How to Control and Reduce the Cost of Doing Business by Limiting the Number of Vendors - Who is Spending and Why!

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1 How to Control and Reduce the Cost of Doing Business by Limiting the Number of Vendors - Who is Spending and Why! With Doug Austin, President of StrategicSource Moderated by Mike Bowers, Executive Editor of DealersEdge Thursday, August 2, :30 pm ET 1 Doug Austin President, StrategicSource Prior to StrategicSource, Doug was the founder and principal of Performance Management Group (PMG), a leading national Purchasing Services Provider (PSP) for the retail automotive industry and former NWA, Inc. Director of Purchasing has been providing Purchasing, Distribution and Operations consulting and cost reduction solutions since Doug earned a B.A. in Business from the College of St. Thomas, a Certified Purchasing Manager (C.P.M.) designation, and has acquired over 25 years of line, staff and executive level experience in the airline, retail, manufacturing and service sectors. daustin@strategicsource.com 2

2 How to Control and Reduce Costs by Optimizing the Supplier Base Who is Spending and Why? Reducing expenses with better vendor controls Presented by: Douglas Austin, President StrategicSource, Inc. 8/2/ The Executive Challenge Webinar Agenda 2. Reasons for a Large Supply Base 3. Costs of Your Supply Base 4. Optimizing Your Supply Base 5. Developing Your Suppliers 6. Benefits of Optimizing the Supply Base StrategicSource All Rights Reserved 4

3 Essential Elements of Spend Management Typical U.S. Dealership Opportunity 22% Cost Savings = enhanced profitability 30% supply base reduction = Improved back office efficiencies Risk mitigation Save time StrategicSource All Rights Reserved 5 The Executive Challenge StrategicSource All Rights Reserved 6

4 Top Pressures for Owners/CFO s/controllers Improving your supply base will help all of these objectives 74% 50% 39% 31% Need to mitigate risk Need to increase profits 31% 39% Need to optimize working capital 50% Need to reduce operating expenses 74% 0% 10% 20% 30% 40% 50% 60% 70% 8 Source: Aberdeen Group 7 One of the Challenges 126 Dealership Expense Categories to Interview, Negotiate, Analyze, Select, Hire, Manage and Process payments for Category Category Item Application Expense Categories Item Expense Categories Application 1 Auto Auction Services 65 MS-Marketing products 2 Auto Rentals 66 MS-Mobile Application Services 3 Auto, Aftermarket Accessories 67 MS-On-Line Chat Services 4 Auto, Aftermarket Services 68 MS-On-line Reputation Management 5 Auto, Glass & Installation 69 MS-Online Review Site Adveretising 6 Auto, Parts, Non OE 70 MS-Owner Loylaty Programs 7 Auto, Tires 71 MS-Owner Retention Marketing 8 Banking Supplies 72 MS-Pay Per Lead Services 9 Body Shop Repair Services 73 MS-Print Marketing 10 Body Shop Supplies & Materials 74 MS-Radio Advertising 11 Business Services-Accounting 75 MS-Research Services 12 Business Services-Legal 76 MS-Search Engine Marketing(SEM) 13 Car Wash Chemicals 77 MS-Search Engine Optimization(SEO) 14 Carpet Cleaning 78 MS-Service Scheduling 15 Check Processing Services 79 MS-Signage 16 Computer Hardware 80 MS-Telephone Advertising 17 Courier Services 81 MS-Television Advertising 18 Credit Bureaus 82 MS-Training(Sales and Support) 19 Credit Card Processing 83 MS-Web-site services 20 Dealer Management Systems 84 Music & Messaging Systems 21 Detailing Services 85 Nitrogen Services 22 Detailing Supplies 86 Office Equipment 23 Employee Benefits 87 Office Furnishings 24 F&I Insurance 88 Office Supplies 25 Fire Safety & Monitoring 89 Packaging Materials 26 First Aid 90 Packaging(To Go) 27 Food & Beverage Services 91 Payroll Services 28 Fuel 92 Pest Services 29 Gift Cards 93 POS Supplies 30 Human Resource Services 94 Prescription Services 31 Information Technology Services 95 Printed Materials-Custom Forms 32 Insurance, Health 96 Printed Materials-Packaged Goods 33 Insurance, Property &Casualty 97 Promotional Items 34 Insurance, Workers Comp 98 Purchasing Card Programs 35 Insurance-Life 99 Records Management 36 Internet Services 100 Retirement - 401K 37 Inventory Services 101 Reward Card Programs 38 Janitorial Services 102 Security Patrols 39 Janitorial Supplies 103 Security Systems(Electronic) 40 Key Track Systems 104 Shop Supplies 41 Landscape Services 105 Shredding Services 42 Lubricants and Fluids 106 Signage 43 Maintenance-Car Wash 107 Software, Desktop 44 Maintenance-Door Services 108 Software, Other 45 Maintenance-HVAC 109 Software, Sales 46 Maintenance-Lighting 110 Store Fixtures 47 Maintenance-Plumbing/Drains 111 Telecom - Cell Phones 48 Mobile Car Wash 112 Telecom Maintenance 49 MRO Supplies 113 Telecom Service - Local, LD, Data 50 MS-Broker Services 114 Telephone Systems 51 MS-BuyingServices 115 Temporary Help 52 MS-Call Management 116 Tooling 53 MS-Classified Listings 117 Towing Services 54 MS-Coupon Services 118 Transportation, Auto Specialized 55 MS-Customer Relationship Management System(C 119 Transportation, LTL & TL 56 MS-Desking Software 120 Transportation, Small Package 57 MS-Digital Marketing 121 Travel 58 MS- Marketing Services 122 Uniforms 59 MS-E-Parts Menu 123 Vehicle History Reports 8

5 Can anyone tell me why I need 16 towing companies? COO Large Import Dealership Group StrategicSource All Rights Reserved 9 Really?...We really need 62 advertising and marketing vendors? Dealer Principal Large Domestic Group StrategicSource All Rights Reserved 10

6 In this changing environment, I am not sure what to buy, who to buy it from, and what I should pay Dealer Principal Single Point Store StrategicSource All Rights Reserved 11 Why do Dealerships have so many suppliers? StrategicSource All Rights Reserved 12

7 **Note: Depending upon Dealership size, Dealers use from 403 to 1,484 Suppliers to support 126 expense categories! How many suppliers does your dealership have? StrategicSource All Rights Reserved 13 Live Example 5 Store Group (Not all Categories Represented) StrategicSource, Inc. Sample 5 Store Auto Group Workplan & Scorecard Orange = Supply base is likely higher than need be. Workplan Expense Savings Savings Current Current Category % Est Estimate Spend Suppliers Uniforms & Laundry 20.00% $11,980 $61,697 3 Shop Supplies 15.00% $37,460 $257, Office Supplies 25.00% $35,405 $145, Janitorial Services 20.00% $60,088 $309,452 2 Utilities 12.00% $55,411 $475,608 8 Information Technology 8.00% $87,224 $1,123,003 3 Auto Body Repair/Supplies 12.00% $52,603 $451, Printed Materials 20.00% $50,920 $262, Telecommunication-Cellular 15.00% $31,633 $217,210 2 Detailing Services 10.00% $31,128 $320,622 9 Auto Parts 7.00% $29,148 $428, Trans. -Auto Transportation 15.00% $29,099 $199, Auto Rentals 8.00% $28,804 $370,849 5 Lubricants & Fluids 12.00% $50,664 $434,864 8 Marketing Services 8.00% $26,134 $336, Office Furnishings 15.00% $21,608 $148,374 6 Information Systems (DMS) 10.00% $21,028 $216,585 2 Aftermarket Services 10.00% $26,309 $270, Information Systems/Office Supplies/Printed Materials 10.00% $15,079 $155,318 2 Trans. -Small Package 14.00% $18,906 $139,092 3 Computer Products 12.00% $12,806 $109,919 2 Employee Benefits 5.00% $10,037 $206,771 1 Advertising 3% $67,614 $2,321, Maint. - Electrical 8% $9,212 $118,610 8 Insurance, Health 3% $8,359 $286,996 2 Office Equipment 10% $8,200 $84, Telecommunication(Local & LD) 20% $8,109 $41,759 3 Food & Beverage Services 10% $8,035 $82, Software 10% $7,943 $81,810 8 Credit Card Processing Services 15% $7,500 $51,500 3 Fuel 2% $7,032 $362,151 6 Aftermarket Accessories 6% $6,894 $118, Pension 2% $6,361 $327,600 2 Glass and Installation 10% $6,280 $64, Tooling 10% $5,730 $59, Services 6% $5,604 $96,207 6 Credit Bureau 10% $5,603 $57,712 2 Trans. -Other 10% $5,376 $55, Maint. - Other 8% $4,964 $63, $927,228 $10,967, Signage 10% $4,937 $50,851 5

8 Decentralized Purchasing = Too Many Buyers Ten Dealership Buyers Supplier Meetings Supplier Selection - Negotiation Analysis Commitment Problem Solving Invoice Reviews - Audits 1 Dealer Principal Owners high ticket items, DMS 2 CFO Controller insurance, credit card, credit bureaus, DMS 3 Office Manager office supplies, print, 4 General Manager any of the above or below, vehicle history 5 Director Fixed Operations uniforms, parts, supplies, janitorial 6 Service Manager uniforms, supplies, facility repairs 7 Parts Manager shop supplies, parts, lubricants 8 Sales Manager advertising, marketing, forms 9 I.T. Manager equipment, software, supplies 10 Used Car Manager glass, reconditioning 15 Top Five Reasons for Supplier Proliferation 1. Decentralized Purchasing Structure Too many Buyers 2. Lack of Purchasing Policies No supplier selection process, controls 3. Lack of Strategic perspective Fire fighting mentality no time 4. Continuous Price Shopping Tactical thinking internet buys 5. Management Turnover New hires = new suppliers StrategicSource All Rights Reserved 16

9 Costs of Your Supplier Base StrategicSource All Rights Reserved 17 Costs of a Large Supplier Base 3 Key Impacts: Pricing Time - Risk Item Dealership Impact - Cost 1. Lost Management Time vetting suppliers, constant shopping 2. Lost Support Staff Time invoice processing, check processing 3. Lost Leverage Less leverage when multiple suppliers are used, higher prices 4. More Risk More contracts, certificates of insurance, bonds to manage 5. More Chaos Employees uncertain who to use StrategicSource All Rights Reserved 18

10 Cost of Managing a Single Supplier Annual Cost to Manage a Supplier Supplier Management Monthly Annual Average Annual Costs Hours Hours Rate Costs Supplier meetings - sales - updates $50 $600 Quoting - comparison shopping 3 36 $35 $1,260 Problem resolution $35 $105 Invoice review and approval - audit $50 $150 Posting, check processing, mailing $20 $120 Check signing $50 $75 Supplier system maintenance $25 $75 Totals $38 $2,385 StrategicSource All Rights Reserved 19 Internal Cost of Managing Your Supplier Base Supply Base Costs Single Two Three Eight Metrics Dealership Dealerships Dealerships Dealerships Expense Categories Suppliers per Category Total Suppliers Average Cost Manage Supplier $2,385 $2,385 $2,385 $2,385 Supplier Management Costs $961,632 $1,442,448 $2,073,519 $3,540,008 Can this labor be more effectively employed somewhere else in your organization? StrategicSource All Rights Reserved 20

11 Optimizing the Supplier Base Reduce supplier base by only 25% Supply Base Costs Single Two Three Eight Metrics Dealership Dealerships Dealerships Dealerships Expense Categories Suppliers per Category Total Suppliers Average Cost Manage Supplier $2,385 $2,385 $2,385 $2,385 Supplier Management Costs $961,632 $1,442,448 $2,073,519 $3,540,008 Reduction in Supplier Base 25% 25% 25% 25% New Supplier Base New Supplier Management Costs $721,224 $1,081,836 $1,555,139 $2,655,006 Annual Internal Savings $240,408 $360,612 $518,380 $885,002 StrategicSource All Rights Reserved 21 Increased Leverage and Supplier Management = Big Bottom Line Impact Annual Revenues $25MM $50MM $75MM $100MM Average Annual Supply Service Spend $1.971M $3.384M $3.969M $6.829M Conservative Savings Estimate 18% 18% 18% 18% 18% Savings Opportunity $354,780 $609,120 $714,420 $1,229,220 Cost savings flow to the bottom line! StratetgicSource All Rights Reserved 22

Getting Control of the Process Essential Next Steps 1.

Review Current Supplier Base develop a spend map to analyze 3.

Develop Preferred Supplier Concept High performing supplier(s) in each category 5.

Measure and Report On-going metric to create visibility StrategicSource - 2012 - All Rights

13 Getting Control of the Process Essential Next Steps 1. Commitment This is not a short term project it is a management philosophy & process 2. Review Current Supplier Base develop a spend map to analyze 3. Implement Purchasing Policies limit individual authority to add suppliers 4. Develop Preferred Supplier Concept High performing supplier(s) in each category 5. Set Objectives Organize the effort and build a plan 6. Measure and Report On-going metric to create visibility StrategicSource All Rights Reserved 25 Step 1 - Executive Commitment - Leadership 1. Spend management is not a short term project need to commit, develop patience 2. Benefits will add up and be readily visible in 3-6 months StrategicSource All Rights Reserved 26

Step 2 - Review Current Supplier Base Develop Suppliers by Category DMS data pull to generate information 27 Step 3 - Implement Purchasing Policies StrategicSource can provide a template Purpose of

employed in the purchase of capital items, supplies and services. It is the responsibility of all employees to adhere to the policies defined herein.

14 Step 2 - Review Current Supplier Base Develop Suppliers by Category DMS data pull to generate information 27 Step 3 - Implement Purchasing Policies StrategicSource can provide a template Purpose of Purchasing Policies The purpose of these purchasing policies is to provide guidance and instruction to all employees concerning the purchasing philosophy, business practices, processes and controls employed in the purchase of capital items, supplies and services. It is the responsibility of all employees to adhere to the policies defined herein. Purchasing Philosophy and Approach Our organization seeks to procure the highest quality equipment, supplies and services, at the most competitive price. Category Owners are decision-makers with purchasing, contracting and/or invoice authority for a particular category. Our employees will avoid entering into supplier contracts whenever possible as contracts usually contain terms-conditions that are not favorable. Our preferred approach is to enter into a pricing agreement with our suppliers through the quote process, in which they agree to honor all quoted price, terms and conditions for months. Quoting Policy It is the policy of our organization to formally quote all purchases that meet the following criteria: Capital purchases in excess of $ Repetitive purchases of supplies and services The Request for Quote (RFQ s) is an information gathering and quoting tool, used by our organization for all purchases defined above. The RFQ is not a bid process and as such, does not obligate us to accept the lowest quote of all the quotes received. RFQ s will be coordinated by our PSP, Performance Management Group. Use of Purchase Orders An authorized company purchase order number must accompany all purchases/orders. This number is used to control and track purchases and will facilitate supplier payment. Any supplier invoice that does not contain an authorized purchase order number may be refused for payment. Approval Authority Purchase Orders, Contracts & Invoices The only employees authorized to commit company funds through purchase orders, authorized to enter into contracts with suppliers or authorized to approve supplier invoices are those employees identified below. Employees who violate these policies could be subject to disciplinary action and could be personally responsible for any unauthorized commitments to suppliers. Category owners are those employees authorized to define initial business requirements and select suppliers in their designated categories. The following list of personnel are the only employees authorized to commit company funds through contracts, purchase orders or who are authorized to approve supplier invoices. Invoices can only be approved by Category owners or Dealer/G. M assigns. Title Contracts Purchase Orders Invoices PMG-BillMarshAutomotiveGroupPurchasingPolicies Copyright PMG

15 Step 4 - Develop Preferred Supplier Program A. Develop the program B. Communicate C. Implement D. Manage StrategicSource All Rights Reserved 29 Category Strategy Strategy Options - Single source, dual source, multiple source You need to define a strategy for every category Most categories require only one supplier(office supplies, shop supplies, check processing) Some categories require multiple supplier strategy (auto parts, auto repairs, etc) StrategicSource All Rights Reserved 30

Step 5 Set SMAART Objectives Specific, measurable, action oriented, attainable, results oriented, time phased Example: We will reduce our supplier base by 25% over current levels (403) by

16 Step 5 Set SMAART Objectives Specific, measurable, action oriented, attainable, results oriented, time phased Example: We will reduce our supplier base by 25% over current levels (403) by implementing the Preferred Supplier Program no later than December 31, ***This objective meets all of the SMAART criteria and is an appropriate objective for this discussion StrategicSource All Rights Reserved 31 Step 6 Measure, Report, Celebrate Spend Management Performance Metrics Spend Metrics Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Active Suppliers in System Preferred Suppliers Designated StrategicSource All Rights Reserved 32

17 Developing Your Suppliers StrategicSource All Rights Reserved 33 Selecting the Right Suppliers Characteristics of High Performing Suppliers 1. Strong reputation 2. Product & Service Quality metrics 3. Competitive pricing & business terms 4. Innovative solutions competitive advantage 5. Provides historical usage electronically 6. Helps you improve your results ideas processes 7. Flexible to meet your needs 8. Accessible & Responsive StrategicSource All Rights Reserved 34

18 Supplier Selection & Development StrategicSource All Rights Reserved 35 StrategicSource, inc. Supplier Qualification Supplier Contact Information Supplier Qualification Tool Company: Contact Name: Address: City: Address: State: Zip: Phone: Fax: Cell Phone: Supplier Background Information Years in Business: Private: Public: Years Supporting Client: Regional Presence - Yes: No: States Served: National Presence Yes: No: Previous Year Sales: Profitability - Yes: No: Local Employees: Total Employees: Primary Business: Key Clients: Goods/Services Provided: Dealership Clients: Supplier Core Competencies: Supplier Competitive Advantage: Comments: Review & Approval Internal Resource: Date: Approval-Yes: No: StrategicSource All Rights Reserved 36 Copyright 2003

19 Supplier Development Model Either find high performing suppliers or develop them High Strategic Focus on Core competencies Common goals/objectives Shared risk/reward Degree of Incorporation of Outsourcing into Business Strategy High volume/critical technology Cross functional relationships Low Tactical Transactional Ongoing relationship Recognition of expertise Supplier Preferred Supplier Partner Alliance StrategicSource All Rights Reserved 37 Step 4 - Develop Preferred Supplier Program A. Develop the program B. Communicate C. Implement D. Manage StrategicSource All Rights Reserved 38

20 Supply Base Optimization Benefits StrategicSource All Rights Reserved 39 Benefits of Narrow Supply Base Function Benefit Metric Financial Fewer suppliers = greater leverage with remaining suppliers and pricing improvements 15-23% on average Internal Efficiency Managing suppliers is costly, fewer suppliers means less internal costs, less labor, ability to re-deploy and re-focus staff $2,385 annual cost of a supplier in your system all in Risk Managing fewer suppliers frees up time to manage the right suppliers better. Managing pricing, contracts, terms, processes, etc. Reduces organization risk Improved Supplier Performance Preferred Suppliers have more skin in the game with their status more to gain and more to lose. 25% supplier reduction opportunity is realistic StrategicSource All Rights Reserved 40

21 Effective Purchasing Practices Best Practices Ineffective Purchasing Practices Lack visibility to total spend, category spend Narrow Purchasing scope Lack Purchasing strategies by category Transactional Purchasing focus Spot buy approach Broad supplier base Purchasing performance not measured Lack of Supplier performance measures Little measurable cost savings impact Erratic supplier quality and service levels Poorly trained Resources Effective Purchasing Practices Visibility to total spend, spend by categories Broad Purchasing scope & mission Purchasing strategies at category level Strategic-Supply Chain focus Long term pricing contracting approach Narrow high performing supplier base Targeted Purchasing performance measures Supplier key performance is measured Cost savings measured, tracked and reported Supplier performance meet-exceed expectations Resources highly trained and well equipped StrategicSource All Rights Reserved 41 Now is the Time To Actively Manage Your Spend and Your Supplier Base! Savings of between $278K annually to $1.0MM are available through improved management of your supply base along. Another 15-23% of your total spend can be reduced by focusing on price, terms and process ***These savings are sustainable year after year dropping to the bottom line if managed! StrategicSource All Rights Reserved 42

22 About StrategicSource StrategicSource All Rights Reserved 43 About Full Service Spend Management Partner Complete Analysis, Sourcing, Process & Audit Services Indirect Expense focus Founded in 1992 Supplier Independent Average 22% cost savings Headquartered in Bloomington, MN Experienced in over 100+ Expense Categories Supporting up to 400+ single point, group and mega group Client Locations 200+ years of experience in Spend Management Help Dealerships save time, save money and mitigate risk StrategicSource All Rights Reserved 44

24 Contact Information For a copy of the Purchasing Policy template, or any questions about the webinar, contact: StrategicSource, Inc. Doug Austin Office Cell daustin@strategicsource.com StrategicSource All Rights Reserved 47 Thank you for your attendance! StrategicSource All Rights Reserved 48

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