Rethinking what a factory produces…

We have just finished our Autumn Meeting for members of the ICDP European Research Programme.  It seemed to go well with a lot of interaction between the delegates both during the formal sessions and over dinner and drinks in the bar.  The meetings force us to pause the daily routine and the reactions from members and discussions sometimes prompt new thoughts and ideas.  That was the case this time, and the question that came into my mind was a fairly fundamental one – albeit one that you may consider has an obvious answer – what is the output of a car factory?

Coming from a manufacturing background, I thought I had that one nailed.  Car factories produce lots of nice shiny new cars – often at rates of one a minute, nowadays generally of a uniformly high quality and all destined for soon-to-be-happy customers around the world.  The terminology of manufacturing even reflects that ‘end of the process’ status.  Cars are ‘passed to sales’ when they come off the line – job done, invoice raised, let’s go and build another one.  Our presentations in the meeting across a range of topics made me think a little differently about that very obvious question, and the implications raise fairly fundamental questions about the output and how you optimise it.

The automotive industry business model is actually a fairly complex one both at the manufacturer and dealer level.  Despite the spotlight always being on new car sales, that is not how manufacturers or dealers make their money.  Aftersales (parts for manufacturer and dealer, labour also for the dealer) and vehicle financing are actually the biggest drivers of profitability for both in most markets.  Used cars – if well managed – should be a major part of dealer profits (and got its own slot in the meeting with a great contribution from Indicata pointing out the billions lost if it is not well managed).  But in order to have something that can be resold as a used car or which will turn up for repair and maintenance periodically, we need a car.  Depending on how that car was originally sold when new, and to whom, its value to the manufacturer and dealer network can vary widely over the rest of the lifecycle.

Reflecting on that, the output from a car factory is therefore just a work in progress.  It has some profit potential as a new car, but much higher further profit as a used car at various points where it changes hands later in life, and on the multiple occasions when it will visit a repairer, and again ultimately when it reaches the end of its life and goes through a process which could result in it become a cubic metre of low value scrap or a set of potentially valuable components that can be returned back into the value chain.  So the factory produces a new car, several used cars, perhaps fifteen or twenty service operations, a couple crash repair jobs and some parts for reuse or remanufacturing every minute.  Mighty impressive, but not actually the way that we manage the process.

Once the car has been produced, manufacturers actually plan around the new car sales channels and their respective profitability.  That applies in terms of the allocation to markets where the new car profitability will be influenced by local market conditions, local taxes, exchange rates and transportation costs amongst other factors.  In market, it also applies to what gets sold through the dealer network (whether by agency or franchise doesn’t fundamentally matter), what goes into regular fleet business and what might be pushed through low margin channels like brokers, daily rental and self-registrations.  This brings us to another fundamental question with a seemingly obvious answer – what’s the best sales channel?

The obvious answer – and one that worked for Tesla for a few years, still does for Dacia in many markets, is to sell through the retail channel if you possibly can.  Low or no discounts means highest retained margin – if we could only manage 100% retail then we would all be rich.  But if we step back a minute, let’s just assume that all these retail buyers have money in the bank, and plan to keep the car for an extended period, perhaps passing it down through the family as it ages.  From a manufacturer and dealer point of view this is actually a disaster.  I will never see that car back as a used car, I didn’t even get the opportunity to make money on the finance as a new car, and at some point (typically 3-4 years in most markets), the owner will decide to start using an independent repairer and they will decide to use non-OE parts.  The total profit generated by that initial unit of production is a fraction of what it might have been.

Now think about a car sold through what with conventional thinking we would consider a poor quality channel, to be avoided as far as we possibly can, such as daily rental.  If I sell that car with a buyback clause, then I might offer a deep discount at the front end, but it will come back after a few months and become a ‘nearly new’ used car.  As a manufacturer, I will remarket that through my dealer network, who will sell it with finance (hopefully a lease) and a service plan, and in three years’ time it will come back again and I will repeat the process.  With manufacturer approved used car schemes now extending their limits out to cars up to ten years’ old, I could have three bites at that cherry.  Both manufacturer and dealer profit over a full decade from that initial decision to sell through the daily rental channel.

In a blog, I am not going to spell out all the options in between these extremes, but it is clear that the lifetime profits of both manufacturer and dealer are highly dependent on the original channel choice.  It suggests that sales planning meetings should include input from both the used car and aftersales teams, making decisions based on lifetime value, not immediate margin on the new car sale.  They are influencing how the value creation process should continue, not how it is to be concluded.

(Footnote: And turning to another of our research presentations on sustainability, let’s not get into how those sales channel choices might also be influenced by the lifetime environmental impact…  Far too much for a blog, but definitely worth a conversation if you’re interested.)