A few months ago I had a post on stair-step incentives. These are incentive schemes that car manufacturers offer dealers that essentially pay rebates on cars that have been sold once sales cross a specified threshold. In that post, I noted that these schemes had the potential to skew competition in local markets:
If you and I own competing dealerships across town, I have a serious leg up on you if I am the first to reach a threshold. I can price more competitively since I know that I am guaranteed to get a rebate while you are still striving to make the threshold. Note this makes everything all that more sensitive to how individual dealer thresholds are set. If mine were skewed low while yours were too high, it’s game over and I eat your lunch.
Obviously, from a dealer’s perspective, this is an issue. Dealers don’t necessarily know how car makers set their targets. They, for example, may be basing targets on national trends that may not apply locally. Further dealers may be facing challenges that the automakers don’t know (e.g., a top sales person just left). Even if a dealer knows how his target was set, he may not know what the target is for a neighboring dealer of the same brand or what is happening with a competing brand. Hence, he could be blind sided when a competing dealer reaches her threshold and starts pricing very aggressively. Is there an easy answer to this dealer’s conundrum?
Enter the New Hampshire state legislature. (more…)
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The early years of my research career were largely focused on supply chain contracting with some focus on the auto industry. I am consequently a sucker for any good story about how automakers use their terms of trade to bend dealers to their will. Thus I read a recent Automotive News article on stair-step incentives with interest (GM stair-step aims to juice Chevy sales, Aug 19). Stair-step programs are dealer-based incentives based around quotas. A car manufacturer may offer a dealer three targets, say, 50, 100 and 125 units. If the dealer sells 50 cars in a specified time period (often a month), he will get, say, $500 per car rebated back to him. If he gets to 100 units, he would get something like $1,000 back per unit and then a bigger number if he goes over 125. So stair-step schemes offer bigger and bigger rewards as sales go up. The actual mechanics of plans can differ. For example, the increased rebate from crossing higher and higher levels may go back to early sales. For example, crossing from 124 to 125 in my example, may mean getting the top reward on every car sold that month. The other complication is what actually counts toward the target. Stair-steps may apply only to some models or to a wide set of models. The article notes that Chevy’s current program is exceptionally broad.
Sales of 2014 and 2013 Impalas, Camaros, Cruzes and Sonics are eligible under a GM stair-step program for August. The program pays dealers escalating bonuses as they hit factory-set sales thresholds. Sales of 2013 Malibus also are included; the 2014 model of the mid-sized sedan goes on sale this fall. …
Dealers say it’s unusual for GM to include so many nameplates in one stair-step program. Some also were surprised that the incentive includes the redesigned 2014 Impala, which has won critical praise since its May debut, including being rated the top sedan by Consumer Reports.
So why are stair-step programs interesting?
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If you look at what it costs an automaker to build a vehicle, purchased components are going to represent a big, big chunk. How an automaker deals with its suppliers and how it chooses just who is going to make what is then critical to its overall success. Automotive News has a pair of stories that highlight how two carmakers are taking somewhat different approaches to managing purchasing.
First up is Chrysler which is opting for a kinder, gentler approach to sourcing. Specifically, it is floating the idea of assigning some parts without putting them out to bid (Chrysler pilots no-bid contracts on new minivan, Aug 5). Essentially, Chrysler is willing to guarantee that a supplier gets the work if it is willing to share a significant amount of financial data.
Chrysler Group is using its next minivan to pilot a collaborative, no-bid purchasing system that guarantees favored suppliers a profit but requires them to open up their financial books. …
The presourcing arrangements between an automaker and supplier are designed to allow both to cut engineering costs, build trust and improve long-term planning. They are common among suppliers at Honda Motor Co. and Toyota Motor Corp., but haven’t caught on among domestic suppliers. …
Long-term, no-bid agreements give suppliers more predictable revenue, allowing them to invest with reduced risk. And suppliers say they provide their best technology to automakers that are loyal to them and offer the best profit opportunities.
For automakers, the no-bid agreements help ensure an uninterrupted flow of parts and access to a supplier’s best technology.
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A dollar today is worth more than a dollar tomorrow so it is not surprising that firms would prefer to defer paying suppliers for as long as possible. As the Wall Street Journal tells it, many large firms like Procter & Gamble and DuPont are working to redefine “as long as possible” when it comes accounts payable (P&G, Big Companies Pinch Suppliers on Payments, Apr 16).
What began as a way to preserve cash when markets dried up a few years ago has become a means of freeing up money to fund expansions, buy back stock and support dividend payouts at a time of lackluster sales growth and shrinking profit margins.
P&G is actually late to this game. It currently pays its bills on average within 45 days, faster than the 60 to 100 days that other consumer products makers and large companies in other industries generally take, according to industry experts. The company is looking to move its payment terms to 75 days and recently started negotiations with suppliers, people familiar with the matter said.
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Steven Colbert once set out the following rules for buying electronic gadgets:
- It must cost next to nothing.
- I must never learn why it costs next to nothing.
That gets us to a recent article with the very un-Wall Street Journal headline of “Measuring the Human Cost of an iPad Made in China” (Jun 3). The article focuses on Hon Hai Precision Industry, the Taiwanese electronics manufacturer better known by its trade name Foxconn. Foxconn makes gadgets and gizmos for a wide range of electronics brands and has gotten attention recently for a factory explosion that killed several workers. This after having several workers commit suicide in the past year or so. (See The Global Post‘s series on Silicon Sweatshops.)
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So tablets are the hottest thing in tech right now. Apple has just announced the second coming of the iPad while every other tech firm is trying to get in on the game. The recurring theme in reviews of these tables is that in comparison to the iPad, they seem pricey. It’s a weird world when Apple seems like a bargain.
One possibility is that competitors simply put more into their tablets. A recent Wall Street Journal article reported on a tear down comparing the Motorola Xoom with the most comparable iPad (‘Xooming’ In: Researchers Say Cameras, Display Add to Costs of Motorola Xoom, Mar 1). Here are the findings in graphical form:
And here’s a discussion of what they mean:
So the Xoom (by the way, doesn’t Xoom sound a lot like Zune? who thought that was a good idea?) is a little more expensive in terms of components. As the Journal notes, Motorola claims not to be aiming for the current iPad but the new one. Thus this gap may close some when Apple adds cameras and faster processors. But Apple still plans to charge just under $500 for its base model while the Xoom is basically $800. What gives?
An article on TechRepublic (The one big reason why iPad rivals can’t compete on price, Feb 18) provides an interesting answer: The Apple Store. (more…)
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An interesting story from the Wall Street Journal (Tight Supplies, Tight Partners, Jan 9). Apparently it is not as easy to get your hands on good trash as it use to be. That may not sound line a bad thing — unless, of course, your business depends on recycling that trash into usable products. That is the challenge facing SCA, a Stockholm-based firm, that in the US sells hand towels, toilet paper and napkins made of recycled paper to institutions like schools and restaurants. (Their brand in the US is Tork.) The company is caught in a double whammy. On the one hand, less waste is being produced. On the other, there is increasing competition for the waste stream that is being produced from developing markets.
SCA has taken on this challenge by working more closely with recycling centers. SCA does not own the local facilities that take in collected cardboard and paper. It can, however, offer financing and advice in order to make recycling centers more efficient in processing the paper that comes back.
The company provides the recycling centers with financial backing to buy upgraded equipment and offers consultation on operations and marketing. In return, the recycling centers sell recovered fiber exclusively to SCA. (The recycling centers may sell varieties of recovered paper that SCA doesn’t need to other manufacturers.)
Last fall, SCA increased its investment in a Chicago recycling plant so that it could bring in additional equipment that compresses the paper into bales. SCA is putting together a “multicity arrangement” with other recycling centers, declining to specify where. “We’re organically growing existing partnerships and adding new ones,” says David Knight, director of fiber procurement for SCA’s Americas division, which contributes $2.1 billion of the Stockholm-based parent’s annual sales.
For SCA, close ties with recycling-center owners has meant it can encourage investment in sophisticated equipment upgrades that enable recyclers to process more “dirty” paper, or materials that are more difficult to recycle such as books, envelopes with plastic windows and paper with heavy graphics.
“With supply going down, we have to go deeper and dirtier into the waste stream to get more,” says Mr. Knight. “Forming these relationships allows us to do that.”
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So here is an interesting business model that leads to a nice supply chain contracting story (from Finnish shoe firm pays lifetime royalties, Oct 12, Globe and Mail). Pomarfin, a Finnish shoemaker, was facing increased competition from cheaper firms manufacturing in Asia and was forced to look for ways to differentiate its products. It seemed to find an answer in mass customization.
Not wanting to walk away from its manufacturing roots, Pomarfin decided to compete in the emerging world of mass customization by making made-to-measure shoes for well-off men who hate shopping for shoes and want a perfect fit. Pomarfin envisioned installing a foot scanner in retail stores that sold its shoes. Clerks would scan the customer’s foot, and the image would be uploaded to a server in Pomarfin’s manufacturing plant, which would create and ship the customer a pair of shoes for his unique feet.
Pomarfin named its new made-to-order brand “LeftFoot.” Once a customer scanned his foot with a LeftFoot machine, he could reorder a custom shoe through the website, cutting out the need to visit a retail store.
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A few months ago, I wrote about how Sears Canada has been trying to strong arm its suppliers following the appreciation of the Canadian dollar. Now the Globe and Mail reports that at least one major brand is pulling out of Sears as a consequence (Chanel to quit Sears in dispute over dollar, Jul 22):
Chanel is pulling its high-profile fragrance products from Sears Canada Inc. stores amid an escalating battle over the department store retailer’s efforts to claim a share of suppliers’ savings from the strong Canadian dollar.
Sears spokesman Vincent Power confirmed Chanel will stop shipping products to the retailer, saying the retailer’s discussions with its suppliers over the value of the dollar are aimed at lowering prices for Canadian consumers.
“We feel Sears’ role is to advocate for the customer with suppliers for lower pricing,” Mr. Power said in an e-mail. “We hope suppliers will agree with our request; that may not always happen. Our goal is to engage with suppliers in meaningful discussions that result in benefits for them and our customers.”
And Chanel may not be the only vendor to go:
Other suppliers are considering halting shipments to Sears in a bid to pressure it to drop its demands. Some stopped deliveries but started again after Sears shelved the matter, sources said.
“In four or five cases, people told me they will not ship to Sears until the matter is resolved,” said David Schachter, president of the National Apparel Bureau, which represents fashion suppliers. “The anger level of people who had money deducted is certainly increasing.” …
Sears’ demands for retroactive currency payments have raised eyebrows in the industry because they’re tied to contracts that are already signed and products delivered.
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Supply chains offer an almost unlimited number of points of conflict. Unquestionably, there are opportunities for partners to jointly increase revenue or lower costs. But it is almost always easier for one party to identify ways to lower his costs at the expense of other supply chain members. Even if there are programs that increase the overall pie, there is still the question of how to split the resulting gain. As the Wall Street Journal tells it, there is currently a lot of tension in apparel supply chains as retailers demand more responsiveness from suppliers while suppliers are leery of ramping up capacity without greater commitment from retailers (Tug-of-War in Apparel World, Jul 16).
Tension is rising in the apparel industry, as retailers push garment makers for faster turnaround on smaller orders ahead of the key Christmas holiday season. The old model—where retailers placed orders six to nine months in advance and suppliers ramped up factories to produce high volumes cheaply—has been thrown out the window after a recession that left stores swamped with unsold clothes and idled factories.
To lower the risk of a fashion miss, more retailers and apparel companies are pressing their suppliers to crank out a small order quickly—allowing them to test styles in stores—and then fill re-order requests even faster, a tactic known as chasing, says Josh Green, chief executive of Panjiva, an international trade data service.
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