Measuring spend before your initiative and after your initiative is another good metric.

So…how has your group done this year? Did your initiative move the needle on expenses and profitability? If your results met or exceeded your plan, you are to be congratulated! If you don’t really know, you are not alone….please read on.

What is the Opportunity?

There are a couple of interesting ways to consider your opportunities to move the expense and profitability needle.

First…many dealers make a conscious effort to sell their way into better profitability rather than tackle the expense side of the equation. Why? I am not sure. Most leaders can execute multiple strategies simultaneously, but expense reduction is not easy…it requires data, analysis, and decisions. Some teams are too busy or too impatient to work at that. But at what cost? Consider the following:

 $100,000 in cost savings

 Assuming 3% net profit margins

 Requires $3,333,333 in sales to produce the same level of profit

 $500,000 in cost savings

 Assuming 3% net profit margins

 Requires $16,666,667 in sales to produce the same level of profit

 $1,000,000 in cost savings

 Assuming 3% net profit margins

 Requires $33,333,333 in sales to produce the same level of profit

Another set of facts to consider while assessing your cost reduction opportunity:

 A dealership with $100,000,000 in annual sales

 Will spend about 5% or $5MM for services and supplies annually

 Research says (SSI confirms) that savings of 25% are available on services and supplies if purchasing is centralized

 25% of $5MM in spend is $1.250MM in new savings opportunities

It might be a good time to ask the question again…how did your team do in 2018 with your cost reduction initiatives? Did those efforts move the needle in some material manner?

Top 10 Reasons Why dealers Spend too Much on Supplies and Services (25%)

1. Lack of concrete objectives and a plan
2. Transaction focus (price) vs. strategic focus (spend)
3. Pride & complacency – some people can’t admit they don’t know it all
4. Broad, decentralized purchasing authority
   (everyone’s buying)
5. Lack of trained purchasing resources or category experts
6. Broad supplier base – too many suppliers sub-optimizing your leverage
7. Lack of procurement policies, processes, & tools
8. Spot buy approach (get it done – focus on the item vs. focus on the entire category)
9. Lack of services and supplies benchmarks –
   what is a good price?
10. Lack of focus on expense management –
    too many distractions

Next Steps to better results

If the results from your 2018 initiatives are less than compelling, and you feel you are leaving too much money in the pockets of your suppliers, you might consider the following action items:

1. Decide on your monthly, quarterly, and annual cost reduction objectives – set an aggressive $$ amount
2. Assemble your cost reduction team (department heads and/or high potential employees)
3. Gather spend data (12 months) and supplier information (supplier names by expense category)
4. Build your sourcing plan for 25 to 40 of your high spend expense
   categories
5. Build an RFQ (request for quote) for each category
6. Source your qualified suppliers in each category
7. Quote the suppliers
8. Analyze the results
9. Make category and supplier decision
10. Implement, measure and report

Now, I am guessing that some of those reading this understand the process and will begin the process enthusiastically. To those of you who begin this process, understand what you are embarking on is not an initiative, but an on-going management process. It is not easy, it requires work, thinking and making decisions, but the results include greater profitability, greater efficiency, less confusion, and fewer surprises. Good management teams are capable of focusing on sales (imperative) and expenses (imperative) at the same time.

How Many Cars Do You Need to Sell?

You will soon be building a sales plan for 2019. How many units will you plan to sell in 2019 in order to hit your profit objectives? If you were to ramp up your expense management efforts by adopting the 10 steps outlined above and generating $500,000 in cost savings, how many fewer cars would you need to sell? Or said another way…how many cars do you need to sell to make the same net profit as $500,000 in cost savings?

You and your team can and should be focused both on sales…and reducing your expense structure. Most businesses outside of the auto dealership world have dedicated procurement teams to perform the 10 steps outlined above. 95% of auto dealers do not have purchasing departments and are operating in a decentralized environment. While a decentralized structure is not optimal, it is still possible to generate material cost savings by following the ten steps outlined above. Are the results worth it?