It has been said, “Leaders do the right things” and “Managers do things right.” While this not the most articulate of definitions on leadership and management, it does create an understandable distinction between the two roles that we all play within an organization.

Leading the way to improved profitability

Business leaders face many challenges and many opportunities every day. If “leading” your organization to reduced costs and improved profitability is a course you have chosen, developing an aggressive objective and an executable plan are essential next steps.

Developing the plan – strategic spend map

In order to create an effective and credible expense management or spend management plan, you need to start with some solid data. The development of a Strategic Spend Map combines the DMS and related spend data into a tool that become the basis of your plan as outlined below. Dealerships buy indirect services and supplies in over 100 expense categories typically. That data should be extracted from your DMS system and built into a 24, 36, or 48 month spend management plan.

Note in the example below that the category name and the 12-month spend is populated, the month (priority) is established, the due date and the individual (that this project is assigned to) is defined as well. An estimated savings objective is also inserted in this document. If you take the time to develop this spend management plan for your organization, your odds of driving sustainable change and improved results increase considerably.

Driving results

With the plan established, now comes the critical execution or management phase. In my experience, most organizations can complete one or two expense categories per month if the management team is aligned, engaged, focused and performance driven.

Suggested management approach

1. Executive sponsor – A senior leader in the organization should take ownership of the plan and provide the resources, encouragement and focus to keep the plan on track
2. Engaged resources – Leadership should identify and select resources (Category Owners) that are motivated, capable and excited to be part of this strategic initiative to reduce costs and improve profitability.
3. Strategy – Each expense category warrants a strategy unique to the category. This might mean going out for quote (RFQ), it may mean renegotiating with an incumbent supplier, it may mean learning more about changes in the marketplace and going out for a Request for Proposal (RFP). In any event, a strategy should be defined by category.
4. Monthly management meetings – Leaders should gather all resources (Category Owners) on a monthly basis to discuss the progress with respect to sourcing, quoting, renegotiation and implementation, including the challenges and wins.
5. Recommendation meetings – To ensure engagement and buy-in from management and organization influencers, the Category Owner should present a summarized version of the recommendation for that category, including current spend, savings estimates, implementation dates, etc. and all service and support implications for feedback and potential course adjustment.
6. Scorecard tracking – The planning tool you develop can easily double as a scorecard or tracking and management tool (see results area below). This document becomes an effective planning, tracking and management tool and helps you keep score and understand how you are progressing against your plan.
   

Opportunity

Organizations that choose to lead in the expense arena, that choose to manage its indirect spend, will be amply rewarded for their efforts. Most organizations will spend at least 5% of their total sales on the purchase of indirect services and supplies. A well-developed and executed spend management plan can contribute 10-20% savings on a sustainable basis. Additionally, innovative leaders will expand the focus of their initiatives beyond just costs savings, to multiple objectives that involve simplifying processes to save time, controlling processes to reduce risk and more.

Leading an organization in any capacity involves making choices. Those choices may be limited by time, resources, money, organizational support and more. Leaders that choose to embark on a mission to improve their expense line, improve efficiency and improve profitability need to take that first step and make a leadership commitment. The commitment is followed by the development of an objective and then the detailed plan as we have outlined above. When the plan is developed, communicated and understood, the regular engagement, management and tracking of results are then keys to sustainability and achieving your desired results. The final results of all of this leadership initiative will be recognized with a very positive impact on your bottom line.

If you are interested in receiving the Spend Management Planning and Management tool, please send me an e-mail at:  daustin@dealer-communications.com. I would be happy to send you the tools you need to begin this important initiative in your organization.

In the area of spend management, there are a number of risks that cost an unsuspecting business considerable dollars and wasted time if those risks are not managed appropriately.

Examples of spend management risks might include the following:

 Internal processes that contribute to risk

• Automatic contract renewals
• Supplier overlap
• Policies and approval limits not established or unknown
• Improper use of purchase orders
• Purchase order that lacks terms and conditions
• Poor invoice approval processes
• Supplier invoice add-ons
• Price creep

Impact of risk on spend management risk

1. Automatic contract renewals – Contracts are not known or managed, and automatically renew with built-in price increases and penalties for early termination are a common problem. Most dealers don’t know where contracts are and if they do know, they don’t have a mechanism to monitor and manage those agreements. A poor or non-existent contract management process can create thousands of dollars in costs to an organization annually.
2. Supplier overlap – Paying multiple suppliers for services that are not utilized or under utilized is a common problem as well in dealerships. Chances are that today, you are paying for DMS functionality that your organization does not use, while you pay another supplier for some functionality that you do use. This problem is exacerbated when purchasing is decentralized and there are multiple locations and multiple decision makers involved with that service. A review of supplier services including all functionality required should be annual event for businesses. This problem is most apparent in advertising, marketing services, DMS, and sometimes in professional services.
3. Unauthorized signers of contracts – If approval limits are not established or known, employees will commit the organization to long-term agreements that may not be favorable and cost the organization in time, money and frustration.
4. Misuse of purchase orders – Purchase orders that are used internally to track commitments, but that are not sent to suppliers, pose a risk to the buying organization. The written purchase order is “an offer” to a seller. The response or shipment, execution of the order is the acceptance to the offer and completes a legal transaction – offer and acceptance. Using verbal P.O.s without a written P.O. tendered to a supplier can cause problems down the road when performance issues arise.
5. Incomplete purchase orders – Just like dealership sales contract with your customers, a purchase order should have a set of terms and conditions tied to the document. Those terms and conditions outline payment terms, returns process, warranty considerations and more. The lack of Terms and Conditions (Ts and Cs) in the purchase order process exposes the dealership to potentially wasted dollars, wasted management time and even legal costs if a resolution can not be obtained with the supplier.
6. Invoice match process – Invoices paid based on a purchase order, matched to a copy of the packing slip, and then finally matched to an invoice is the best process to prevent fraud and abuse. This is referred to as a three-way match. Some businesses use a simpler two-way match…P.O. and invoice and some businesses pay directly from an invoice. The simpler the match process the greater the risk. A three-way match process is the best solution to mitigate risk.
7. Supplier add-ons – Chances are, if you look at your invoices, you will find fuel surcharges, new items added to uniform invoices, new services added to your phone bill and items added to your DMS bill that was never contracted for originally. Fuel prices are going down, yet fuel surcharges remain at higher levels. Phone bills frequently have over-charges and scam related fees that get embedded into your invoices. Other suppliers add services and functionality that may have been approved by someone in your organization, and in many cases, those add-ons were not authorized. Invoice audits or supplier audits are the only known way to combat these costs.
8. Price creep – An organization selects a supplier based on a great price…today. In two to three months, that pricing is adjusted upward based on “market conditions.” Pretty soon that “loss leader” that got a supplier in the door now becomes a net cost increase as they begin to spread higher costs across a broader set of supplies and services.
   

Strategies to reduce risk and reduce costs

For every challenge or problem there should be a viable solution. The following strategies, once employed and followed, will reduce your risk and reduce your costs as well. Additionally, the peace of mind that comes from knowing your organization is managed using common best practices is a benefit that is hard to quantify, but certainly appreciated.

1. Contract management – All supplier contracts should be identified, collected and stored in one location within the organization….preferably within finance (CFO or controller). A tracking device should be created to manage the expiration and renewal process such that your organization is aware of upcoming renewals at least 180 days in advance of the date.
2. Supplier review – Most dealers or dealer groups will find that they have 400-plus suppliers supporting their organization. A top down review of the largest suppliers should be conducted with the management team to clearly identify the purpose of the supplier and ensure that those services do not overlap with other suppliers. Once an overlap is identified, optimize and shrink the supplier base and improve your cost structure.
3. Purchasing policies – An effective purchasing policy must address process, intent and authority levels. Contracting authority, P.O. authority and invoice approval authority limits should be set by position and dollar amount. Purchasing policies should be updated, communicated and enforced to reduce process and control issues.
4. Purchase orders – Purchase orders (P.O.s) should be sent to the supplier confirming a verbal commitment or an e-mail commitment. The P.O. should be received by the recipient and acknowledged. The purchase order is an external commitment tool, not an internal tracking tool.
5. Terms and conditions – A well defined set of terms and conditions should guide each purchase in an organization to reduce risk. The terms and conditions could be printed on the front or back of the purchase order, which is the most common approach. Another approach is to create the terms and conditions (Ts and Cs) and post it to your website and reference same on the P.O. Yet another strategy is to send a hard copy set of Ts and Cs to your supplier annually via U.S. mail or e-mail. In either event, your organization will be much better protected with the inclusion of a well crafted set of Ts and Cs attached to your purchase orders and contracts.
6. Payment process – A three-way match process should be the expectation within a business. The three-way match consists of a P.O., a packing slip and an invoice before payment is authorized. If that process is not practical, a two-way match should be accomplished at a minimum.
7. Invoice reviews – Supplier invoices should be reviewed frequently to look for and catch add-ons such as surcharges, or additional charges that were not expected or authorized in a contract or quote.
8. Price compliance audits – Supplier pricing should be audited against the contract or the quote to prevent price creep and overcharges. Having the contracts or copies of contracts and agreements close to the payables team can make this process much simpler and much more efficient. Once suppliers know that audits are conducted, compliance will improve pretty quickly.
   

Summary

An organization focused on risk mitigation and cost reduction should start with a good hard look at their internal processes and controls. This is especially important when the group consists of multiple locations where unique process seem to take on a life of their own….interpreted by many and followed by few. While this part of management is not the most interesting or gratifying use of a leaders time, the investment today in these key process improvements will pay significant dividends next week, next month, next year and beyond in terms of reduced risk and reduced costs.

If you are interested in receiving the spend management risk assessment tool, please send me an e-mail at: daustin@dealer-communications.com requesting same. If you would be interested in receiving a jump drive with all of the previously offered Strategic Source tools and related spend management articles published by Dealer magazine, please contact me via e-mail and provide your contact information including address, city, state and zip.

Is this situation unusual? Does this situation occur at other dealerships and groups? No, this is not unusual and yes, it happens every day…..and it is costing dealerships in more ways than they know, or care to admit.

As a spend management provider, we have an opportunity to look deep inside many organizations every day to see how organizations spend their money and with whom. One common denominator among the auto and truck dealerships, schools, manufacturing and hospitality concerns that we work with and see every day is this: too many suppliers are being utilized within a given expense category.  A broad supplier base was not unique to the dealership we presented to that day and it happens in many businesses, private and public every day.

Why does this happen?

High performing suppliers are an indispensable part of your business. In most cases, you need the unique expertise, unique capabilities, supplies, parts and services your vendors provide to support your business in a profitable manner, and to keep you customers happy.

I can’t think of many organizations who intentionally set out to hire 16 towing companies, or engage 68 different advertising and marketing vendors, or utilize five office supply companies, yet it happens all the time. When performing a spend analysis, we identify each supplier, categorize those suppliers by expense categories and in that exercise, can easily see whether a company is strategic or tactical in their spend management approach. This is accomplished by simply counting the suppliers in each expense category.

Three observations for large supplier bases

1. Culture – Senior management leaves supplier strategies to front line management and they are reluctant to get involved in those decisions.
2. Time – The staff doesn’t have the time to leverage the best performing suppliers.
3. Leadership – Senior management is not willing or able to set the correct expectations.

Net, net…..it is up to senior management to repair this problem. Unless management sets the expectation, communicates those expectations and manages to them, this problem, the waste and the additional expense will continue unabated.

What are the costs?

Large supply bases cost an organization in many ways. Most of the costs are invisible to management but are certainly felt by the support levels of your organization. The cost to manage a supplier annually easily exceeds $1,000 for most organizations, and higher than that for many more. Most dealerships have 300+ suppliers to manage over 100 expense categories…much more than is required. Costs incurred from having too many suppliers include the following:

1. Lost leverage – Spreading your total “spend” among many suppliers reduces your leverage with a single supplier and often results in higher costs. The opportunity cost of using too many suppliers may impact the following:

• Price
• Terms
• Rebates
• Service levels

2. Increased administrative costs – Managing suppliers has a cost. Managing extra suppliers is an example of additional costs you shouldn’t incur…or waste.

• Supplier set-up in system
• W-9s
• Year end 1099 reporting
• PO creation
• Invoice approval by management
• Invoice matching
• Generation of a check
• Signing of a check
• Postage and mailing

3. Redundancy – Using more than one supplier to provide a product or a service, and potentially paying for more capabilities than you are using.

• Competing functionality – Are you using all the DMS or advertising functionality that you pay for?
• Redundant suppliers – Do you really need all of the suppliers you have on a service agreement currently?

4. Lost management time – Every supplier that you work with has probably met with a member of your management team a number of times in order to sell into your group. Consider the following costs for each supplier:

• Initial interview time with the supplier
• Supplier vetting and qualification
• Quoting and analysis
• On-going relationship building

Managing suppliers has a cost. It is best to utilize the fewest suppliers required to support that category to drive efficiencies and lower your costs.

Largest opportunities

The following expense categories seem to have the largest supply bases most often, reducing leverage, adding redundancy and adding additional administrative costs:

• Advertising and marketing
• Printed materials
• Parts
• Shop supplies
• Aftermarket accessories
• Office supplies
• Facility maintenance
  

Improvement strategy and benefit

To avoid these problems and reduce your direct and indirect costs, you will need to take a few important steps:

• Develop a spend map for previous 12 months.
• Determine your spend and supplier count by expense category.
• Determine potential overlap and redundancy of suppliers by expense category.
• Set your supply base objectives by category.
• Designate a Preferred Supplier for each category.
• Reduce and eliminate extra suppliers.
• Implement policies to control the sourcing process going forward.

If your organization can reduce your supplier base by 30% or 100 suppliers, your organization could save an additional $100K annually, which can be used by re-deploying your staff to new tasks or holding off on new hires due to your new-found efficiencies.

Summary

The management of your supplier base is a critical function throughout your organization. Your organization probably has a supplier base of over 350-plus suppliers supporting 100 categories of supplies and services and each of those suppliers has a cost. That cost is evident in management time, administrative time, lost leverage and redundancy….all having a negative impact on your efficiency and bottom line.

If you want to eliminate the waste that occurs every day in your business, and improve your overall efficiency and profitability, it might be a good time to step back and review how you manage your spend. The development of a spend map, conducting a supplier review and a fresh look at your purchasing policies can be the starting point to driving new levels of efficiency, excellence and profitability into your organization.

To obtain a copy of an expense planning tool, used to identify supplier counts by expense category, please contact me via e-mail at:  daustin@dealer-communications.com.

According to a recent article from The Detroit News, economists for both General Motors Co. and Ford Motor Company expect U.S. auto sales to increase in 2012 above the expected 12.5 million units that were forecast for 2011. A general figure that seems to be circulating in the industry is that we may see vehicles sales in the 13.5 to 14.0 million range, which would represent another 10% increase.

Why is everyone so bullish on auto sales, in spite of a sluggish economy? Five simple reasons:

1) Average age of vehicles:

The past 15 years have seen a steady increase in the average age of vehicles, according to a Polk research firm. In 2011 the average age of vehicles on the road was 11 years. This trend is due to two reasons: vehicles are more durable and customers are holding on to their cars longer. At some point, however, as older cars break down and the cost of repairs start to rise, the benefits of holding onto a car versus purchasing a new one will be tipped in favor of the latter. As that tipping point is reached for millions of older cars, consumers will start trading them in.

2) Scrappage rates:

Starting with ‘Cash for Clunkers’ in 2009, scrappage rates remained higher than usual for two years, with total numbers of cars scrapped exceeding the total numbers of new vehicles registered. According to Polk research, the trend of scrappage rates exceeding sales was expected to continue through 2010 and 2011.

And in another article from The Detroit News, a sales analyst from Ford Motor Co. predicted that scrappage rates of 6% on 250 million vehicles on the road in the U.S. (in 2011) would generate the need for 12.5 million to 13 million new vehicles.

Scrapping statistics are generally viewed as a bellwether for future gains in vehicle sales. The higher the scrappage rate, the more demand for new and used vehicles.

3) Inventory levels back to normal:

Last year was a bad year for Japanese automakers. The tsunami in March severely impacted inventory levels for much of the year. Supply chain interruptions caused by the tsunami also affected U.S. manufacturers’ production.

Then, just as things were getting back to normal, flooding in Thailand threatened to impact production again. As of press time some auto plants in Thailand had been shut down, and the expected impact to production was unknown. However, we predict any slowdown will be short-lived and the impact on inventory levels will be nowhere near as severe as was caused by the tsunami.

In Q4 of 2011, AutoNation was expected to receive shipments of 30,000 units from Japan, well above their average rate of 27,000, indicating that Japanese automakers are up to 110% of their pre-tsunami production levels. Presumably other auto dealers are also back to normal inventory levels as we head into 2012.

4) Easing lending requirements:

Since the 2008 crisis, banks and finance companies have taken losses in real estate and business loans. One bright spot, however, has been in automotive retail. Apparently people are more likely to walk away from their homes than let their cars be repossessed. Banks took minimal losses, if any, for car loans, so naturally their interest in this area has grown and they have begun to ease lending requirements.

According to an Experian Automotive Credit Trends Report released in 2011, banks starting easing up lending in the second half of 2011. New car loans for buyers with credit scores below prime jumped 22.4% in 2011 compared to 2010, while car buyers with the worst credit, deep subprime scores, saw the largest increase of 44.1% over the same period.

Since almost half of all consumers have credit scores below prime, that’s good news for both car shoppers and auto dealers.

5) New, innovative products:

In 2012 automakers are releasing new products that are in compliance with increased government regulations, as well as appeal to increased consumer demand for fuel-efficient, safer, and “green” vehicles.

Some innovations include:

• Many 2012 vehicles will have higher miles-per-gallon (MPG) compared to models from previous years. 40 MPG is the new standard in compact vehicles.
• Start-Stop Technology: Hybrid owners are familiar with start-stop technology, but now manufacturers are expanding its use because it’s an inexpensive way to improve a vehicle’s fuel economy by up to 10%.
• Electronic Stability Control (ESC): the government has mandated that all 2012 models under 10,000 lbs. have ESC, which has been proven to reduce fatalities in accidents.
• Inflatable seat belts: Ford Motor Company is introducing this innovation, which combines the features of traditional seat belts with those of airbags. The feature enhances safety, especially for rear seat passengers such as young children who are more vulnerable in crashes.
• Luxury: The 2012 Ford Focus will have new perks: rain-sensing wipers, a parallel parking system, a blind spot warning system, a backup camera, ambient lighting, push-button ignition, a stitched dashboard and a navigation system. In the past, consumers would have to pay for a pricey model to have all these luxuries included, now they are becoming de facto in less expensive models.
• “Green” Cars: Some consumers want more than fuel efficiency. Car manufacturers have responded by producing new cars using recycled and environmentally friendly filler in the seats, headliners and carpets. The Ford Fusion Hybrid, for example, has seats made from reclaimed plastic.

The combination of older cars and high scrappage rates indicates a pent-up demand for new vehicles, and thanks to lending requirements easing up, along with normal inventory levels, consumers will find it easier to purchase a new car in 2012 than in recent years. Additionally, auto manufacturers are offering plenty of choices with increased fuel efficiency, safety features and other attractive options for consumers.

For these reasons, I believe that 2012 will be better than 2011, and another 10% increase in sales would put us that much further down the road back to 15-16 million units.

Spend management is a strategy that innovative companies employ to control and optimize the money they spend. Spend management includes a number of familiar disciplines that are designed to reduce costs, improve efficiencies, improve controls and optimize cash flow. Typically, spend management deals with indirect expenses for supplies and services, or those expenses that do not go into a finished or manufactured product. Spend management can also be described as a “strategic” approach to the financial management of the business and often includes the following functional disciplines:

• Spend analysis
• Sourcing
• Purchasing
• Receiving
• Payables
• Audits
• Process management
• Contract management

Spend management, when executed properly, becomes a very effective mechanism to reduce costs near term and control costs long term.

Impact of spend management strategy – To understand the impact of an effective spend management strategy, we’ll identify some potential benefits:

• Spend analysis – A detailed review of spend by expense category, and by supplier, allows one to plan, prioritize, assign and manage the spend plan across the organization. The spend analysis is a data driven exercise that can focus the management team on the biggest expense opportunities to the smallest, to both reduce costs and mitigate risks.
• Sourcing – The business environment is a rapidly changing, competitive environment. Researching and interviewing new suppliers, new solutions and new pricing and terms is a key ingredient in keeping your business competitive. While developing partnerships with proven suppliers provides stability to an organization, overlooking new opportunities can provide your competitors with significant financial advantages and cost your organization in higher expenses.
• Purchasing – An effective purchasing function involves defining requirements accurately, then bidding, quoting, negotiation and analysis of competing opportunities. Many organizations take a number of short-cuts in this area and feel that a highly charged negotiation session with suppliers is all that is needed to be effective. An effective purchasing function reduces costs near term and long term using a process driven model that addresses all components of a purchase, including the transmission of a purchase order for selected buys.
• Receipt – Once a purchase order is generated, a product is shipped or service delivered, the receipt process needs to occur to validate shipment, complete the P.O. process and prepare for payment. Organizations that do not have a formal receipt process open themselves up to possible risk and exposure, due to fraudulent invoices, incomplete shipments and more.
• Payables – The best, most secure payables process includes a three-way match. The three-way match requires that a purchase order (PO) be matched to a vendor packing slip and then to the matching invoice before payment occurs. Some dealerships utilize an effective three way match process, but most utilize a two-way match process. Again, a payables process that is tightly controlled reduces risk and can potentially reduce costs if early payment discounts are pursued. Additionally, how a supplier is paid represents yet another cost reduction opportunity.
• Audits – Periodic audits of suppliers is a productive and necessary activity. While recovering supplier overcharges through audits will not drive new levels of profitability in your store, it is important to review your most expensive expense categories on a regular basis to prevent “price creep” from occurring. Your management team or accounts payable group should have regular scheduled supplier audits to complete. This discipline also requires ready access to pricing or contracts which can often be a challenge in dealerships.
• Process management – An effective spend management approach can drive internal efficiencies with a focus on process improvements. There are hundreds of processes within an organization, executed daily that cost your organization money. Processes need to be challenged in a continuous, methodical way to reduce labor, reduce costs and improve results. Do you ship packages across town using next day air rates? A process improvement will reduce your costs. Do you pull three credit bureaus for every potential sale of a car? A process improvement will reduce your costs. Does your service department collect the correct credit card information for each sale? A process improvement can reduce your costs.
• Contract management – Effective contract management will provide at least three benefits to an organization. Managing contracts so that auto-renewals do not occur can reduce automatic price increases. Managing contracts in a timely basis will allow enough time to source and quote competing suppliers to take advantage of favorable market conditions. And managing supplier contracts proactively can reduce risk associated with under-performing or risky suppliers.

A well-conceived and executed spend management plan can have a very positive impact on costs and ultimately your profitability. There is considerable research that suggests cost savings impact of 15-25% of your spend can be achieved with a centralized approach to spend management.

Your 2012 spend management strategy – An effective spend management strategy should include all of the above components for obvious reasons. Spend management is a very linear process in which one component is supported and tied to the other…a process focus. Since 2012 is providing you and your team with a fresh start, now might be a good time to develop your spend management strategy for this year.

The next steps to developing your spend management strategy should include the following:

• Define your 2012 cost savings objectives (see December article in Dealer magazine).
• Organize your team – Assign responsibility for each component of your strategy.
• Set expectations – Each component of your strategy needs to be articulated, quantified and spelled out.
• Communicate the strategy – get your entire team aligned and on-board with your strategy.
• Execute – Develop the internal discipline to manage the process regularly, as part of your regular weekly or monthly management meetings.
• Measure and report – If it cannot be measured, it probably won’t be accomplished. Set a reasonable metric to every objective and component and measure against your plan.

Summary – Executive management and financial/procurement leaders in many industries are making a concerted effort to develop a “holistic” approach to managing and controlling company assets and resources. Spend management is a financial platform that is data-driven, analytical and process oriented to drive near term improvements in costs that are sustainable over time. Spend management is crucial to organizations that are interested in improving efficiencies, providing a predictable cost structure and sustaining strong levels of profitability. This might be the perfect time to develop your spend management strategy.

To learn more about the development of a 2012 spend management strategy, stop by and visit us at the NADA show in the StrategicSource booth #3352 or #4215. We will provide you with a complimentary suite of electronic Spend Management Strategy tools.

Obviously, when people think of Las Vegas, they think about gambling. Unfortunately, I’m starting to think that subprime financing is developing a similar connotation. There are some people who see the word subprime next to an increase in loans and recoil, thinking about the pain from the financial market meltdown just a few years ago. Much of the real-estate crash revolved around subprime loans, and it seems subprime auto loans are guilty by association. In reality, when lenders drop into the subprime category, it can be very beneficial to dealers, as it opens potential sales to many more customers.

In Q3 2011, share of loans to sub-prime customers overall was up by 3.18% since Q3 2010, from 36.71% to 39.89%. However, this doesn’t necessarily mean the industry should be alarmed. As long as it is managed correctly, a little bit of risk can be good.

When automotive lenders have healthy loan portfolios, with low delinquency rates and lower dollar volumes at risk, they are free to adjust loan criteria for down payment, term and loan-to-value ratio and to make more loans to riskier customers. As long as lenders carefully monitor loan performance relative to delinquencies and dollar volume at risk, subprime auto loans can work well.

A couple of years ago, when automotive lenders started to see higher delinquency rates and had high dollar volumes at risk, it limited their options in terms of how much they could push the envelope with their loan strategies. They wisely began focusing their loans mainly on customers with strong credit.

In Q3 2009, nearly a year after lending markets froze average credit scores for new vehicle loans peaked at 775, up from 749 in Q3 2007. In part, this was because subprime lenders did not have access to adequate capital. It also was a reaction by other lenders to a significant rise in automotive delinquencies. In Q3 2011, the 30-day delinquency rate was 3.27%. However, by Q3 2011, this rate had dropped by 14.9% to 2.78%. Total dollar volume of at-risk loans dropped by more than $9.4 billion from Q3 2009 to Q3 2011.

With fewer loans and dollars at risk, lenders felt comfortable opening more loans to subprime customers. The average customer credit score for new car loans dropped from the Q3 2009 high of 775 down to 763 in Q3 2011. In addition, the average dollar amount for a new vehicle has grown. In Q3 2010, the average new vehicle loan was for $25,273. This increased to $25,873 by Q3 2011.

The appetite for larger loans was prevalent in the nonprime, subprime and deep-subprime categories as well. In the past year, dollar values for new vehicle loans to nonprime customers were up 4.1%, from $25,793 to $26,850; for subprime customers, they increased 6.4%, from $23,981 to $25,527 and for deep-subprime customers they went up 9.12%, from $21,866 to $23,862. So in addition to more loans to riskier customers, lenders are freeing more dollars for each loan.

However, this doesn’t need to set off warning bells in the industry. As the lending industry has shown in the past, it will expand and contract its share of subprime loans based on the overall performance of consumers in repaying their loans. Ultimately, this puts the odds in lenders’ favor and keeps automotive retailers — at least for now — with a larger pool of potential customers.

So if you see some of your friends in the automotive lending industry playing a few hands of blackjack during the convention this year, don’t be alarmed. They are just having fun.

The focus of our articles have centered on purchasing, audits, planning, process management….or said another way, “spend management.” Spend management encompasses sound expense planning, a methodical approach to sourcing and contracting, process improvements, execution and an effective back end supplier audit process. Spend management is what your Operations team does everyday. Some teams are more effective at spend management than others. Effective spend management directly contributes to your profitability. As we enter December and close the books on 2011, you have an opportunity to improve results in 2012, if you choose to take action.

Are you satisfied with your 2011 results?

There are many moving parts to profitability as you know. New and used vehicle sales, parts, service, and F&I and related products are primary drivers of top line revenue which contribute to profitability. Expenses such as manpower, rent, insurance and a large bucket of supplies and services that typically represent 4% to 6% of revenues, are contributors to expense and ultimately erode profitability.

Dealers who have survived these past few turbulent years have obviously done a lot of things right to be standing as viable businesses today. Dealers have created and managed profitable operations, but are those profit levels satisfactory? Has the dealer management team wrung out all waste, all excess costs, reduced risk and maximized profitability of the dealership? If the answer to that is “yes,” then you should probably keep your eye on expenses, but shift your focus to top line revenue creation. If the answer is “no,” now might be the perfect time to set new, aggressive profitability objectives for 2012.

Significant opportunities for 2012

Most dealerships spend between 4% to 6.5% of their top line revenues for 100+ categories of supplies and services, from office supplies, to credit card processing, insurance, to shop supplies and much more. For even the smallest of dealerships, that annual spend is usually north of $1.0MM to $1.5MM, and typically much more. Successful dealers can plan to shave 15% to 20% off of that spend over time with the right approach. Aggressive dealers have an opportunity to manage their spend much more effectively to reduce costs and drop those dollars to the bottom line, enhancing profitability. To take advantage of this opportunity, there has to be a desire to be more effective and drive greater levels of profitability. A “strategic approach” to spend management is now required. 

Your 2011 spend – Information needed for your 2012 spend plan

In order to develop an effective 2012 spend management plan, one first needs to understand your own historical spend and the suppliers you have utilized. The correct approach is to generate a 12 month spend report from your DMS system as a first step. A common report that most dealerships have access to is a 1099 report. This report can be extracted to include vendor names, vendor spend totals and vendor address information. Once that information is extracted and coded by spend category, the true picture of your spend and the size of your supplier base becomes very apparent. When the total spend is massaged and cleansed, you will arrive at a total 12 months spend that will become the basis for your 2012 SMAART objectives.

Setting SMAART objectives for 2012

SMAART objectives have been around a long time. I have yet to find a more effective tool for building meaningful objectives across an organization. As a review, SMAART objectives should be written with the following components:

• S – Specific – Objectives must be written with a high degree of specifics.
• M – Measurable – Objectives must be measurable at all points in their duration.
• A – Attainable – The objective should be a stretch, but attainable.
• A – Action Oriented – Objectives must be achieved through direct action, not by accident.
• R – Realistic – The objective must be realistic and can actually be achieved in the stated time.
• T – Time Phased – There must be a definitive start and end time to the objective.

Example #1 – Beginning in January, we will reduce our supply and services spend by $250,000 over current spend levels and this will be achieved by December 2012. We will achieve this spend reduction through spend planning, sourcing, requests for quotes and selection of the best supplier partners available.

(Specific = spend planning, sourcing, quoting, measurable = $250K over current spend levels, attainable = a modest objective is certainly attainable, action oriented = spend planning, sourcing etc, realistic = this objective should be easily accomplished in 12 months and time phased = start in January and completion by December) 

SMAART objectives can be set around the following areas to reduce your spend, reduce waste and improve profitability:

• Spend reductions
• Supplier reductions
• Long term price protection
• Supplier price compliance
• Rebate generation based on dealership spend and leverage
• Contract visibility and management 

Planning and executing for success

Success is not an accidental event. Your dealership(s) has survived a difficult period of time and is obviously well run. While you may be profitable, you, like most other dealerships, have opportunities to drive additional waste and inefficiencies out of your business and in the process, enhance your profitability. A strategic spend plan or spend map is a required first step.

If you seek to improve profitability in 2012, engage your management team and set some aggressive objectives. Go on offense, develop a strategic mindset, set a handful of SMAART objectives that you can reasonably attain in 2012 and drive excess waste out of your spend. A bit of spend planning, spend analysis, objective setting and management can provide you with improved results and a more successful and profitable 2012.

If you are interested in receiving a set of tools to assist in your 2012 spend management planning, contact Doug Austin via e-mail at: daustin@dealer-communications.com. I would be happy to send you these tools to help you drive new profitability in 2012.

I have reviewed hundreds of policy sets every year and find on average from three to seven mistakes in each of them. These range the gambit from simple clerical errors to serious oversights that, under the right circumstances, could cost your dealership dearly. Often these mistakes go undetected because policies go unreviewed. If there is no disputed claim there may be no reason to suspect a mistake has been made.

While the types of policy mistakes are many and varied, here are the ones we find most often. Compare your policies against this list and see what you find.

Know Yourself: Often dealerships are made up of many corporate entities, partnerships, trusts and others, all with an insurable interest. Are they all properly listed as named or additional insureds? While many policies have broad named insured definitions, it is important to have all the appropriate parties listed on the policy.

Don’t assume that your personal assets like watercraft, snowmobiles, etc. have liability coverage just because they are titled in the dealership’s name or reported in your inventory values. Policies often have liability exclusions that relate to watercraft and other toys. Ask specific questions about coverage for any assets that are not normally considered part of a dealership operation.

Vacant buildings can be particularly problematic. Storing a few obsolete items in the building and sending a porter over once a month probably is not enough to avoid the policy’s “vacancy clause.” While the wording of “vacancy clauses” can vary from policy to policy, they are usually quite specific on what percentage of the building must be in regular and customary use and how long (often 60 days) the building can remain “vacant.” Should your building be deemed vacant at the time of loss, the insurer has the right to reduce coverage and claim payments.

Know your limits: Check your building and contents limits. Do they properly reflect the replacement cost of those items? It is not uncommon to find a building worth $1,500,000 insured for $150,000, a simple typo. If you have multiple buildings, consider blanket coverage so the aggregate values are more relevant than the individual values.

Does your dealership operation include a number of buildings, maybe some small ones? They all should be listed with insurable values. Do the contents values between your buildings fluctuate or have you moved your excess parts inventory from Building A to Building B without changing the contents values to reflect the change? There are easy cost free ways to structure your policy to allow for these fluctuations, but many times these solutions are not included, leaving the dealer vulnerable for an under-insured claim plus coinsurance penalties.

Auto inventory limits can be a tricky thing. Most carriers set auto inventory limits at 125% to 150% of your expected inventory levels to deal with the normal inventory fluctuations. However, do you know what inventory level your quote was based on? Auto inventory is one area where it is very simple to low-ball a quote, and underestimating the premiums will make you ultimately pay. Some carriers offer reporting forms with rates so it is easy to plug in your expected inventory, and compare it to the quote. Others however will adjust your premiums based on your actual inventory but not show you the rates or how they calculate the premium unless you push for this information. Don’t assume your quote is based on the inventory levels you provided, it often is not.

What did you negotiate?: Negotiated points are often left off policies, especially with renewal carriers. They already have your policy ready to print and last minute changes just don’t get communicated. This is especially true with both rates and deductibles. We suggest you keep a list of all negotiated points and have your agent show each change once the policy is in your hands.

Changes in deductibles are easy to spot, but sometimes the rates that go to make up your ultimate premiums are not so easy to find. As mentioned before, some carriers are even hesitant to reveal them. That said, it is those variable rates they use to adjust your monthly premiums or at year end. Require your carrier to provide any and all variable rates and the rating basis they used to determine your premiums. This exposes low-balling, whether intentional or not.

Miscellaneous issues: So your agent says your policy was renewed without changes. Is it true? Often the answer is no! Insurers love to slip changes into their renewal policy and often these go undisclosed, even to the agent. A few of the most common are, auto inventory flood exclusions, increases in employment practices deductibles, reduction in limits for E&Os and EPLI and liability coverages that once were included in your umbrella are no longer, reducing your total coverage limits.

Geographical issues can come into play. Most business interruption policies exclude losses due to offsite power failures. This coverage is very important in the northeast and midwest where damage from snow and ice storms can cause extended power outages.

Also look out for those little housekeeping issues like the proper ERISA endorsements to keep you in compliance and making certain those detail coverages like employer’s liability are included in your umbrella.

Insurance policies are complex and the possibilities for errors are endless. These are just a few of the most common. Check your policy in detail to make certain the policy delivered provides the coverage you intended to buy.

Manufacturers told dealers if they upgraded their facilities new vehicle sales should increase. Some guaranteed increased allocations, while others provided cash incentives. Many dealers began to believe, “If we build it, they will come.”

Of course the financial markets contributed to this mentality. At the height of the credit bubble, dealers could finance 100% of their real estate projects at very attractive rates. The thought was, after building a new facility rent would go up, but so would sales. Also, real estate should continue to appreciate, so the entire investment seemed relatively riskless. How the world has changed in just a few short years!

Highly leveraged investments are by their very nature risky. Many dealers built new facilities at the top of the market, locking in very high real estate values for the long term, while securing a great deal of debt in the short term (five to seven years). Now, those large mortgages are coming due at a time when real estate values and loan-to-value rates have plummeted. Suddenly, “no money down” investments have become “show me the money” refinancings.

Real estate investments create fixed costs

Since the credit crisis, dealers have very successfully reduced variable expenses resulting in record profits. However, they have been unable to reduce their largest fixed cost, rent (see Chart 1).

Chart 1: Annual Dealership Rent and Rent per New Vehicle Retailed Source: NADA *2011 data estimated by annualizing results through July 2011

According to NADA, the average dealer saw annual rent expense increase 25% between 2004 and 2009. When sales plummeted in 2009, total rent expense remained high, driving rent per new vehicle retailed to an astounding $902. Since then, new vehicle sales volumes have improved very nicely, reducing rent expense per new vehicle retailed. However, aggregate rent expense continues to climb, with 2011 tracking toward a record year and rent per new vehicle retailed still 47% higher than 2004 levels.

Unfortunately, manufacturers are once again rolling out expensive image programs after a short break during the recession. Many of these programs provide cash incentives for the dealer, but the incentives often run out while the fixed cost remains. NADA has commissioned its first ever independent study to determine the cost effectiveness of these image programs.  We will all be interested in its findings.

Before that report comes out, I thought it would be helpful to provide a framework for analyzing the financial impact of an investment in dealership real estate. To do this, I looked at the sales increases required to cover the cost associated with a $1 million real estate investment, depending on real estate capitalization rates (“cap rates”) and gross profit margins.

According to our REIT sources, current capitalization rates range from a low of 8% for the strongest credit to a high of 10% for the weakest. With this in mind, a $1 million investment in real estate would result in between $80,000 and $100,000 of additional annual rent expense. The average dealership’s sales would need to increase between $533,333 and $666,667 (depending on cap rate) to cover 100% of the increased rent expense, assuming an overall dealership gross profit margin of 15%. Any sales increase above these levels would mean the real estate investment was profitable for the dealership.

Chart 2 highlights the importance of knowing from which department sales are expected to increase as a result of a real estate investment. The higher the gross profit margin, the less sales need to grow, while the lower the gross profit margin, the more sales need to grow. For instance, if a dealer only expects new car sales to improve as a result of the $1 million real estate investment, then sales would need to increase by between $1.6 million and $2 million (depending on cap rate) simply to cover the additional rent, assuming new car gross profit margins are 5%.

Chart 2: Estimated Sales Increase Required to Cover the Increased Rent Expense Associated with a $1 Million Real Estate Investment at Varying Gross Profit Margins (Dependent Upon the Department/Departments From Which the Sales Increase Comes) and Capitalization Rates Sources: The Presidio Group Analysis and NADA

 Image facilities’ impact on blue sky values

Dealers often ask Presidio what the impact will be on their blue sky value if they complete an image facility upgrade. If the image facility increases profits, then it will likely increase blue sky and real estate value, a win/win scenario and certainly an investment worth making (plus most buyers prefer image compliant facilities). However, it is important for a dealer to consider the downside scenario if this does not occur.

What is the impact on blue sky value if the increased rent expense reduces, rather than increases profits, meaning sales do not increase after the real estate investment is made? As can be seen in Chart 3, the more valuable a franchise the greater the loss in blue sky value if this occurs.

Chart 3: Estimated Loss of Blue Sky Value Assuming No Sales Increase as a Result of the Increased Rent Expense Associated with a $1 Million Real Estate Investment. Source: The Presidio Group Analysis

This analysis shows that while a dealer’s real estate may be worth an additional $1 million as a result of the investment, the dealership’s blue sky may have decreased by between $240,000 and $800,000 (depending on cap rates and blue sky multiples) as a result of the increased rent expense.

In closing, manufacturers rarely give dealers options when it comes to their real estate. Dealers are often required to build the image facility regardless of the return on investment. Also, if a dealer plans to sell his business in the near term, most buyers want image compliant facilities and will discount blue sky if a project is required. That said, it is important to understand the business ramifications of these real estate investments. Knowing exactly how much sales are needed to increase, (and from which department) is strategically important to a dealer’s business. The resulting profits or lack thereof directly impact blue sky value. An image facility is no field of dreams. If you build it, make sure you know exactly how many need to come, particularly to cover your rent factor!

• The need for energy independence, especially from the “bad guys” in the Middle East
• ROI – a lowering of ongoing dealership expenses
• A marketing opportunity to differentiate your store from the competition

There are also some additional practical reasons to check out the “green/sustainable” movement slowly taking place at many stores:

Recruiting Gen Y: Most dealers struggle with recruiting a younger generation of employees. Whether you feel they are right or wrong, they are very sensitive to the damage they feel has been done to their environment. Research says Gen Y’ers gravitate to work – and buy – from companies that have a track record of good environmental practices. For this generation that grew up with recycling and a true concern about the air they breathe, the “green” topic is not a debate, but a value. Ignoring or discounting the largest generation that will be buying your vehicles for as long as you’re a dealer is a perilous decision.

Check Your Inventory: By the end of 2012 OEM’s will have 80 alternative energy vehicles available for sale (hybrids, electric and fuel cell).  Demand for fuel efficient vehicles will also remain high as gas prices will invariably rise, government pressure to achieve higher CAFÉ standards will only continue, and a crop of customers who demand high mileage vehicles due to their environmental beliefs will continue to grow. So, you’ll be selling “green”, but will you be acting “green”?

Differentiating Your Dealership:  For those of you who have built or significantly remodeled a facility during the last three years,  you’ve added “sustainability factors” that you probably wouldn’t have dreamed of a few years ago. The decision to build a “greener” facility was probably a combination of expense reduction and good citizenship. The tough part, building a new facility, is done.  Now that you’ve made the investment in “green technologies”,  have you developed a marketing plan to further differentiate your store (s) from the competition?  This is particularly important with the advent of Internet shopping – allowing you to move beyond “commodity pricing” through differentiation.  If you’d like me to send you 5 Marketing Tips that make it easy to tell your “green story,” just send me an email with your request to: mrikess@dealer-communications.com.

It’s time to be nimble.

What do you need to look for and how do you think they are going to perform after the initial signing on the dotted line?

Either the vendor is going to come in with amazing screens, laptops, high quality business cards (I have seen metal ones!) high end suits & goodies or you may have a casual wearing, paper business cards, small laptop vendor come in. Regardless of what they wear or what they come in as, what comes out of their mouth during the demonstration of the product is the most important part to pay attention too.

Key Terms to pay attention too:

WE PROMISE: Hearing this is like a broken record similar to a child promising to remember to do their chores on a daily basis, but you find yourself constantly reminding them daily to remember.

WE GAURANTEE: This is very scary! How can you guarantee traffic, customers, increase and such? It’s impossible to throw that term out unless the vendor has full control of the actual online consumer. Demographics & general location play a major role in this.  Are they at the front door of each and every consumer “MAKING THEM” come to you? I highly doubt it. If your vendor is guaranteeing results it is a term loosely used and a headed direction for failure. (A way to get you to sign faster)

SPECIAL ACCOUNT: I have heard this several times.  “You will be one of our Special Accounts & will have lots of attention”… What about their other clients? Do they get the Special Accounts treatment & do you think the non special accounts would be a bit disturbed if they heard that they weren’t? The proof is in the pudding when you make those calls to clients that are not listed on their testimonials page. This brings me to my next point.

CALL OUR TESTIMONIALS: Sure thing, this is nice giving the opportunity to do your homework but what about the non testimonials. If they claim they have several hundred accounts, ask for the list and you can have the opportunity to pick and choose who to call that are not on the Testimonials page of their website.  Remember you want to pay for a great product which then entails to great customer service.

WE WILL MAKE IT HAPPEN: If you hear this, have them include it in on the agreement. When this is mentioned in a demo, this is not going to help you one bit because once you sign and throw that request in either the developers or programmers are going to say “Can’t do it”… This will safe guard your request if it is in writing along with the other request you may have.

LOOK AT THIS GUY: They may pull out a few customers that are performing amazing with stellar numbers. Grabbing up clients that have demographics, location, products and such can help create a huge performance for those numbers month in and month out. What if you were the guy with a smaller demographic and location, don’t expect those numbers; this is just part of the Glam & Glitter of a product demo to show only the best of the best. What about the smaller guys?

IF YOU SIGN TODAY: Reminds me of the 4-squares & the Sharpie marker when I sold cars! Now what if I don’t sign today! Are you going to pull all these promises and guarantees away from me? You haven’t even done your homework yet, so why in the world would you sign today?

If it sounds too good to be true, then it’s not going to be. Just pay attention and be educated when meeting up with your next vendor.

I may not have covered all of the words to keep an eye & ear out during a product demo. Do you have any that you have heard but were never lived up to?

All views & opinions are solely based by the author Jennifer Schrader

jennifergene@hotmail.com (231) 360-0730

Almost every major vehicle manufacturer comes out with its latest, greatest facility image designs every few years, which typically include new space guides combined with new structural requirements pertaining to the look of the facility. For the latter requirement, manufacturers will include items like arched entrances, a particular type of tile in the showroom and a specific type of glass for the front of the facility. Of course, it is easy for the manufacturer to create a new image for its dealers’ facilities, but it is quite another question whether the cost of those image upgrades can be justified by the dealers who will be paying for them. A dealership facility can be attractive, clean and more than adequate in size to meet the needs of customers without including the manufacturer’s desired image changes.

Under the current economic circumstances, dealers should proceed very cautiously with spending millions of dollars on structural changes to their dealership facility if they believe their facility is more than adequate to meet the needs of their sales and service customers. The latest economic forecasts state that there is a 50% chance that the United States will dip into another recession (I am not sure we are out of the last one, but I am not the economic forecasting expert). When being asked to spend millions of dollars on a construction project, I don’t like those odds!

In addition to the broader economic conditions, many of our dealers, including GM dealers, complain that they cannot obtain enough vehicle allocation to keep up with customer demand as it is. Dealers tell us that they are at historic lows in day’s supply of vehicles and that dealer-trades for the most popular vehicles are virtually non-existent. It will not surprise you to hear me say that, if you are in this situation, you should be firing off monthly e-mails to your factory representative telling him or her that you continue to be short on vehicles. You have to be as specific as possible in requesting more allocation of the model vehicles most in demand in your market.

Unfortunately for most of you, other than maybe Honda and Toyota dealers, there does not appear to be any significant uptick in vehicle production capacity on the horizon. So, even if you assume the manufacturers’ always rosy sales forecasts are accurate, they don’t appear to be able to supply a sufficient number of vehicles to justify the expense of a remodeled and expanded facility.

With these kinds of forecasts, no businessperson would voluntarily choose to spend money to change a perfectly good facility when little or no return on that investment is expected. In speaking with our dealer clients regarding manufacturer facility upgrade pressure, the first thing we ask is “without the manufacturer’s pressure is a facility renovation something you would consider?” In most, but not all, instances the dealer’s response is “absolutely not.” That response should be the starting point in the dealer’s discussions with the manufacturer. I have written numerous times in this column about the process we use to assist dealers in pushing back against unwarranted facility demands. This process always begins with an economic and financial analysis of the dealer’s expected return on investment in the facility changes.

In addition to repeatedly documenting for the manufacturer the lack of expected return on the requested facility renovations, dealers should be communicating their concerns to dealer council members who, in many cases, have significant influence over the manufacturer’s decisions. Dealers need to arm their council members with as many examples as possible of the expected cost of a facility upgrade versus the little to no expected return on that investment.

GM dealers have pushed back against the Essential Brand Elements facility requirements since the inception of the program in the summer of 2010. The dealers we have advised have provided their GM representative, and in some cases their dealer council members, with detailed analysis of the cost of the changes to their facility, the difficulty in convincing lending institutions that the investment is a good risk, the continuing poor economic outlook in their market and nationally, the severe lack of vehicle allocation and, ultimately, an analysis of the lack of any material return on the cost of renovating the dealership facility. When dealers provide this kind of detailed information to the manufacturer and their dealer council representatives it can be a powerful tool in reducing or slowing the manufacturers’ facility image demands.

Many of you may have heard that the National Automobile Dealer Association has commissioned a study to review the costs and benefits to dealers and manufacturers of facility image programs. We hope to provide information from our experience with this issue and look forward to the study results.

Don’t pursue ownership changes without experienced legal assistance

In the last few months, we have been contacted by two large, privately held dealership groups that were pursuing internal ownership changes. Both groups were passing ownership down from the organization’s founder on to the next generation of dealer operators. Although both groups would be considered very sophisticated dealer organizations, they were having great difficulty obtaining approval from their manufacturers for these desired changes. We have seen this situation over and over again.

The problem is not with the dealership group; it is with the manufacturer. Unfortunately, most manufacturers simply don’t the respect dealers’ requests for an ownership change. Whether intentionally avoiding dealers requests or as a result of having too much on their plate, we have seen manufacturers allow a dealer’s ownership change request languish for months. What many dealers don’t know is that most state franchise laws require the manufacturer to respond to an ownership change request within a specific period of or the request is automatically approved.

It is money well spent to utilize an experienced franchise lawyer to assist with obtaining approval of an internal ownership change – especially if complicated estate planning mechanisms are also part of the proposed change. Once the manufacturer realizes that legal counsel is involved the request seems to garner increased attention. Experienced legal counsel will know what information the manufacturer needs to more quickly process the request. Likewise, the manufacturer will not feel quite as comfortable attempting to delay the approval process by asking over and over again for “additional information.” For those manufacturers that do ask for additional information, experienced motor vehicle franchise counsel will know what is reasonable and what requests need to be politely rejected as unreasonable.