Controlling Those Costs

Recently, a client forwarded a copy of Jeffrey J. Mayer's Succeeding In Business newsletter in which he discusses being the low cost producer.

Using United Airlines and McDonalds as examples, Mr. Mayer asks, “What has happened to these once great companies? Answer: They've failed to remain financially competitive. Their cost structures are so much higher than their competitor's they can't run their businesses profitably. In the business marketplace, the goal is to become the low cost producer. Not to cut your prices so that you're selling your products, merchandise, or services at or below cost.”

AutoNation Inc. has managed to do just that. In announcing their first quarter 2003 results, Chairman and CEO Mike Jackson, credits, in part, its lower operating expenses to its improved earnings per share “in spite of a challenging economy.”

“The goal is to find ways of reducing your costs so in good times you make a lot of money. And, when business slows down, you still make money while your competitors, who aren't as efficient as you, struggle to make ends meet, or eventually go out of business,” Mr. Mayer writes.

Dieter Zetsche, Chairman-DaimlerChrysler Corp., understands the importance of improving efficiencies. In an article in the May 2003 issue of Bloomberg Markets, he is quoted as saying his goal is to build 1 million additional vehicles without hiring more workers while reducing by more than 15 hours the time required to build a vehicle.

How do I control my costs in a business that has expense categories entitled variable and semi-fixed? There are so many variables, no pun intended, it's near impossible to get my arms around it. How do we maximize our efficiency?

The first item I propose is to take a look at your employee turnover and the hard cost associated with it. Obviously we can quantify the associated additional taxes and employee benefits, but the loss of business is harder to measure. We know from experience, a tenured sales force is more productive in terms of both volume and gross.

Next, I suggest you list each non-personnel related recurring expense. Literally go down the list and categorize each expense as essential, non-essential, or if that's too restrictive, assign each expense a designated value. For example, floor plan interest is a 1, or an essential expense, while a season ticket for a sporting event might be a 4, or a desirable but nonetheless, a non-essential expense. When you have completed this study, list the associated dollar amount of each expense category and divide it by your retail vehicle sales volume. Compare the answer (value) with your current cost. The question you need to ask is this, would the reduction or elimination of this expense in any manner reduce or restrict our ability to obtain the desired/required dealership sales volume?

Fixed coverage and absorption are terms we all are familiar with. If my information is correct, this theory and term is originally credited to Alfred Sloan. The theory for fixed coverage is as follows: to have your parts, service and body shop operations cover as much of your total fixed overhead as possible. By having a high fixed coverage, less burden for covering expenses is placed on new and used vehicle sales. We all know high fixed coverage is a combination of gross production and expense management.

There are so many areas the average dealer can address in terms of efficiency without adding costs. For example, employee productivity, raising closing ratios, increasing appointments, both in sales and service, using your database as a source for repeat business, concentrating on employee retention, and training to name only a few items.

The bottom line is we must structure our business so we can generate a high return on investment and profit while remaining competitive in the retail business. By improving our efficiencies, the first step has been taken.

Good selling!

Tony Noland ([email protected]) is the president and CEO of NCM Associates, Inc.