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Could Toyota Win By Losing?

Posted by lowellyarusso on March 18, 2010

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?


2 Responses to “Could Toyota Win By Losing?”

  1. […] by lowellyarusso on April 15, 2010 In a recent post, I commented on the possibility that Toyota could “win by losing”.  The point was that […]

  2. […] a recent post, I commented on the possibility that Toyota could “win by losing”.  The point was that […]

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