How Toyota Dealers Interact with Toyota

February 10, 2010 - Tags:

Interview on September 3, 2008, with Steve Gates,Toyota Dealer

The purpose of the interview was to discuss how Toyota dealers interact with Toyota and to better understand the dealer’s role in the supply chain.

Steve Gates started by explaining the Toyota car allocation system to dealers. The allocation follows a “turn and earn” model where specific vehicles are allocated by region. One of the tasks of the dealer is to explain to customers the value proposition offered by Toyota. Most repeat customers who have owned Toyota cars earlier or are familiar with other Japanese manufacturers understand the concept that variety will be limited to maintain quality and value. The remaining customers require salesperson assistance to walk them through the value proposition of the increased features that accompany the limited variety, thus providing the “added value” for the cars offered. Steve did not feel that variety limitations were a deterrent. He did highlight the fact that dealers have a voice in Toyota’s product planning and their perceptions regarding customer needs were considered when allocations were made.

Some regions such as Florida usually sell cars with no cold weather kits. But other regions such as Kentucky and Indiana cannot sell cars without cold weather kits. Likewise, dealers in Cincinnati, Kentucky, and Michigan decided that an antilock brake system (ABS) would be an option most customers would not be willing to pay for; thus, vehicles with these systems would not be stocked. So customers in these areas wanting antilock brake systems in their cars would get a car from Chicago that had to be traded for a car in the region. In the Toyota system, there is a limited ability to do such trades.

Every quarter, the sales managers in each region meet with dealers to decide which cars should be built. This process is guided by Toyota Motor Sales (TMS), so dealers may not get exactly what they want. However, dealers get to influence product configuration (e.g., dealers in the Kentucky region pushed for the new Tundra truck to be sold with a big V8 engine and TMS acquiesced). Dealers get quick access to the highest levels at Toyota sales executives to provide feedback regarding customer preferences.

While most vehicles are sold as carefully planned variants, the Scion is sold differently. It continues to be allocated using the “turn-and-earn” model. The car is manufactured in Japan and shipped to the United States to the ports around the country nearest to the dealers. But the product is held at the port and then released to dealers against orders. The dealers have the choice of customizing the product at the port or at the dealership. Each customer is encouraged to customize his or her car through choice of decals, crests, and other accessories. The car and its accessories are presented to customers with fixed prices, so pricing is transparent with no negotiation. The customer waits for 7 to 10 days to get the car.

Dealerships that are allocated cars have the option to decline to take possession, but that decision will affect future allocation preferences. The allocation is based on the dealers’ share of the region sales. Each line is allocated separately so that sales of one type of car (e.g., Prius) do not affect allocations of another (e.g., Camry).

The Lexus dealers use a sales approach like Toyota’s. Lexus cars are usually offered fully loaded with few options. Toyota Motor Sales knows the percentage of vehicles each dealer will sell, and it allocates accordingly. The Lexus approach to allocating cars is different from that of Audi or BMW which prefer to offer more flexibility to customize the cars.

Toyota’s relationship with dealers is like a partnership. The National Dealer Council consists of 10 to 12 dealers, including Steve Gates. It provides a lot of input to Toyota regarding customer preferences. For example, the dealer council pushed for a large truck and got Toyota to produce the Tundra. They have also proposed a smaller truck, which Steve referred to as a Home Depot truck that customers would use to take things home from the Home Depot. There are 1,200 Toyota dealerships across 12 regions that are represented by the dealer council.

Steve provided an anecdote regarding the collaboration between the National Dealer Council and Toyota. Two years ago, the dealer council urged TMC to increase Prius production from 125,000 to 150,000 cars. TMC asked the dealers to target 225,000 cars. But a year later, in February 2007, the dealer council found it had too many cars and requested a $500-per-car incentive to reduce inventory. But in 2008, there was again a shortage of Prius, with most dealers having a one-day supply (if all inventories in the pipeline were included). This collaboration between the dealers and Toyota is, in Steve’s words, a rarity in the auto industry.

Steve mentioned that the dealers adopt Toyota’s approaches toward kaizen and expect to increase their productivity. Sales associates who provide ideas for improvement are rewarded individually. The goal is to decrease expenses without affecting the customer.