Dealerships are routinely overcharged by suppliers for supplies and services – costing dealerships thousands of dollars annually. In our spend management practice, we have the opportunity to audit supplier compliance across 100-plus expense categories and have learned where some of the largest problems are and how to avoid them.

Supplier overcharges are normally thought of as purely pricing issues…incorrect pricing applied by a supplier. While there is plenty of evidence pointing to supplier pricing practices as a significant  culprit in the overcharge arena, we have found that organizations need to look internally as well to shut off sources of “waste or profit leakage” that occur due to poorly designed processes, controls and internal practices.

Supplier audit experience – industry examples

Space does not permit us to publish a list of all of our audit findings for 100+ categories, but some of the more common spend categories with significant issues are listed below. The audits we conducted were focused on price and business term compliance against the contract or agreed to pricing agreement. The column identifying percent accuracy is a simple metric of lines audited compared to lines priced correctly. This information is presented by expense category. The takeaway for all readers should be that supplier invoices are full of errors, some industries and some suppliers are more prone to these issues than others. Net, net…dollars are being wasted and profits going down the drain.

Four common reasons for overcharges

Overcharges can come from a number of sources, including direct supplier pricing actions or add-ons to the invoices. Overcharges can also occur from poorly designed, executed and controlled internal processes.

1. Supplier price creep – incorrect pricing

One of the primary reasons that overcharges occur is price creep and/or incorrect pricing

• Example – Low initial offering price, but then price changes within weeks of months – a supplier loss leader to get their foot in the door
• Example – Pricing/terms not correct – pricing and terms are not fixed or memorialized in an agreement or contract, giving suppliers the license to increase prices and alter terms.

2. Approvals – controls

Agreements that do not specify “who” can add, alter and approve new products or services to a contract or agreement is yet another large source of overcharges.

• Example – Uniform company obtains approval of technician or clerical staff to add new products to agreement(floor mats, toilet seat covers)

3. Lack of “negotiated” pricing, terms, etc.

Acceptance of a supplier offer of price, terms, price annual price increases over time, that are not countered and adjusted. This also includes the acceptance of “auto renewals” with built in price increases.

• Example – Signing a supplier contract with built in price increases, unfavorable terms, onerous early payment penalties(credit card, uniform agreements)

4. Supplier invoice add-ons

This source of overcharges comes in many areas…DMS, Telecom, Uniform…and frequently within categories that rely on significant transportation.

• Example – New services applied to a phone bill, new items added to a uniform program, new charges added not previously agreed to.

Seven strategies to prevent overcharges

You can wage an effective battle against waste and lost profits by implementing a number of inexpensive processes and controls, including:

1. Define your specifications – Be careful about setting your specs and requirements for products or services. Buy what you need rather than what you want and define those specifications clearly before you even accept quotes from suppliers.
2. Negotiated contract/pricing – Commit your pricing and terms to writing with your supplier. You don’t have to be in a contract, but get the supplier to lock in pricing for a period of time to prevent price creep. Negotiate the terms you desire and prevent the ability of supplier to add in surcharges or alter pricing.
3. Invoice review and audit process – Using the table provided above, you should implement a regularly scheduled audit process for high expense categories and/or those prone to invoice errors. Be sure to communicate audit results to the suppliers for recovery purposes or to recognize positive supplier performance.
4. Supplier management – Set expectations with suppliers that audits will occur and that the positive audit results will play a big part of future business opportunities.
5.  Purchasing approval policies – Implementing a simple approval matrix, training your staff on who has authority to add/alter contracts will provide controls to prevent supplier add-ons without management approval or fight them if they do occur.
6. Spot audits – Implement spot audits periodically to check on supplier compliance for low cost categories and suppliers you may be suspicious of.
7.  Track audit performance – Audits should be tracked by date, vendor name, expense category and the audit results observed.

A few practical category tips

Listed below are a few areas you may want to investigate as we tend to see these issues frequently:

• Uniforms: Review pricing and inventory levels against contract for compliance. Verify that no new items were added since the agreement was signed.
• Telecom: Review invoices to ensure that no additional services have been added without your approval. Make sure phone lines being billed are actually in use.
• DMS: Invoice review to verify pricing is accurate against contract. Wayne Youngs  & Associates also recommend a functional review to validate that you use all functions paid for.
• Office supplies: Validate pricing and off-contract discounts according to your pricing agreement.  Watch for surcharges, delivery charges not originally agreed to.
• Shop supplies: Again, validate pricing and the discounts that you expect. This is also a category that will frequently have new charges for deliveries, fuel surcharges, etc.
  

Summary

By looking into these categories, you will probably get a sense as to the opportunities to prevent overcharges across your organization. Based on our latest 2011 spend data, most organizations will spend 6.5% of their total sales on supplies and services annually. Because that spend number is significant, your time would be well spent in shoring up your operational and spend management controls.

If you would like to receive some additional information on supplier audits results and strategies to prevent overcharges, contact me at: daustin@dealer-communications.com, or visit our web site at www.strategicsource.com and request same.