Performance Terms and Conditions Redesign

At A Glance:

Carlisle led a Performance Terms and Conditions redesign for a large automotive OEM that shifted the dealer focus from managing parts inventory and YoY parts purchase growth towards behaviors that would better address end-customer needs and provide a sustainable growth in OEM part sales. The new terms were projected to reduce the annual incentive spend by ~20%, a portion of which the OEM used to implement a new Retail Inventory Management (RIM) solution for the dealers.

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The Context:

Many OEM dealer terms and conditions are designed to minimize an OEM’s parts logistics cost through discounts for stock orders or penalties in the form of handling / transport fees for emergency orders. While the terms are relatively simple to administer, they do not generally drive the appropriate dealer behavior. Dealers are often motivated by the stock order discount to buy in big lots which ties up capital and leads to inventory obsolescence. Or dealers may pass emergency order fees to the end-customer which may ultimately impact customer retention. Over time, these terms become embedded entitlements in the dealer’s profit margin.

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Traditional Terms

• Objective: Enticements, Entitlements and Dealer profits
• Focus: OEM and Dealer Parts Manager
• Metrics: Order volume
• Marketing Strategy: Push and volume purchases
• Typical Terms: Stock order discount, critical order surcharge, volume return allowance

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Incentive Terms

• Objective: Reward input behaviors
• Focus: Dealer Parts Manager
• Metrics: Order and inventory quality
• Marketing Strategy: Push and pull
• Typical Terms: Retail inventory management compliance, order mix benefit, low dealer E&O benefit, training participation benefit, assets in place benefit, service processes benefit

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Performance Terms

• Objective: Reward results
• Focus: Dealer Parts Manager, Service Manager, Customer
• Metrics: Growth and service often based on DMS point of sale data
• Marketing Strategy: Pull
• Typical Terms: Parts sales growth benefit, repair order growth benefit, parts loyalty (to OEM) benefit, dealer off-the-shelf fill benefit, fixed-right-first-time benefit, service satisfaction benefit

The trend over the past few years has been to move away from “traditional” terms to “incentive” or “performance” terms. Performance terms are as the name implies, rewarding dealers based on their performance in attaining OEM-specified goals. The goals can be parts related (e.g. growing dealer sell-out sales or OEM purchase loyalty), service related (e.g. repair order growth or retention) or any other deemed critical by the OEM to growing their business (e.g. dealer brand standards).

The large automotive OEM’s existing terms were more “incentive” based where dealers were rewarded for hitting specific input behaviors – carrying appropriate stock to meet demand, maintaining clean inventory, achieving customer fill and growth performance metrics. A key driver for change was that the OEM wanted to roll out a Retail Inventory Management system at dealers, where a terms redesign was imminent as several of the incentives in their current terms would no longer be necessary.

Terms and conditions changes tend to become an emotional issue with dealers that require significant hand holding to overcome. The OEM wanted to understand how to create a comprehensive set of terms and conditions bundled with RIM that would not only meet the OEM’s financial and strategic objectives but also one their dealers would be receptive to.

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The Approach:

To execute the terms and conditions redesign, Carlisle followed a four-step approach.

• Summarize Current T&C Spend and Benchmark: Before starting a redesign effort, it is critical to understand the current state and how the terms compare to the industry. In this step, Carlisle set out to understand the financial cost of the current terms, the magnitude of financial leverage at the dealer level, how concentrated this leverage was by dealer type or size, and what areas the OEM had opportunity to improve to reach the best-in-class state relative to industry benchmarks.
• Determine Strategic Goals and Select Metrics / Rewards: Carlisle interviewed OEM stakeholders from various groups (sale & marketing, supply chain, dealer network development, finance) to identify their business objectives. Carlisle also interviewed select dealers to understand current issues and concerns. By consolidating stakeholder feedback and through iterative workshops, Carlisle secured consensus on three key objectives – drive RIM performance, encourage dealer part sales growth, and reward dealer loyalty.
  The next step is often the hardest – determining specific metrics that could be used to measure each objective. This is a critical step as the metric must be one that is robust, acceptable by dealers, and one that cannot be easily gamed by dealers. This involved defining the metric, working with the OEM to map out data streams, and evaluating the quality of the data.
• Model OEM and Dealer Financial Impacts: Once the metrics had been determined, Carlisle drafted a set of strawman future terms and built two sets of financial models to simulate the impact of these terms – one from the OEM viewpoint and the other from the dealer viewpoint.
• Dealer Socialization: Once the OEM internally reached a consensus on the terms package, it is important to socialize the design with select dealers before a formal launch. Carlisle generally recommends getting feedback from select members of the dealer council. The feedback from these sessions was used to refine and finalize the new set of terms as well as prepare the OEM for questions they would have to respond to from dealers during a full roll out with their dealer body.

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The Result:

With new terms supported by RIM, the OEM was able to eliminate ~20% of their current incentive spend that was designated to assist dealers to manage their inventory. These savings were used by the OEM to fund the implementation of their new RIM system. With the remaining pool of money, the client was able to shift dealer focus from inventory management and sell-in growth (purchases from the OEM) to growing their part sales (service lane and wholesale sell-out growth) and improving dealer purchase loyalty from the OEM.