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How Do You Decide Whether to "Make or Buy"

 

When I became general manager of a large, multi-line dealership years ago, my first goal was to cut costs. One of the first outside vendors I reviewed was a company who came and put stickers on our used cars. At that time they charged about $7 to $8 per sticker for an average monthly cost of $500. I thought we could save money by purchasing a $200 software package and bringing this operation in house. The first couple months were great; the used car manager put out all the stickers. The third month we were missing some stickers, and the fourth month maybe 25% of the used cars had stickers. It kept getting pushed back as a priority. So guess what? By the eighth month I re-hired that company to come back in and do the stickers.

In manufacturing, this decision is referred to as “make or buy.” Is it cheaper to produce this product in-house, or to hire an outside vendor? In the case of the stickers, I had to look at not just my out of pocket cost, but at what it was costing the dealership to NOT have those stickers on the cars. How many sales did we lose because a customer wasn’t patient enough to wait for a salesperson to provide them with information? How did customers perceive us as a dealership because we didn’t have stickers on most of the used cars, and would they have referred their friends to us?

The advantage to hiring outside vendors for a task is that typically this is their only job and focus. Every month they have to continue to “win” your business, so they get the job done. Whether it’s hiring appointment setters in sales or service, or an outside company to clean up your database, it’s important for dealers to look beyond their out of pocket cost. It may be cheaper to assign a task or responsibility to internal employees, but are those employees getting the job done?

When comparing costs of a certain task or product, dealers shouldn’t just look at what the monthly vendor charges. If the task is assigned to a person in-house, that cost should be included in a side-by-side comparison. Is this the employee’s only responsibility? What percentage of their time is spent on this task? If it’s 20%, then write down what 20% of that person’s salary is plus 20% of the dealership’s cost of having that employee. Then you have to ask, is this person getting the job done 100% of the time, to 100% satisfaction? Or, are they only performing this task to 80% of expectation? Or 50%? What is the cost associated with having the task performed to only 50% efficiency? Then add that cost to the cost associated with the salary, and see whether that figure is getting close to what it would cost to hire a vendor.

Is it worth it to pay someone $50,000 per year to manage the customer database, run queries, and set up effective marketing campaigns? What are the measurements of their success? Or, is it better to hire outside vendors like a data cleansing service and email marketing company, because that’s their only focus?

Dealers, what make or buy decisions have you made lately and how do you determine the costs associated with those decisions?

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