2020 will be coming to an end within a few weeks. 2021 will be upon us all soon, and with the new year, there will be significant opportunities and challenges to face. Let us look at 2020 and review the current environment and likely conditions for 2021 before we start planning.
- The economy is recovering, but there is still uncertainty.
- Employment is improving.
- Dealership are adapting to new selling strategies, but buy-sell activity is getting stronger.
- Expenses for most dealerships are growing a bit faster than sales.
- Profit margins are narrow and continue to be a challenge for most dealers.
For most dealerships, and other businesses for that matter, 2020 has been a challenging year. And 2021 seems to be shaping up to be just as challenging based on economic indicators and restructuring of the industry’s sales processes.
Your Dealership or Group – A Strategic or Top-Level Review
How has your dealership or group performed so far this year? As you begin to review 2020 and plan for 2021, you are probably gathering up key performance indicators and reviewing current performance at the strategic level of the business.
- Are you tracking to achieve your 2020 sales objectives?
- Are you tracking to achieve your headcount and retention objectives?
- Are you tracking to achieve your 2020 profitability objectives?
Your Plan to Improve Profitability in 2021
Businesses are designed to produce a good or service that will return a fair profit. That profit should provide a return on investment for the significant capital and sweat equity that has been invested, and client satisfaction that has been achieved over the years.
Many factors involving dealer profitability are being significantly challenged by outside influences including COVID, vehicle sales, OEM programs, inventory levels, online buying, other macro-economic factors. Dealership performance is controllable and is a place to focus your attention to drive new profitability.
So how do dealers battle these external and internal factors to improve their profitability and earn the returns that they were earning years ago? Where are the opportunities? What strategies do dealers embark on to improve profitability?
A few Strategies to Consider for 2021 Improved Profitability
- New tools and strategies to gain market share
- Increased revenue avenues – new, used, parts, service, finance
- Inventory optimization
- Headcount adjustments – realignment
- Centralization of key functions and tasks within an enterprise
- Outsourcing of non-key roles within the enterprise
- Comprehensive cost reduction – profit recovery strategy
- Improved operational performance to drive out inefficiencies and cost
Five Finance / Operational Strategies to Improve Profitability
The following strategies if employed correctly can have an immediate impact on the organization expenses and improve profitability.
- Headcount Adjustments – All organizations should take a serious look at headcount for all their locations. Is there duplication in positions? Are there positions that are not needed at all? Can selected positions be shared among locations? Can selected positions be trained to wear more than one hat, filling multiple roles with one full-time equivalent (FTE) rather than multiple FTE’s?
- Centralization – Where similar tasks and activities are being performed at multiple locations, there is built-in inefficiency. Do you have an Accounts Payable group at each location? Are Managers at each location performing purchasing roles and bringing in their own suppliers adding to confusion? This represents wasted effort, lost purchasing leverage, higher prices, and more complexity. Centralization of the Purchasing and Payables functions can lead to dramatic cost savings, staff savings and space/equipment savings as well, reducing the need for multiple FTE’s in many cases.
- Outsourcing of Non-Core Responsibilities – There are experts with years of functional experience that can probably perform some jobs more efficiently and most cost effectively than your own staff can at some levels. Human Resources, Information Technology, Marketing, Procurement, Compliance Management, and selected Consultants can often bring significant value at a fraction of the cost. You are expert at marketing, sales, service and customer support…..it might make sense to focus on those areas and leverage the expertise of outside experts to help you achieve Best-in-Class status in other functional areas.
- Comprehensive Cost Reductions – 5% of total revenues are spent on services and supplies. Research says and has been borne out by our practice that a thorough review and implementation of new solutions of the 130 expense categories can throw off up to 25% of that spend number. Will all categories generate big savings? Hopefully not………but there will be enough savings opportunities to average 25% for most groups if you approach this correctly. Employees like to buy and interact with suppliers for some obvious reasons. Executive Management needs to insist on optimizing (reducing) the supplier base to maximize leverage, reduce costs and inefficiency. Pushback from internal employees against these changes are often simply a reluctance to change and unwillingness to give up tasks that they enjoy, and sometimes benefit from.
- Improved Operational Performance – These operational improvements can come from many areas of the business and can often be driven by the experts…. the employees themselves. A simple process of soliciting new ideas from employees to drive waste out of the organization can yield significant opportunities. Top that process off with a financial reward to the employees and you will have a way to improve morale, drive employee engagement and reduce costs as well. Your suppliers, and consultants know your business well……tap into them before year end and ask them for their suggestions on how to drive costs out, and new profits into the business. That is what “partners” do and should provide to your organization.
Expense Management is a Discipline, a Function, not a Project
Look at Fortune 500, 1000 organizations that have staying power and operate at high levels of efficiency. These organization don’t approach expense management only when times are bad, or when economic times are challenging. They don’t view expense management as a short-term project, but rather they organize around and build competencies to manage costs and expenses routinely. Large organizations tend to centralize to realize economies of scale………they leverage their suppliers, partner with their suppliers to manage costs. They know that having too many suppliers increases costs, complexity and drives inefficiencies. Dealerships do a lot of things right…. manage by metrics, share best practices among similar businesses, but decentralized operations provide diseconomies of scale and costs the dealership money…. lost profitability. Consider the development of a Spend Management Group in 2021 or look at outsourcing that role to be both efficient and effective at expense management. A Spend Management Function could reside in Operations or report to the Dealer Principal as it will cross many functional lines within a business and has to have the freedom to uncover waste, regardless of the silo they are looking at.
Dealers do a great job squeezing a small profit out of large operations. The job is becoming more challenging, not less challenging. As a result, the dealer must arm themselves with new options, a larger arsenal of strategies and tactics to drive to the desired profit level. Many factors influencing profitability are outside of a dealer’s control. But the dealer still has almost a dozen levers the can pull as outlined above to drive new profit levels. The choices are not an either-or choice, but most of them can be implemented and should be implemented simultaneously.
Is now the time to begin thinking about your 2021 Profitability strategy? Might be a good idea to begin the planning process now to stay ahead of events and be in control rather than reactive later.