Maximizing Profits Through Spend Management
Tonight, we are pleased to introduce our readers to our new guest writer, Jennifer Albright. In her first post, Jennifer educates readers on maximizing profits through spend management. But first, allow us to introduce Jennifer Albright in her own words:
My start in Procurement began unexpectedly with a temporary position, evolving into a career spanning over 20 years and becoming a true passion. I’ve worked in industries ranging from manufacturing to high tech to heavy equipment including 11 years with a large heavy equipment dealer, all of which have reinforced the fact that best practices are truly universal and the biggest strength of any organization is its people.
I enjoy bringing value through the details – working with systems, analyzing data, reviewing contracts – but my true passion is people, building relationships and figuring out what motivates people in order to bring about positive organizational change and millions in cost savings.
- Certified Professional in Supply Management – Institute for Supply Management
- Certified Purchasing Manager – Institute for Supply Management
- Six Sigma Green Belt
- EdM – Education – Boston University
- B.A. – Psychology – Rutgers University
Many dealers have yet to embrace spend management as the strategic opportunity that it is; it’s only natural put the focus on sales since that’s the obvious profit generator. The thing is, there are two ways for any business to increase profits – sell more and spend less. I’m not knocking our sales friends, but the savings a dealer can experience through effective spend management can make all the difference in the world during an economic downturn, global pandemic, the off-season, or any time when sales are more of a challenge – and when times are good it can make profits even higher.
If we look at dealers through a spend lens, they typically fall into one of the 4 stages outlined below:
We’ve been fortunate to work with a number of dealers in Stages 4+, and many who are in Stages 2 and 3 who are typically surprised by the magnitude of opportunity within their dealerships. We often hear things like, “I care about selling iron, not what we spend on copy paper” – but it’s so much more significant than paper.
Okay, so how significant?
The Center for Advanced Procurement Strategy (CAPS) is a nonprofit research center at Arizona State University, dedicated to supply management research. They have done extensive research on savings opportunities to be gained through a “mature procurement organization” – meaning, a company who embraces best practices in procurement and spend management.
They were able to quantify addressable spend – meaning, the spend you have control over – as a percentage of gross sales. They went on to define the percentage of savings a company should be able to save through the use of best practices. My colleagues and I have taken their numbers for Industrial Manufacturing and refined them further to find more specifically how the CAPS findings apply to the heavy equipment distribution sector. Don’t hesitate to reach out if you’d like to learn more about this research, I’m happy to share as many nerdy details as you’re interested in hearing.
Bottom line – dealers who embrace spend management as a strategic business function can aim to save 1% of gross sales annually. The average dealer size in North America is approximately $75M – which means a potential savings opportunity of $750K. By focusing solely on sales, the average dealer is letting up to $750K slip through their fingers each year. And the bigger the dealer, the larger the opportunity.
At this point, if you’re in Stage 2 or 3 I hope you’re wondering where to start.
First stop – look at your spend. Who are you buying from? How does your category spend shake out – meaning, do you have 42 office supply vendors when 1 or 2 would do the job? The same goes for tools, furniture, shop supplies, tires, and nearly everything else you buy. Supplier consolidation means higher volume with your chosen suppliers, which leads to larger discounts and other perks with the suppliers you choose to work with, which leads to stronger relationships with those supplier partners. Then, when the next Big Thing happens (hopefully not a pandemic!) you’ll have key partners in place to support you.
Next, look at your processes – you’d be surprised by the cost of waste. As dealers grow and especially as they add new locations, it becomes easy for processes to splinter and to find that you have many ways of doing the same task and that most are likely not as efficient as they could be. Anything from how you process parts orders to how you pay your suppliers, the layout of your facility, closing work orders or processing warranty claims – if you haven’t stepped back and given your processes an objective look, now is the time.
Embrace technology – while this industry is built on relationships and handshakes, many of our customers are becoming more tech savvy. If the pandemic has taught us anything it’s that dealers need to follow suit if they haven’t already. There are so many incredible systems & tools designed specifically for the equipment industry that can save time, streamline processes, and ultimately save money – which means increased profits, and in many cases makes it easier for your customers to do business with you. If you haven’t gotten out there and looked lately, take a moment to see what’s available.
Last but most certainly not least, hire a procurement manager. It may sound excessive for a small dealer, but keep that 1% savings opportunity in mind. This person may initially need to wear multiple hats but an experienced professional will more than pay for themselves a lot faster than you might think.
It’s an exciting time to be part of the equipment industry. By embracing these types of opportunities to improve profitability, dealers can ensure that they will be able to weather whatever storms may come next.
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