Thursday, May 17, 2012

Terms & Conditions Redux

In May 2009, Paul Gurizzian and Gene Metheny wrote a Spare Parts blog discussing the state of the industry in regards to Terms and Conditions. They identified three classifications of Terms & Conditions:
  • Traditional Terms – an approach from the past, but still being used at roughly half of OEMs (in May 2009);
  • Incentive Terms – an approach of the present and being used at roughly the other half of OEMs (in May 2009); and
  • Performance Terms – an approach for the future that is being used by a few OEMs.
Performance Terms are effective because they reward dealers for directly achieving definitive corporate objectives (think growth) and end-customer service (think CSI). In other words, they focus on results rather than inputs. But, implementing these is not without challenges. There are hard requirements, like meaningful and robust metrics calculated from accurate and manageable data. And, Paul and Gene identified other “soft” requirements, like dealer readiness for performance-based payouts and OEM commitment to sustain their anticipated change management.

But there’s more to it than that – Performance Terms also help move dealers toward aligning their operations more effectively with our higher velocity supply chains. Traditional Terms are great at promoting behavior to support the supply chains of yesteryear, but we’ve changed and need our dealers to evolve to fully act as the partners operating our supply chain terminus. If we don’t, the best laid network simply won’t work because of a misaligned tier.

Timeout: About a year ago, and almost two years after that blog was written, Carlisle met with the parts director of a large heavy truck dealership group in the southeast. He told us that his current struggle was finding ways to fairly redesign the compensation structure and management of his team of outside parts salespeople: “My team’s fleet sales can’t just be an annuity payment. They need to be paid for growing the bottom line. I can’t afford to pay them to just show up.”

Maybe dealers are ready for this kind of treatment, too

Fast forward to the 2012 NAPB and we find that OEMs are refining Performance Terms and even more are implementing them. After having largely survived the automotive industry’s equivalent of Europe’s current debt crisis, all OEMs are now getting serious about ridding themselves of dealer “entitlements,” the 21st century’s newest dirty word. A quick summary:

  • An Agricultural Equipment OEM has a renewed focus on part sales growth, and took the plunge from Incentive to Performance Terms by directly compensating for overall volume and growth, and also mandating more efficient supply chain operations with required monthly returns (no longer annual) and mandating daily stock orders. What did they find?
    • “Dealers like the improved delivery times.”
    • “Returns satisfaction went up significantly.”
    • “As a company, we’re OK spending more money on discounts that get us more growth.”
    • “There wasn’t a lot of pushback from dealers.”
  • A domestic auto OEM wants dealers to provide customers with better part availability, so they overhauled their terms and conditions to directly pay based on the quality of dealer parts inventory – do they have the right parts to promote growth? What did they find?
    • Dealers report higher fill rates and lower inventory.
    • As an enterprise, they are one step closer in the evolution of the dealer parts sales manager.
  • Another domestic auto OEM identified dealer parts purchase loyalty as a major opportunity and tweaked their industry-leading Performance Terms to require higher parts purchase loyalty from dealers. What did they find?
    • Parts purchase loyalty improved about 1-2 points.
    • There wasn’t increased incentive spend despite improved retail sales.
    • “We collected and incorporated dealer feedback for how to measure and reward ‘good’ behavior.”
Bottom line: Common questions about performance terms reflect a real doubt that dealers are ready to be paid for performance. In reality there is strong evidence that dealers want to be rewarded for results. The showcased OEMs at NAPB all shared stories of strong dealer reception and performance improvements. Additionally, some of the largest dealers are implementing this approach within their organizations to drive improvements and better manage their businesses. We shouldn’t let our fear of change, or presumed dealer resistance, prevent us from evolving our supply chains and operations.

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