During yesterdays post we discussed the following four retail P&L measures and how to use them to pin point a starting point for e-procurement events. They were 1.Gross Sales, 2.Cost of Goods Sold, 3.Gross Margin and 4.EBITDA.
In yesterdays post; here is some Lasik for retail e-procurement professionals in order to create better focus we promised review what underperforming the above measure means and how careful evaluation will point you in the direction as to where to begin your e-procurement focus.
Here you go.
If your EBITDA is low, and your top line sales are in line with your plan, it is pretty clear that you have either an expense problem or a cost of goods problem. If the problem is expense related the first indicator is that your gross margin is most likely in line and your costs of goods are ok relative to your plan. In this case since the issue looks like it is below the gross margin line you have an expense problem. This does not always mean that the issue is your largest expense category like health benefits. Often times the problem can be caused by mid level expense related categories particularly categories that are hard to monitor and as such hard to control like hired services. A few examples are items like landscaping, snow removal, pest control, window washing and other similar types of expenses. These expenses have multiple invoices from multiple suppliers multiple times each month and are approved at store level. As a result, e-procurement results for these categories return impressive results while also streamlining suppliers as well as the process. With out going into to much detail the exact same process works if you turn this issue around and sales are near plan and gross margin is out of line, you most likely have a cost of goods issue.
A caution that procurement professionals should be aware of is that of measuring yourself solely against your own plan. You may be achieving your plan, but underperforming the industry you serve. This author believes that this is the 2nd level of analysis required once you have addressed the items indicated above and want to take the next step in creating a sustainable e-procurement process.
I hope this helps and allows you to use the lyrics from the 1972 song by Johnny Nash titled “I can see clearly now” as your sourcing mantra.
We look forward to and appreciate you comments.