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Tuesday, June 2, 2009

The "Throughput" Myth!

David Ruggles
Much has been written and spoken by the administration and in the media about the bankrupt Chrysler and GM Dealers lack of “throughput” as if it is a big drag on Manufacturer viability. This is used to justify the rejection of “deficient” and “extraneous” Dealers. It was pointed out in the Wall Street Journal recently that Toyota Dealers average 1613 new units per year while Chevrolet averages 643 and Dodge 408. The piece used the word “disastrous” to describe Buick Dealers’ 102 unit per year average, as if “throughput” is a settled issue as a negative. It is common knowledge that the administration’s automotive “task force” views “throughput” as a critical element to Chrysler and GM’s future profitability and is using Toyota as their benchmark.
In truth, new vehicle “throughput” has little to do with either Dealer or OEM profitability. For Dealers profitability has everything to do with the ratio of overhead to overall sales, which includes pre-owned, service, parts, etc. Dealers who have been committed to higher overhead levels are desperate to increase new vehicle “throughput” just to break even. Dealers who have been able to keep their overhead under control are less vulnerable to the vagaries of the overall automotive market and to the fact that Manufacturer offerings run hot and cold. Dealers who have learned to maximize the results of their other profit centers are also less vulnerable. In my own experience I ran the 2nd most profitable Chrysler dealership in the Chicago zone in the early eighties. We never sold as many as 100 units in a month. We were making $50 K a month in 1982 dollars during the peak of the Chrysler bailout crisis of that era. Chrysler had not succeeded in getting us to move into a higher overhead facility and otherwise boost our overhead. The profit leader was a large fleet dealer that had to sell thousands of units a year to beat our profit numbers. During that same era, Long Chevrolet, a Dealership that still holds the record for yearly new vehicle “throughput,” was shuttered and bankrupt. And for Manufacturers, each Dealer is a profit center, not an expense.
Toyota, with their high “throughput,” has one of the lowest J.D. Power “SSI” figures of any Manufacturer’s Dealers. “SSI” is Sales Satisfaction Index. Toyota’s high “throughput” must contribute to the fact that their customers are highly dissatisfied with their purchase experience even though they love their Toyota vehicles. Toyota’s sales numbers have tumbled along with the rest of the industry in recent months. Using Toyota as a model may not be the most intelligent benchmark for the “task force” to use as they have posted record losses recently.
It is widely understood within Toyota, and within the industry, that one big reason for the lack of success of Toyota’s superb new truck, the Tundra, is their lack of Dealer coverage. Adding Toyota Dealers will tend to lower each one’s “throughput.” It has been proven that truck owners, who tend to be loyal to their brand anyway, prefer to drive say 30 miles to their nearest Ford, Chevrolet, or Dodge Dealer than drive over a hundred miles to a Toyota store. Further, court documents in Chrysler’s bankruptcy included comments by Jim Press, ex Toyota exec, which indicate he is aware that shedding Dealers is counterproductive to Chrysler’s profitability. If he’s right, lowering the Dealer count to increase “throughput” is counter productive.
According to Joe Eberhardt, Chrysler’s senior vice president for sales and marketing, when a Manufacturer’s loses a Dealer, OEM costs stay the same and–at least in the short term–it loses that Dealer’s new vehicle and parts sales. “There’s no immediate payback,” he stated.
Arbitrarily stating that high “throughput” is an essential element to the viability of Chrysler and GM may sound good to those who think the “Factory” owns all of its’ Dealerships, but those in the know ain’t buying it. If the “task force” actually believes this, and they are in charge of fixing the two ailing automakers, we’re all in trouble! In the meantime, Ford and other competitors are gloating and making absolutely no moves to raise their Dealer’s “throughput” by reducing their Dealer count. I suspect there will be immediate moves by GM and Chrysler’s competitors to pick up some additional market representation by forming relationships with “rejected” Dealers and by securing abandoned GM and Chrysler facilities.