Conducting a Fixed Operations Expense Review – Part 3

This is Part 3 in a three-part article. If you missed Parts 1 and 2, you can read them here: Part 1, Part 2.

 Maintenance and Use of the Vendor Pricing Guide – the Parts Department should be the sole purchasing agent for the dealership.  Write a purchase order (P.O.) for each purchase prior to ordering.  The Parts Department should confirm the use of the proper vendor and include the current price from the Vendor Pricing Guide.

Too often, use of purchase use guidelines are a source of problems.  Several general standards should be adhered to when establishing a policy regarding P.O. issuance.

P.O generation in the dealership should be kept to an absolute minimum.  The ideal situation would be to use one department for the entire dealership, generally administered by the Parts Department.  Use of the dealership computer system may provide an opportunity for substantial control of P.O. usage.

Specific entries should be required on all P.O.’s, including:

  1. Vendor name
  2. Specific description of material or service purchased
  3. Quantity ordered
  4. Total agreed upon price
  5. Repair order/invoice reference, as appropriate
  6. Person placing order

All P.O.’s written for rebill on a shop repair order should be recorded on the repair order at the time of issue.

No P.O.’s should be issued for rebill of materials or services without an open repair order for the above purpose.

The accounts payable clerk should check all authorized invoices for accuracy, according to the original P.O. and the Vendor Pricing Guide, prior to processing for payment.  Obviously, no invoice should be processed for payment without a P.O. and any price discrepancy must be resolved before the invoice is paid.

 Monthly Monitoring of Individual Expense Categories

Select a specific number of expenses (two or three) to analyze on a monthly basis.  To do this, ask the accounting manager to provide the detail information and source documents relating to all current month activity in the account you are examining.  This will probably require not only the detail of the subject vendor’s payable activity, but also access to the relevant purchase order records, and possibly the resulting repair invoices.

Review each item to determine that the invoice carries the proper authorization and proper account number.  Check to ensure that each item is on the listing provided.  Any question or variation should be resolved at once.

At least once a year (or more frequently if a trend is noticed), measure product usage and determine if usage is appropriate.  Normally, just listing the monthly purchases of a particular item will identify possible over-purchasing.

For example, if you wash an average of 500 vehicles per month, is the amount of soap purchased appropriate, or are you buying enough to wash 2,000 vehicles per month?  If the amount of soap purchased is excessive, why?  Where is it being used?  Is it being mixed properly or is it being wasted?  Be sure to check that order quantity or frequency has not changed without management authorization.

 Results of Asset Management Review

Keep in mind that any reduction in expense to operate the department and still maintain the same amount of business and gross, results in the net improvement directly related to the reduction in expense.

Failing to take advantage of the many opportunities to compare and negotiate product and service prices will prove costly to the dealership.  Once your awareness of the available opportunities is increased and you take action to organize purchasing and control costs, the results will be significant.

Written by David Dietrich

About the Author