The Automotive Retail sector is going to change dramatically over the next five years. New retail experiences, technologies and consumer buying behaviors will mean that automotive retailers will need to adapt to remain profitable in a changing market. However, the one positive aspect is that over 60% of consumers still go for test drives and see the retailer as a source of expertise and knowledge. So don’t worry they are not going to go away just yet!
In a sector where cost of goods ranges in the 80%- 90% of revenue it’s challenging to increase profits. Happily we see an opportunity in ramping up procurement capabilities, shared services and AP automation. The largest profitability drivers which have not yet been tapped in the automotive retail space.
Some of our key findings are as follows:
- Indirect materials are still largely decentralized and not leveraged
- Retailers below the 1 BN revenue threshold don’t have a formal procurement department
- Integrating back-office systems from ongoing acquisitions is time consuming
- Back office personnel are still spread across individual dealerships
- There are multiple siloed IT systems across dealerships
We see four key areas which can help boost profitability dramatically:
1. Centralization / Shared Services
In order to leverage economies of scale across dealerships Finance and Procurement should be centralized. Also, automotive retail is one area which should not have difficulty in doing this from a business process point of view, as the process by and large should be the same across dealerships. Other industries which have different types of business units would struggle but that’s not the case here.
A centralized function will not only deliver economies of scale from a personnel point of view but it will also deliver improved services to dealerships allowing process to be streamlined and operational knowledge to be centralized and improved upon. Ultimately this will create more efficient operations and allow dealerships to focus on the customer more.
In an industry which has large volumes of suppliers and transactions, in relation to revenues, it’s vital to automate and digitize as much as possible. Introducing self-service capabilities can free up significant amount of AP time. This includes areas such as allowing dealership personnel to request suppliers, enable suppliers to provide their data, allow suppliers to check status of invoice payments, will not only provide much better data but free up a significant amount of administrative work.
Another area to address is removal of paper and moving to scanning and central document management solutions can create dramatic cost savings and streamline operations. Automotive retail is known for having to deal with a lot of paper work, this are should be a no brainer.
3. Indirect Materials Procurement
Sourcing of indirect materials is still largely unmanaged. There is a lot of corporate spend in IT, Facility Management and also in Marketing which can be leveraged into national contracts to help drive costs down and supplier volumes down.
By centralizing supplier onboarding, will allow you to have better control and manage demand so it’s either re-engineered or channeled into existing contracts.
4. Integration of IT systems
While integration of IT systems is not itself going to reduce costs directly, this is a key enabler for any type of efficient shared services or operational leveraged model. By implementing a system to manage supplier data across all dealer management systems will create efficient shared services operations, provide the right level of control, and allow you to streamline processes around data maintenance.
Furthermore, this will have a dramatic impact on data quality which in turn is the foundation for efficient decision making and risk reduction.
So even though the industry is changing there are ways that the automotive retail sector can start to adapt its operations to reduce cost, to free up cash for growth and capital investment in new retail experiences and channels.