THE POWER OF BENCHMARKING TO REDUCE COSTS AND IMPROVE PROFITABILITY By Chris Austin, Executive Vice President of Marketing & Sales & CRO, StrategicSource Inc. Is your organization flying blind about whether your supplier prices for supplies and services are competitive or not? In this article, we’ll outline strategies to take back your purchasing power with suppliers using various quoting and benchmark strategies. WHAT IS BENCHMARKING? Benchmarking is the practice of comparing something (process, data sets) against a standard or market leader that performs the same processes or have the same data sets. The objective of benchmarking is to identify opportunities for organizational improvement, including cost reduction and profit improvement. WHY YOU SHOULD USE PRICE BENCHMARKING Research tells us that organizations that do not have centralized purchasing functions can cost their organizations 25% on average by overpaying for supplies and services. A request for quote (RFQ) is the most reliable method to gather current market pricing for supplies and services. An RFQ is the best way to obtain competitive market pricing data and reveals “truth in the marketplace”. PRICE BENCHMARKS AND WHERE TO FIND THEM Pricing benchmarks are a collection of pricing data related to those items that might represent the best and worst of pricing for those items in the marketplace. Using a shop towel example — obtaining benchmarks on supplier pricing might look something like this: Supplier Item # Description Unit of Measure Price ABC Company #123 Shop Towel - 6 x 6 Each $.16 XYZ Company #345 Shop Towel - 6 x 6 Each $.06 Johnson Uniforms #567 Shop Towel - 6 x 6 Each $.10 This would be a good example of benchmarking for both services and supplies. With a range of prices for the same item, you’re comparing apples to apples and will arrive at the best, most competitive market price. Your target pricing is now $.06 for a shop towel based on these benchmarks, and the high-priced outlier is $.16. Negotiating a deal for $.14 for a shop towel might be a “win” to some people, but you’re still paying far too much for the product based on benchmark data. The unfortunate reality is that this situation is what happens most often: negotiated pricing that falls short of the mark, without the power of benchmark data behind it, will result in overpaying for the item. WHERE TO OBTAIN PRICE BENCHMARKS Obtaining benchmarks takes some time, but the approaches listed below can speed up the process. • Request for Quotes: The most efficient way to determine the true price in the marketplace is to develop a well-designed RFQ and target 3 to 4 qualified suppliers for quote participation. • Internal Benchmarking: Compare prices for services and supplies within your own dealership group to obtain “target pricing” by obtaining other supplier invoices. 32 MONTANA AUTO DEALER
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