Take A Closer Look
You probably think you have a good handle on your expenses; knowing exactly what you are spending your money on. But do you really?
I recently spoke with Doug Austin, founder and president of Performance Management Group, a division of Strategic Source Inc. Performance Management primarily works with dealers to help them improve their profitability. But I happen to think the things they suggest are applicable to your businesses as well.
One of the first things Austin suggests his clients do is something called expense mapping. This is a process that requires you to look at every one of your indirect expenses on an individual basis.
You can set up a spreadsheet that shows the vendor name and how much money you spent with that vendor during the previous 12 months.
Once you have that list, you need to establish categories such as office supplies, uniforms, insurance, etc. and assign a code to each invoice. After that you need to analyze each of those categories.
Expense mapping can result in a 15% to 23% cost reduction opportunity.
If you discover that you have five office supply vendors, you probably need to ask yourself why. Having that many vendors for an indirect expense category means you probably are not using your leverage with one vendor to get the best prices.
Obviously, the number of vendors that makes sense varies by category. You don’t just want one brake parts supplier for example. However, having multiple vendors for some categories makes no sense at all.
Once you have all your expenses categorized you can then develop a strategy and goals for each category. That could include reducing expenses in that category by 10 percent. One way to do that might be to reduce the number of vendors so you are in better position to negotiate discounts.
“If you go to a supplier and tell them you are interested in their best pricing you are going to get one answer,” Austin says. “But if you give them another bit of information that says ‘I spent $100,000 last year on office supplies,’ all of a sudden they are going to become much more aggressive.”
In addition to establishing your strategy and goals, you also need to set a timetable for when you want to achieve your goals and assign someone the responsibility for seeing the goals are met.
With all of this information in a spreadsheet you end up with “A document or a process that says here is the category, here is what I spend, here is how many suppliers I have, here is what our target is next year for reductions, here is my strategy, here is who is assigned to it, and here is when I am going to work it,” Austin says.
He adds, “It is a pretty comprehensive tool. If you follow that logic down to the bottom of the page, you can sum up very quickly what you think the savings opportunity is if you get aggressive on those categories.”
If this all sounds like a lot of work to you, think about this. Austin says clients of Performance Management who have used expense mapping have seen a 15 percent to 23 percent cost reduction opportunity.
Not bad for the few hours you or your CFO spend compiling and analyzing the data. The end of the year is a great time to implement this so you start off the New Year informed and focused.