Friday, June 14, 2013

Terms and Conditions Design Considerations

If you manage the supply chain spend at your company, then you definitely know this piece of paper. You know that it has a significant impact on both your parts revenue and your cost structure. It defines how you do business with your customers and what you will pay to provide a certain level of service. In fact, it is probably one of the most important documents on your desk. If you’ve guessed that this document is your “Terms and Conditions” or “Ts&Cs”, then you are absolutely correct. (If you answered “My pay stub”— that too, arguably, does help drive revenue and provide customer satisfaction.)

At Carlisle, we have been collecting, studying and designing OEM Ts&Cs for a long time. We’ve seen some major trends evolve, and also learned what works and what does not. If you have decided that it’s time to revise your Ts&Cs for the better, here are some things to keep in mind:
  1. Define what objectives or behaviors you are trying to achieve with Ts&Cs:
  2. OEMs have historically struggled between accomplishing two goals: keeping Ts&Cs simple and introducing elements that will encourage their dealers to adapt certain desired
    behaviors. Over the last few years, the trend has shifted from the simple and traditional discount-based philosophy to the more complex performance-based philosophy. Instead of simply offering discounts for buying more parts, the incentives are now tied to metrics that reinforce positive dealer behavior, such as Fixed Right First Time, purchase loyalty, off-the-shelf fill, lower obsolescence, attaining brand standards, etc.

    Performance-based terms can add complexity, but their value usually justifies the effort it takes to create them. OEMs have found ways to simplify metrics so dealers can easily understand them. The rule of thumb when deciding which metrics to incorporate is simple – “If you cannot accurately measure it, you cannot use it.”

  3. Do not underestimate or oversimplify the task:
  4. Evaluating changes to Ts&Cs is not an easy task. It can take several months. And it is complex… really complex. Changing even one lever can have implications across the entire supply chain. For instance, let’s say the OEM decides to change emergency order cut-off times.
    This may have an impact on the OEM’s warehouse labor, on transportation cut-off /delivery times and transport costs; it also may have implications for the dealer and the end-customer, which ultimately impacts the OEM’s parts revenues. If the OEM decides to charge for the additional warehouse or transport costs, this may impact dealer profitability, or it may impact end-customer satisfaction if the dealer decides to pass on the cost to the customer. So, what other lever can the OEM pull to mitigate this impact, and what financial and service ripples can this second lever have? These questions cannot be accurately answered without mapping out the relationships for all the factors and developing a robust and sophisticated simulation tool. You can do back-of-the-envelope calculations for one factor, but imagine doing this for a combination of factors. Adding to the complexity is the involvement of sales & marketing, warehousing, transportation and other OEM departments to support these decisions. Making T&C changes without a robust tool to simulate the financial and service impact is nothing short of hara-kiri!

  5. Evaluate scenarios that are win-win strategies:
  6. This step is just as difficult as building a Ts&Cs model. Could you convince your dealers
    to accept a strategy that puts less money in their pockets? Or convince your management to spend more money without any incremental benefit? Scenarios where one or both players lose money are not good strategies. You have to look for the most effective Ts&Cs levers in order to grow the total system profit for you and your dealers. 
  7. Keep your dealers informed and involved:
  8. Imagine the chaos if your dealers do not hear about the planned changes, or their possible impact, until you suddenly
    announce them. Usually, once the OEMs have vetted a strategy and defined their direction, they review these options with their Dealer Council members. The key to these reviews is to be transparent, and share why the proposed changes are important. And the most effective way to gain consensus is to demonstrate to each dealer, via financial statements, how the new Ts&Cs impact their bottom line compared to the existing ones. We’ve also learned from OEMs that if multiple changes are planned, it is better to announce them all at once, even if the changes won’t be rolled out at the same time. Dealers are generally more accepting of changes presented as a total package, instead of learning about them piecemeal down the road.

Bottom line: Designing effective Ts&Cs is a time consuming process that needs to be backed up by the organization, as well as your dealers. However, if done right it can change dealer behavior and drive significantly improved results.

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