Profit Drain: How Many Dollars are Slipping Away From Your Operation?
If you keep up on recent automotive news, you have probably come to the conclusion that new car sales in 2017 are forecasted to plateau. Sales will flatten out, and margins are likely to continue on the same trajectory—flat or shrinking. These realities will challenge most of the dealerships who try to improve profits by only selling more new vehicles as their primary profit driver. That top-line sales strategy has worked well for many dealers since the downturn, but many have successfully focused on working both sales and expenses to enhance profitability issues when sales flatten out. In fact, many dealers have realized the untapped potential for big profits right in their own dealerships that are available today.
In the spend management space, we are accustomed to working with dealership spend data, supplier pricing for supplies and services, and multitudes of benchmarks. The following was true eight years ago and according to our internal calculations, it is still true today, though the data has changed slightly:
- Dealerships spend money in up to 130 expense categories every month.
- Single-point dealerships average 400+ suppliers to support those 130 expense categories.
- Multiple-point dealerships can have 800+ suppliers supporting the organization.
- Dealerships will spend between 4.5% of sales to 9% of annual sales on services and supplies.
- 94% of dealerships do not have a formal purchasing department.
- Aberdeen Group (procurement authority) says that if you centralize sourcing and purchasing, you can save up to 25% of your spend in new found savings through leverage and focus.
- Our internal metrics demonstrate 23% cost savings to validate Aberdeen research in the dealer space.
- Supplier reductions of 45% of total suppliers are quite common—reducing back office support.
What does this all mean?
- Dealerships are spending too much on supplies and services.
- Supplier pricing is generally too high, which accounts for the 23% savings opportunity year-after-year.
- Dealers are using too many suppliers, impacting price and back office administrative costs.
- The de-centralized purchasing strategy—using managers to fill the role of purchasing—is not working.
- Unless dealerships re-think and alter their current purchasing strategy, they will continue to pour money down the drain every day and lose a great source of new profitability.
New profit opportunities.
Based on the data and benchmarks available, dealerships can get a pretty good idea of new potential profits—or lost savings—by reviewing the data in the chart below:
|Supply/Service Spend as % of Sales||8.00%||7.50%||7.00%||6.50%||6.00%|
|Annual Spend for Supplies & Services||$2,000,000||$3,750,000||$5,250,000||$6,500,000||$9,000,000|
|*Savings Opportunity at 20% - Year One||$400,000||$750,000||$1,050,000||$1,300,000||$1,800,000|
|*Savings Opportunity at 20% - Year Two||$400,000||$750,000||$1,050,000||$1,300,000||$1,800,000|
|Total Savings Opportunity||$800,000||$1,500,000||$2,100,000||$2,600,000||$3,600,000|
*Year One and Year Two savings are achieved by negotiating a competitive price, then locking those rates in for 24 months or more. Contracts are not necessarily required to achieve this.
Reasons for doing nothing.
I have scratched my head over the years wondering why only 5% of dealerships centralize their procurement and 95% of them still do nothing. As best as I can tell, dealerships do not change their approach for the following reasons:
- Owners and management do not realize the potential benefits of changing their approach.
- Not enough time to attack their expenses in a methodical manner.
- Unsure of where to begin—expense management can be complex with many moving parts.
- Too focused on top line sales to drive profits—sales-driven companies are not comfortable in the operations space.
- Perceived internal threat—if new savings are generated, those responsible might appear as ineffective managers.
Reasons for taking action, now!
- Margins are being compressed and profits are or will be shrinking, therefore it is the obligation of management to be proactive and move.
- Taking action today will protect the business when the next downturn occurs—and it will occur.
- The cost savings achieved are not transitory; they can be sustainable if approached correctly.
- The cost savings dollars are significant, as demonstrated above, and can have a positive impact on the business.
Suggested next steps.
If you and your management team are ready and serious about generating new profitability and stemming the loss of profits, consider the following actions:
- Leadership: Meeting of the minds. Gather your management team together and get some consensus around your objective of improving profitability and how you can achieve the results outlined above.
- Assess your spend. Identify how much you spend annually for supplies and services (see above) from your DMS data and then determine who in your organization is managing that spend.
- Gap analysis. Review your processes and controls today. Do you have purchasing policies? Do you track contracts? Do you have a list of preferred suppliers for each category? If not, you need those tools in place to guide the organization.
- Develop a plan. You are not going to manage 130 expense categories effectively and generate the profit potential without a plan—let’s be honest. You need to centralize your procurement function; either hire someone—or some group—to assist you in organizing your internal resources so that they have matrix responsibility for generating cost savings. Assign each category to someone on your team and assign a due date to get your resources aligned and your plan established.
- Execute the plan. Business school taught us the fundamentals of management: Plan, Organize, Direct, and Control; you do this every day in other parts of your business. Now might be a good time to do the same thing with your expenses.
Expenses: The last business goldmine.
Based on the research of outside consultants and what we see in our spend management practice, that statement is true. If you are serious about driving new profitability in your business, now might be a good time to do so. If it is not a good time, then just realize that you are pouring dollars down the drain every month and will continue to do so until you change your approach and strategy.