Blind To The Whole

by BILL WADDELL

So GM announces that 2,600 dealers are going to fall by the wayside, and Chrysler is giving the heave-ho to almost 800.  That will take them from about this:

2008 UNIT SALES		DEALERS	UNITS PER DEALER
HONDA	1,425,000	1000	1,425
TOYOTA	2,250,000	1800	1,250
FORD	2,025,000	3800	533
GM	2,950,000	6300	468
CHRYSLER	1,475,000	3200	461

To about this:

2008 UNIT SALES		DEALERS	UNITS PER DEALER
HONDA	1,425,000	1,000	1,425
TOYOTA	2,250,000	1,800	1,250
GM	2,950,000	3,700	797
CHRYSLER	1,475,000	2,400	615
FORD	2,025,000	3,800	533

By my math, GM needs to dump 4,000 dealers to get to the Honda/Toyota benchmark - not 2,600.

Then give this article a read: Fixing Detroit's Broken Business Model

The author writes of GM purchasing: "Almost overnight Lopez changed all that. He tore up existing contracts and demanded that suppliers agree to immediate price cuts of up to 20%. Many suppliers protested, but ultimately submitted to his demands. Lopez's early success delivered a windfall for GM. Emboldened, they began crafting a new aggressive standard for purchasing operations – a standard copied not only by Ford and Chrysler, but also by many other large players in the supply chain. Over the next sixteen years, Detroit and its increasingly powerful purchasing departments demanded, and got, ever greater discounts and cost-downs from their suppliers. Purchasing agents began getting bonuses for successfully negotiating lower prices. Suppliers, over time, became conditioned to believe that the "lowest price always wins."

He goes on to describe how the relentless domination of GM over their suppliers with a single-minded cost focus completely destroyed any incentive the suppliers had to innovate or improve.  Continuous improvement on the part of a supplier was immediately converted to cost reduction for GM.

So a supply chain picture emerges of suppliers beaten like whipped pups over cost upstream, a bloated fixed cost pig of a dealer base downstream, and the GM accounting department ( and training ground for just about all senior management) sitting squarely in the middle. It is patently obvious that GM didn't care about the total cost, so long as it wasn't their cost.

As the dominant force in the supply chain, Toyota, with their legendary supplier partnership focus and much smaller dealer base optimized the whole of the supply chain.  GM, on the other hand, saw the lean lessons from Toyota as applicable to themselves only, and never saw the whole.

From the eyes - and wallet - of the customer, the corporate borderlines between supplier and manufacturer, and manufacturer and dealer, and dealer to customer, are distinctions without differences.  The price the customer pays is largely a function of the total cost, regardless of which entity in the chain incurred the cost.

A worse train wreck than the cost issue is quality.  In reading over the National Automobile Dealer Association report for 2007, I was surprised to learn that the average dealer loses money on a new car sale, but makes a great deal of money selling parts and service.  Maybe you already knew that.  I am sure that this is true for GM dealers much more than for Honda and Toyota dealers simply because the smaller dealer base in the Japanese supply chains sells so many more cars per dealer - so much less fixed cost per car sold.

By deploying such an obese dealer network, GM has put the dealers in the service business - with the unintended consequence of making defects the dealer's best friend.  Couple that with a 'low cost is all that matters' mentality hammered into the suppliers and it should come as little surprise that GM has been perceived as a worse value than Toyota and Honda for as long as the Japanese have been operating in the US.

Buy a GM car and you will be paying more for dealer advertising than you will for the labor cost at GM, but dealer advertising was not GM's cost and, hence, not their problem, so their own employees have been the singular focus of their cost problem.

The dealer base and dealer cost is 3 times greater at GM than Toyota - and all of those GM brands are certainly the biggest driver.  A different dealer for each brand, in spite of the fact that the products under each of those brands has become more and more the same over time.  The Toyota System originators advocated asking why 5 times to get to the heart of things, so ask why all the brands 4 more times and you will get so far out into marketing theory la-la land you might never find your way back to reality.

So the bigger why is why only axe 1 brand - Pontiac - and why only axe 2,600 dealers when it will take 4,000 dealers less to operate at the Toyota/Honda benchmark?

And what does this say about Ford?  They have the worst dealer structure of all and they cannot blame it on the proliferation of brands.  At Boeing, Alan Mulalley built a reputation for driving lean, as the factory focused leanies understand it, but he also turned Boeing into a world class "outsourcing - cheap supplier - China price" outfit.  And Boeing got themselves into a world of trouble with the DOD for their shady sales and marketing strategies.  So the evidence that Ford really understand the entire value stream as it looks and feels to the final customer is not there yet.

Finally, GM's loss - tragedy, in fact - is your company's gain if you can take this and look at the entire value chain in which you operate, and honestly assess how it plays out in the eyes of your final customers.  Do you manage for the optimization of the whole, or are you like GM, grabbing your own and letting the rest of the players in the chain, and the final customers, fend for themselves?

Comments

[Mark Graban]

What's with the need for central planning in regards to dealerships, either from Detroit or DC?

If these dealers can stay in business, why not let them? If they fail and go bankrupt, so be it, but why force them out of business?

[Georjina]

Mercedes Benz pulled the same brain dead act on their dealers last year - turning them into 'parts and labor' gyp-joints.

It has been kept reasonably quiet that they did this, but question a number of European auto mechanics and smaller specialty auto service businesses across the US, you'll find they can no longer get the parts they need unless the customer pays more by purchasing 'dealer only' parts.

Too bad they haven't learned from the meltdown in Detroit.

[Bill Waddell]

Mark,

I would agree with you if these were simply arms length businesses operating on their own. But a car dealership is a far cry from a typical mom and pop corner store doing business on their own hook, at their own risk.

These guys are tightly bound, tightly limited and tightly controlled by the manufacturer. Over the years the dealers have been the dumping grounds for excess production, allowing the manufacturers to over-produce and create artificial profits; they are often on land owned by the manufacturer paying hefty rents; and compelled to be an extension of the manufacturer's financing arm.

They are a division of the manufacturer for all practical purposes, except they keep a seperate set of books, and that opens the door to all sorts of destructive practices.

Making the manufacturers shed a big chunk of their dealer base is a lot like telling an alchoholic uncle he has to empty out his liquor cabinet.

The bigger problem, as I pointed out in the post, is that by keeping too many dealers active in the face of declining volumes, they have created an environment in which the dealers cannot make a profit selling cars (and most don't). Instead, the dealers are pushing repairs, services and parts that are often unneeded - or at least excessive. This practice is an absurd abuse of the customers.

I do not support the government taking charge of this or any other aspect of the auto business. I simply pointed out that the dealer reduction was long overdue, and that all 3 Detroit automakers ought to do more of it.

[Kevin Carson]

GM's treatment of its suppliers is pretty much typical of how MBAs treat the production side of things everywhere. I work in hospitals myself, and every place I've ever worked, the management approach to "cost cutting" was the same: gut human capital, strip assets, and hollow out long-term productive capability in order to massage the quarterly numbers and massage their own bonuses. An MBA would break up every stick of furniture in his house and throw it in the furnace, and brag about how much he cut this month's heating bill. Only semi-tongue-in-cheek, I'm beginning to suspect we need an American Pol Pot to take out everyone who wears a necktie to work or sits behind a desk.