Toyota Dealer and Demand Fulfillment

Dealers use a number of different processes to fulfill retail customer demand. This chapter will explore the major ones; it will be subdivided into three areas: vehicle allocation, demand fulfillment options, and dealer operations.

Vehicle Allocation

At Toyota, vehicle allocation in North America is a two-step process. In the first step, the national sales company allocates vehicles to their regional areas. In the second step, the regional areas allocate these vehicles to dealers.

Regional Allocation

The regional allocation is performed monthly, about six weeks prior to the start of the production month. If the next production month is July, then the regional allocation would occur in mid-May. The purpose of the regional area allocation is to allocate the quantity of vehicles by model to each region. The quantity is calculated using a share or percentage of the total national market that each region will receive. The following are some of the factors that are used to determine each region’s share:

• Sales versus previous month and model-to-date objectives
• Regional weather conditions that can impact future sales such as floods, snowstorms, drought, etc.
• Regional economic conditions and trends that impact future sales
• Competitive strategies that may affect market share in a region and necessitate more aggressive marketing strategies

Once the volume of each model is allocated to the regional area, the region must create a vehicle order for each unit. The regional vehicle order is an input to the sales and operations planning process, which was described in Sales and Operations Planning. After the monthly order is scheduled by manufacturing, regions receive a file containing the details of each vehicle along with the tentative scheduled date. These data are used to perform the dealer allocation.

Dealer Allocation

Toyota uses three methods in the United States to allocate vehicles to dealers. The methods vary for the three Toyota brands: Toyota, Scion, and Lexus.

Toyota Brand Allocation

Dealer allocation is based on the fair share of the regional volume for each model. That apportionment is intended to be a very objective calculation based on a turn-and-earn concept. Turn-and-earn is a results-oriented methodology that rewards the dealers for increasing their sales. The goal is to ensure that all dealers are treated fairly and to avoid the perception of favorable treatment. Therefore, the initial dealer allocation is based on each dealer’s share of the regional market, as calculated based on actual sales. The allocation is performed twice each month and, unlike with the regional allocation, dealers are allocated or assigned unique vehicles with full specifications.

The vehicle specifications that the dealer is allocated are matched to two inputs that are provided by dealers. The dealers can maintain an allocation preference database that describes the type of vehicle specifications that they desire—or do not desire. We return to the example that dealers in Arizona may not want dark colors and dealers in northern cities may want cold weather kits. Dealers can also submit special orders from customers.

Once the dealers receive their allocation of vehicles, they have a few days to accept the vehicles. If there are reasons why dealers do not want some vehicles, they may turn down specific units. Those units will be placed in a supplemental pool and offered to other dealers. In the situation where there is a surplus of some models because of slow sales, the region may offer dealers a financial incentive to take these slow-selling vehicles.

After the dealers accept the vehicles, they appear in a pipeline inventory report. At this time, dealers can make changes to some of the factory specifications and also add accessories that will be installed at the marshaling yard and/or port. Now that the dealers know which vehicles are scheduled for production and approximately when they will be built, they can use information regarding these vehicles in combination with the dealer stock to fulfill demand.

Scion Brand Allocation

The method of allocating Scion is similar to the method of allocating the traditional Toyota vehicles, with one major difference. For Scion, the vehicles allocated to each dealer are held at the port until the vehicle is sold. Once the vehicle is sold, additional accessories are installed based on customer request. Those accessories can be installed at the port or at the dealer. The flexibility to add accessories after the base vehicle is built enables Toyota to market to younger buyers. Younger buyers are usually first-time buyers and tend to want to personalize their vehicle.

The model for distribution of the Scion is similar to the way Toyota distributes vehicles in Europe. In Europe the vehicles are held at a hub until the dealer receives a customer contract. Then additional accessories are installed and the vehicle is shipped to the dealer.

Lexus Brand Allocation

The primary difference between the Lexus allocation model and the other allocation models described previously is that Lexus vehicles are allocated to dealers based on a quarterly sales plan. Unlike the Toyota models that are based on actual sales to “turn-and-earn,” Lexus’s vehicle allocation is based on the forecasted sales of each dealer as a share of each region’s total sales. The allocation share is revised each quarter to adjust for market changes. The allocation process is consistent with the idea that firms can take greater risk with products that have a higher margin.

Toyota’s Order Fulfillment Process: U.S. Model

There are four options for dealers to fulfill customer demand, as outlined in Toyota’s options for demand fulfillment.

The first option is to fulfill the customer’s order from dealer stock. The salesperson will attempt to influence the customer to select a vehicle already in stock. Such an approach is preferred by the dealer because the sale can be consummated immediately, before the customer leaves the dealership. The salesperson is always concerned that once a customer leaves without the keys to the car, she will change her mind and end up buying from another dealer or a competitor. The order-to-delivery lead time for vehicles purchased from stock is usually zero to two days.

The second option for fulfillment is a dealer trade. In that case, the salesperson can access a dealer locator system to determine if the vehicle is in another dealer’s stock in a nearby city or state. Usually the distance is limited to less than 500 miles, because if the vehicle is driven more than 500 miles before it is sold, the excessive mileage may violate the warranty. This issue can be avoided by hauling the vehicle on a trailer. In most cases, the dealers actually swap vehicles, meaning that two vehicles need to be transported instead of one. This method of fulfillment will add several hundred dollars to the dealer cost, because the dealer must pay a driver as well as cover the cost of fuel to transport the vehicle. That extra cost may or may not be passed along to the customer depending on how anxious the dealer is to sell the vehicle. It also adds miles to a new car before customer possession. The order-to-delivery lead time is usually two to three days.

The third option is to locate the vehicle in the dealer’s pipeline. The pipeline consists of vehicles that have been allocated or assigned to the dealer but have not arrived at the dealer. The pipeline can be divided into three segments:

1. Vehicles produced and in transit from the plant
2. Vehicles that are either in the process of being built or for which the specifications have been frozen just prior to production
3. Vehicles scheduled for production with specifications that have not yet been frozen

If an exact match of the customer’s specifications can be located in the first two groups, then the vehicle can be reserved for the customer and should be delivered in two to three weeks.

The next choice is to locate a vehicle that is scheduled for future production and request a change in specifications. That step requires the manufacturing plant to agree to change the vehicle specification. The process is as follows:

• The dealer submits an online request to change a vehicle that has still not been produced. The change request can be a simple one-for-one change; for example, “I have a red Camry and I want a blue Camry.” The change request can also be one-to-many or many-to-one; for example, “I have a red Camry and I want either a blue or white Camry,” or, “I have a blue Camry and a black Camry and I want a silver Camry.”
• The next step is for the sales company’s computer system to analyze and determine if any of the change requests can be satisfied by simply swapping the vehicle with a dealer who has submitted a change that is the exact reverse change request. For example, if a dealer in Boston wants to exchange a blue Camry LE for a black Camry XLE and a dealer in Chicago has a black Camry XLE and wants a blue Camry LE, then the computer can simply swap the dealer assignments. If this online swap is successful, then the virtual swap is made and both dealers will be notified.
• If the above swap is not available, then the changes are sent to the manufacturing computer system that checks to ensure that the change can be made without exceeding any of the manufacturing constraints. Each assembly plant establishes a fluctuation allowance for each vehicle option, including color. Each dealer change request is systematically evaluated to make sure that none of the allowances are exceeded. If the change is accepted, the vehicle specifications are changed and the result is sent back to the dealer via the sales company. Also, the dealer will be notified if the change cannot be accepted, so the dealer can modify it or leave it in a pending status to be reprocessed the next day. Vehicles changed at the factory are usually delivered in 30 to 40 days.
• The last resort (or fourth option) is to request a build-to-order vehicle from the regional office. That step would require the region to input the special order in the next month’s order cycle. A special request order typically has a very long lead time (usually three or more months).

In addition to the order-to-delivery lead time for each of the fulfillment options as shown in Order-to-delivery time for U.S. market , it is also important to provide an accurate ETA (expected time of arrival) for the dealer to keep its customer updated. Not only should a date be provided, but the actual progress should be updated daily, similar to the way UPS tracks packages. Initially, the ETA is calculated using the estimated production build day and adding the standard transit time from the factory to the dealer. As can be seen from Order-to-delivery time for U.S.market, the longer lead time orders will result in a less accurate ETA. This calculation must take into account the standard deviation, because the transit time for each route will vary depending on many external factors. Toyota believes that it is better to underpromise and then overdeliver.

Choice versus Value Trade-off

What is a dealer’s perspective on how customers respond to Toyota’s strategy to limit the mix of vehicles produced in a market area? Steve Gates, an owner of a Toyota dealership in Kentucky, explained that most customers are repeat customers; they have owned Toyota cars previously or are familiar with other Japanese manufacturers and understand the concept that variety will be limited so that quality and value can be maintained. The remaining customers may require salesperson assistance to be guided to the increased features that accompany the limited variety, thus providing the “added value” for the cars offered. Steve Gates did not feel that limitations of variety were a deterrent. He did highlight the fact that dealers did have a voice in Toyota’s product planning and their perceptions regarding customer needs were considered when allocations were made.

The concept that Toyota offers added value is interesting, but can it be measured? How should one measure the “added value” of a Toyota? While quality is measured and controlled by suppliers and assemblers using thousands (perhaps millions) of data points among all parts, how is a consumer to measure the difference in value between a Toyota vehicle and one produced, say, by an American or Korean competitor? One way of estimating value could be to compare used car values of vehicles in the same class: how much of its value does a car retain after three, five, or seven years of use? To measure the difference, we obtained suggested used car retail values from the Kelley Blue Book (KBB), which reports the residual values for vehicles of different makes, models, and years. This value is calculated by analyzing thousands of actual transactions across the United States, producing prices for a varied set of mileage and vehicle conditions. These data are presented in Vehicle residual value chart, which shows how Honda and Toyota cars not only command a premium at initial sale but also retain their values more than other vehicles sold at comparable prices. While Honda Accord and Toyota Camry retained 85 percent and 89 percent of their values, respectively, after three years, General Motors, Ford, and Hyundai cars that were similar retained only 56 percent, 48 percent, and 65 percent of their values, respectively. The Kelley Blue Book Suggested Retail Value for these vehicles was sampled in August 2008 and is updated every two months.1

Toyota’s Order Fulfillment Process: Europe Model

One of the big differences between the order fulfillment model in Europe and in the United States is that most European dealers do not have space for dealer stock; therefore, stock is owned by Toyota or one of its distributors and is stored in a central hub. There is at least one hub in each major country. The other major difference is that the production and stock are not allocated to dealers until they are sold to customers.

Several government regulations in Europe also impact automobile operations, among which are the following:

• In Europe, various countries have different tax laws, which may skew how options are ordered. For example, if a country calculates valueadded tax based on the invoice price from the factory, then a customer may order a vehicle with very few options and contract with a dealer or private shop to install accessories.
• Laws pertaining to the registration process could also affect the delivery time. Some countries require several days to process the vehicle registration, so even if the vehicle arrives at the dealer quickly, the customer may not be able to take delivery until registration is approved.
• In the past, the Block Exemption Agreement for automobiles affected the way OEMs set up their dealer network, which resulted in there being many small dealerships (for example, Germany has as many dealers as the entire United States). That arrangement also negatively affected customers, because they ended up paying a 35 percent premium to get repairs done at the local dealership. In addition, dealerships located in premium real estate locations meant that dealer inventory space was limited. However, the recent repeal of the Block Exemption Agreement means that the European dealer networks are expected to change considerably. Already several dealerships have been consolidated, and more aggregation is expected. Manufacturers have to choose an exclusive dealer or exclusive territory. The impact is expected to decrease customer costs and increase competition.

In summary, the order fulfillment process in Europe is more complex because there are over 25 countries involved, each with different laws and policies. Europe fulfillment model illustrates the five options for fulfilling demand in Europe.

As in the U.S. market, in the European market too it is important to provide an accurate ETA. Not only should a date be provided, but the actual progress should be updated daily. For vehicles in the central hub, the ETA is calculated by adding the hub processing time to transit time from hub to dealer. If the vehicle is not yet produced, the ETA is calculated using the estimated production build day and adding the standard transit time from the factory to the dealer. As can be seen in Order-to-delivery time for European market, the longer lead time orders will result in a less accurate ETA. That calculation must take into account the standard deviation, because each route transit time will vary depending on external factors. It is better to underpromise and then overdeliver. If too much buffer is built into the estimate, however, then the customer may not be willing to wait. Order-to-delivery time for European market shows the estimated order-to-delivery time for each option.

Metrics

Metrics are an important method to monitor order fulfillment. The following are some of the key metrics:

• Sales. The total sales by model and by mix
• Daily selling rate. The sales divided by the selling days in a month
• Dealer stock. The number of units in dealer stock that have not been delivered to a customer or put into demo service
• Company stock. The number of vehicles produced that are still at the factory or in transit to the dealer
• Days supply. The number of vehicles in stock divided by the daily selling rate
• Aged stock . The number of vehicles in stock over N days (usually 90 or 120 days)
• Order-to-delivery lead time. The number of days from the time the customer orders to the day of delivery

Dealer Operations

Dealer operations are an important part of the automobile supply chain. Dealers receive vehicles from the OEM, hold them in inventory, negotiate the sale with a customer, assist in financing, take a used vehicle in trade, prepare the vehicle for delivery, and familiarize the customer with the vehicle features and operations during the handover process. In addition, the dealer provides after-sales warranty and service support.

Dealer operations include providing after-sales service and support to Toyota’s customers. Toyota’s service chain management is based on establishing strong links with its customers using a two-pronged strategy of supporting dealers and directly interacting with customers. The majority of customers are served by dealers for their after-sales service needs. Therefore, Toyota has created an efficient supply network to provide reliable supply of service parts to dealers. Toyota also trains and helps dealers in providing excellent service. In addition, Toyota is not averse to using advanced technologies, such as e-commerce and telematics, to directly interact with vehicle owners. We do not describe these systems in detail as they are somewhat tangential to the description of the main auto supply chain. Instead, we refer the reader to Lee, Peleg, and Whang’s case study2 for a detailed description on how the after-sales service systems at Toyota help build customer loyalty.

Dealer operations are considered so important that they merit a special section under the Toyota Waydocument titled “The Positioning of The Toyota Way in Sales and Marketing.” The section related to dealers lays out the ideas that form the basis for continuous improvement and learning, both for and about dealer operations. For example, the mission statement for sales and marketing is “Customer First/Lifetime Customers as Well as Radar for All of Toyota.” The historic concept at Toyota is that benefit should first go to the customer, then to the dealer; only after that does it go to Toyota. The sales operation is itself broken into five linked “targeted processes,” namely:

1. Obtain necessary information quickly.
2. Drop into sales outlets with ease and without pressure from sales staff.
3. Understand the value of the purchased vehicles.
4. Obtain the vehicles with ease of mind.
5. Own the vehicle with confidence.

Each of these items is further broken down into subprocesses with objectives and clearly defined metrics. The following are some specific ideas discussed in this chapter and outlined in the Toyota Way document:

• The process of allocation, dealer feedback, and various methods to resolve issues related to the process are standardized and rigidly timed. Those procedures allow problems to be noticed immediately and corrective action taken as soon as they have been identified. The system is practical and allows for changes in orders but within the specified time limit and cost. The sequence of corrective actions is also scripted: look at dealer stock, then dealer trade, then dealer pipeline, and finally the scheduled pipeline of vehicles.
• The amount of flexibility necessary to respond to requests is carefully controlled with a fluctuation allowance.
• One of the missions of sales and marketing is to “support the dealer in conducting constant kaizen.” That objective involves planned sales activities and measures based on Plan, Do, Check, and Act (PDCA), creating a high-performing sales cycle and practice of field activities based on “Genchi Genbutsu,” or “go to the source.”

All that effort at sharing knowledge, learning, and process know-how pays off. In a 2007 Dealer Attitude Study for Japan by J.D. Power Asia Pacific,3 Toyota was ranked the highest for the thirteenth consecutive year. The study measured dealer satisfaction with vehicle manufacturers or importers and determined dealer attitudes toward the automotive sales business. It was based on eight factors: product attractiveness (31 percent), responsiveness to dealers (21 percent), sales support (13 percent), service relations (12 percent), warranty (6 percent), sales representatives (6 percent), vehicle ordering systems (6 percent), and parts (5 percent).

For Toyota, profitability of its supply chain partners—including dealers— is important for its success in the long term. Therefore, it is still trying to improve its dealer operations and continuously increase the value delivered to customers. For example, Toyota Motor Europe (TME) is trying to determine how best to make the Toyota Production System work for car retailing as well. To that end, it has created the Toyota Retailing System (TRS), which takes a bottom-up approach to developing the best practices for Toyota dealers. It works somewhat like Wikipedia, the Web-based encyclopedia that is maintained and improved by its own readers. Both Toyota’s production and retailing systems adhere to a straightforward problem-solving methodology called PDCA, where problems are solved by teams, not individuals. This approach offers the benefit of better structure and measurability in problem solving than other methods have. The solution created by the team is used to create a kaizen module that can be shared with all other retailers in Europe through a common database.

This bottom-up construction is a big advantage of TRS, says Dave Cussell, the general manager of market development at TME. In his view, dealers are more open to listen to positive experiences from colleagues than to top-down case histories presented by carmakers.

Reflection Points

The following is a summary of the link between ideas in this chapter and the v4L framework:

• Variety differs in Europe, where customers expect more customization than in the United States. Dealers work to convince customers that the limited variety is compensated by higher attribute levels.
• Velocity of the dealer sales is matched to shipments to dealers to maintain a lean supply chain.
• Variability of sales is minimized by mix planning, which restricts variety sold in each region.
• Visibility of the product flows is ensured by providing each dealer with a specific delivery date for a car. This date is updated as the product flows through the supply chain. It permits the final customer to have a good idea regarding the expected delivery date.

The following are highlights of the learning practices:

• Create awareness. The dealers are made aware that the Toyota Way extends to their processes.
• Establish capability. Dealers are trained and supported in conducting constant kaizen.
• Make action protocols. The process of allocation, dealer feedback, and various methods to resolve issues related to the process are standardized and rigidly timed.
• Generate system-level awareness. Toyota uses both a top-down as well as bottom-up approach to provide the system level perspective for monitoring, planning, and continuously improving dealer operations.