Tag Archives: Toyota

Does it matter if a 600 lb gorilla is Chinese or American?

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In a recent post, I commented on the possibility that Toyota could “win by losing”.  The point was that Toyota’s efforts to rekindle sales through rebates, financing deals, and other inducements could lead to long term problems for, in particular, Chrysler and GM which are trying to match those promotions.  By so doing, the cash-poor American manufacturers could easily recreate many of the situations that led to their recent bankruptcy filings.

Now, we see that the U.S. government is talking about imposing fines on Toyota that would be, as reported in the April 6 Chicago Tribune, “…by far the largest civil penalty U.S. auto safety regulators have levied against an automaker.”  From a Strategic Sourcing and Supply Chain perspective, this raises a number of issues we all should be tracking. <p>

First, if, indeed, Chrysler and GM are at risk in trying to match Toyota’s use of deeper pockets to stimulate sales, one solution for their owners, the U.S. Government, is to reduce the depth of Toyota’s pockets.  A $16.4 million fine may not seem like much by itself, especially for a company that lost $10 billion over the last two years.  In this case, the point is largely about the symbolism.  For the rest of us, it raises the caution that, as the government continues to transform its relationship with the nation’s economy, there is a new gorilla in the mix and it is a lot bigger than the proverbial 600 pounder of which we usually speak. Let’s look at a few more examples. <p>

I also recently commented on the risk posed by China’s central government and its ability and willingness to manipulate the Chinese economy. Who would have thought that we need to add that risk to the mix when looking at domestic suppliers?  Not sure that’s right?  I’m not wholly convinced either but…who’s to say.  Given the push for the government to take an ever bigger role in a seemingly endless list of industries (banking, hedge funds, automobiles, real estate, etc.) there is a real risk that your assumptions about the US economy need to be reevaluated.  Is this really a free market anymore?  Or, will we have to constantly be on the alert for the possibility that people seeking reelection will replace the rational man of classical economic theory? <p>

One other thought before I close.  Who, other than the government, could own the lion’s share of two of the three major domestic players in an industry and NOT have to justify its holdings to the Department of Justice’s Anti-Trust Division?  And, who among the watchdogs will be willing to bite it’s master should the government undertake actions (like hiking import duties on cars) “in restraint of trade”?  The bottom line: Keep an eye on developments in this arena.  There may be a huge, new category of risk to help keep you focused as you work with you Supply Chain partners. <p>

To answer the question I posed in the title, if a 600 lb gorilla sits on you, I don’t think you’ll worry about what country it’s from.

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Could Toyota Win By Losing?

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There’s an old supply chain joke about the entrepreneur who went to his bank with a “Great Business Model”.  The idea was to buy pencils for five cents and sell them for three. When the banker commented that the margin on that plan was skimpy at best, the entrepreneur replied, “I know. But I figure I’ll make it up on volume.”

In an effort to revitalize its sales, Toyota has, if you haven’t noticed, taken some unprecedented moves. By offering zero percent financing, deep discounts on prime models, and extremely attractive leases, the automaker saw a significant sales rebound in recent weeks. More importantly, Toyota’s actions are getting a reaction from, in particular, the U.S. Big Three. Ford, GM, and Chrysler are scrambling to match Toyota’s application of end-of-year sales gimmicks to the current mix of incentives.

As reported in the press, there is a growing concern about the impact of all these deals on the bottom line of, in particular, GM and Chrysler.  The issue is that the drive for sales at any cost was considered to be a major contributor to the profit woes that led them into bankruptcy.  Analysts are now concerned that, if Toyota continues to pull their American competitors into a price war, the fragile recovery they have experienced may be in jeopardy

It should seem obvious (unless you’re hoping to make it up on volume) that a company can’t continue to sell products or services for less than the cost to deliver them.  Applying the same logic to mid-year sales that seems to make sense at the end of the model run is a potential recipe for disaster  That raises some important supply chain issues for everyone trying to recover from 2009 economic woes.  In particular, it points to the importance of at least understanding total cost and target costing concepts throughout the supply chain. 

Why are total / target costing so critical?  Whether or not the approach is used as part of the Strategic Sourcing effort is really not the point. The critical issue is the extent to which the entire supply chain understands the philosophy of total costing and target costing and uses it to analyze proposed strategies.  Simply put, if you know that your price point is X and your costs are Y, you have to be sure that X is bigger.  And, to make the equation work, X has to include all the revenue sources and Y has to include ALL your costs. 

How does that work for the Big Three?  At the risk of oversimplifying, I wonder how deeply the car makers have analyzed the cost of, for example, a 0% loan.  First, there are the costs of processing the loan in the first place, a component of the “Y” for them.  While not significant on a deal by deal basis, it will add up over the, hopefully, thousands of deals they will process.  More importantly, how does the loss of interest impact the X  in their target cost equation?  Given that, in many cases, the financing is where the profits traditionally accrue, this approach must have an impact on the bottom line.  The same can be said for lease rates and rebates.  And that’s why the analysts are concerned.

What does this tell the rest of us?  Be wary of the pencil pushers in the supply chain.  When proposals are made that increase the cost of the pencil to five cents or reduce the income to three cents, there is no way to “make it up on volume”.  The time to address the issue is early on in the decision process.  That means that total cost HAS to be a way of doing business, not a minor part of the sourcing process.  Embedding a “Total Cost / Target Cost” philosophy is one of the most important tasks for any Strategic Sourcing organization!

How close is your supply chain to adopting a total cost / target cost philosophy / way of doing business?  Have you seen any examples of price cutting that seemingly ignores the cost to deliver?  What other thoughts do you have?

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