Time to look at things differently

Distribution cost is generally viewed as being around one third of the list price of a car, and it is a proportion that has been fairly stable over many years, even decades.  It must be said that using the list price as the divisor is in itself misleading when average revenue per unit falls well short of list, but that is not a new problem.  The stability is still remarkable when you consider how the real cost of purchased parts, manufacturing or engineering has decreased.  I say that, recognising that the actual powertrain cost or engineering budget may have increased, but it is clear that we get more for that spend – higher performing engines (horsepower, emissions and fuel consumption), and safer, higher quality cars with richer functionality.  However, I struggle to make the same argument for distribution – do customers get more for the same spend, or is it just an area that has proven resilient to any effort to cut costs or at least add more value?

There are broadly three elements to distribution cost – those related to physically transporting and storing cars, and the financing costs during that process; the operating costs of the wholesale and retail processes i.e. national sales companies and dealers; and the marketing and promotional costs to attract buyers.  Behind these operating costs sit some fixed and working capital investments, in particular the value of inventory and the physical buildings that dealers occupy.  Some of the costs and investments are linked – variable marketing spend is biased towards models where there is an excess of supply over demand, so if the balance is corrected on the supply side, physical distribution and variable marketing costs are reduced, as is the inventory working capital.

If the industry wants to follow the path of engineering, purchasing and manufacturing by improving the effectiveness of the distribution element of the value chain, we need to get back to some pretty fundamental questions.  What is the price of the car?  What is real demand?  Is there economic value in supplying ahead of demand?  How much of the National Sales Company cost is adding value as opposed to fixing self-inflicted problems?  Similarly, how much of the dealer cost adds value from a customer perspective?  Typically these fundamental questions are rarely if ever asked, because they cross boundaries within and beyond the sales and marketing function.  OEMs do not ask the fundamental questions they need to address, and instead sub-optimise within the different silos of responsibility.

Such a process of serial sub-optimisation will not yield the transformation that is required.  In some OEMs we see leaders at the HQ and sometimes national level who recognise the need for a broader reinvention of processes and fundamental questioning of why things are done in a particular way.  At the HQ level, different functions can be brought together in a genuine strategic review.  At national level, influence is less, but at least the point can be made that traditional market share and volume KPIs may not be the most important drivers of good business.  They may instead drive behaviours that destroy brand value in the long term and damage the economic interests of dealers who they describe as partners.

I believe that in three years’ time we will see a gap open up  between those OEMs who have shown leadership at the top level and inverted the thinking from being a product company that has routes to market to being a customer-driven company that offers the best solutions to their needs in the most effective way.  The basic buildings blocks will be very similar, but the operating philosophy and processes will be very different, as will the results.