I started a presentation to dealers by asking, “How much does your dealership pay for a roll of toilet paper?”
The looks were priceless. Here sat a group of talented entrepreneurs, and this guy is asking about toilet paper!
Are you surprised none knew the answer? I wasn't. I asked them to call their stores and find out from purchasing or accounts payable.
Each dealer then shared the results. Turns out, some of the dealers were paying double what the others were. I then asked the group, “If that is happening with a roll of toilet tissue, what about the other 150 to 250 items your dealership buys on a regular basis?”
The light bulbs went on. How about your dealership? Are you overpaying on a regular basis?
Have your office manager print out of your dealer-management system a report of cash disbursements by vendor in descending order, from the highest amount to the lowest, starting January 1, 2007.
You may be surprised to learn how much you collectively spend for everyday items. Select vendors and pull invoices from the first quarter. Compare them to recent invoices for the same items. See if the prices went up.
I bet they have. What safeguards do you have to avoid being “high grossed” by vendors? Did you negotiate prices and lock them in for six months to a year? With the financial challenges dealers face today, every saved dollar is important.
Consider following this process:
Create a “request for bid” letter. This should say you are requesting a formal bid from your company. List each item and service with as much detail as possible, such as size, description, quantity and frequency of service. Include a reply due date. (If you would like a sample letter, my contact information is at the end of this column.)
Determine what items and services you purchase from each vendor. Identify at least two other vendors who supply the same at the standards you expect, ranging from quality to quantity to timeliness of delivery. In no case should you accept poor quality or service to obtain the savings. Be aware of any special arrangements or contracts with particular vendors that need clarification before bidding starts. Obtain at least three bids per item so you can accurately compare prices.
Send the letters. Be prepared for phone calls, e-mails and visits from concerned vendors who you have done business with for years but haven't seen for a while. These may be vendors who “high grossed” you. Stand your ground.
Agree to a price. Ask to lock in it in for six months or more. Send acceptance letters to each of the vendors chosen. A thank-you letter to vendors not chosen can aid in future bidding. Or call them and see if they are willing to negotiate the prices.
Remember, sometimes it's not just the price of the item that is important to compare. Make sure the correct sales tax rate is being charged on each bid. Environmental surcharges should also be questioned to validate their legitimacy. Be on the lookout for “standard” price escalation clauses that exist in many contracts, allowing prices increases every year without notification to the dealership.
Develop a worksheet that lists the agreed-to prices for each item by vendor. Distribute the price listing to the appropriate managers and accounts payable.
As part of the invoice-approval process, the appropriate manager should verify that the invoice price agrees to the price on the worksheet. Before accounts payable prepares payment to each vendor, prices listed on the worksheet should be checked. Discrepancies should be questioned.
This process is simple and the returns can be gigantic. Pulling together the information may be a job. But the savings usually are great enough to make it worth the effort.
(As a side note, I will again be conducting a workshop — “Performance Pay Plans for Fixed Operations” — at the National Automobile Dealership Assn.'s convention in San Francisco in February. Be sure to attend.)
Lee Harkins, president of ATcon in Birmingham, AL, is a dealership management consultant and industry speaker. He is at 800-692-2719 and LHarkins@ATconSSE.com
Questions or comments about this column? Send us an e-mail at Dealers@wardsauto.com.