Digital Dealer - March 2019 - 31

CHART 1

The Cost Savings Reporting Challenge

"The aggregation of 130+ expense categories into a typical 25 line P&L will
often mask the results of a successful cost reduction effort at the category level
....leaving category audits as the only viable alternative to verify cost savings."

Indirect
Dealership
Expenses
(130 expense categories)

Profit & Loss
Statement
(25 lines)

 Supplies Expense

including the following:
 BLENDING PROBLEM:
Shop supply spend or some
other spend under this Supplies category on the P&L
may have increased this
month, hiding the effect and
benefits of the new office
supply savings.
 CONSUMPTION
PROBLEM: While the pricing of office supplies has
improved by 25%, it may be
that your consumption of
those supplies increased...
using more product than
you did before
 SUPPLIER AND MIX
PROBLEM: While the negotiated pricing is in place for
designated items, your employees might be purchas-

 Detail Supplies
 Janitorial Supplies
 Office Supplies
 Shop Supplies

WE HAVE ALSO
DISCOVERED THAT MANY
ELEMENTS OF A COST
SAVINGS INITIATIVE
NEED TO BE CONTROLLED
TO ENSURE THAT THE
SAVINGS ACTUALLY
MATERIALIZE."
ing the "wrong" items...they
might be ordering the brass
stapler at $25.00 versus
the steel stapler at $5.00.
They might also be using
the wrong supplier. Or, said
a different way, you have an
internal compliance issue.
If any of these scenarios
occur, the cost savings you
achieved are legitimate,

but the issue is either a reporting problem (P&L) or a
management issue (usage
or compliance).

AUDITS: THE BEST
WAY TO VALIDATE COST
SAVINGS

So far, we have reviewed
the spend management
elements that will yield
long term, sustainable cost
D I G I TA L D E A L E R . C O M

savings. We understand
that negotiated cost
savings can and will be
masked by the construction of the P&L statement
given the summary nature
of the document. We
have also discovered that
many elements of a cost
savings initiative need to
be controlled to ensure
that the savings actually
materialize. So, what then
is the best way to validate
cost savings for supplies
and services across an
organization?
CATEGORY AUDITS
WILL VALIDATE COST
SAVINGS

A category audit can be
used to validate cost savings in any expense. There
are four components of a
category audit, all of which
are critical to the integrity
of the audit. Cost savings
will be achieved if four
things occur: the pricing is
right, the right supplier is
used, consumption levels
are correctly realized and
finally, if the right items are
being purchased. If those
things happen, then the
savings will occur regardless of whether it can be
seen on the P&L or not.
Those audit elements are
as follows:
 SUPPLIER
COMPLIANCE: Reports
on supplier price and
business-term compliance
against expectations or the
original contract.
 CLIENT
COMPLIANCE: This part
of the audit reports on
whether the organization
is using the right supplier,

Continued on pg. 32

MARCH 2019

31
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Digital Dealer - March 2019

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