One of our Best and Brightest pointed us to these “back of the envelope” calculations on the relative costs of running GM’s dealer network. [The comment was originally posted on the DealersEdge website. We’ve republished it here with the author’s permission.]
In a very limited attempt to figure out the savings, I’ve come up with a quickie comparison of just the cost of “reps”, with a number of assumptions. Comparing GM and its 6400 dealers to Toyota and their 1200 dealers (both of which sell almost the same amount of cars). Assuming 2 Reps (one Sales one Fixed) for every 10 dealers (for both manufacturers) and a 1:10 ratio for Supervisory positions of those reps (for both manufacturers) and for the sake of easy calculations, assume 100K Salary average for everyone.
Toyota:
1200 Dealers
240 District Reps
24 Regional Reps ( Supervisors of the District Reps)
2.4 (lets assume 3) Corporate Reps
Total dealer support staff = 267 @ 100K per = $26,700,000 Annually.
GM
6400 Dealers
1280 District Reps
128 Regional Reps (supervisory again)
13 Corporate Reps (supervisory to the Regional)
1 Executive Corporate
Total Dealer support staff = 1422 @ 100K per = $142,200,000 Annually
If you take that number of 142 million and divide it by the 6400 dealers, than the field support expense for GM per dealer per year is $22,218, which doesn’t sound like much does it?
If you look at the difference in “field support” expense between GM and Toyota on a nationalized basis, there is a difference of $79,500,000 per year.
When you consider that GM has an additional $80 million per year in “field staff” expenses to sell almost the same number of units, I can see how a bunch of suits in an ivory tower can come to this decision. There seems to be an assumed belief though, that if GM reduces its dealer count, it will still sell the same number of units. I think that belief is the “Wild-Card” thought though, and unfortunately, no one will know the reality until the dealerships are in fact closed.
There are other savings, by fewer dealers, in shipping.
If you assume every dealer gets one truck delivery per day (be it vehicles or parts) and just for easy math, lets assume $500 per truck delivery (not the cost of the vehicles or parts themselves) (for both manufacturers)
GM – 6400 Dealers X 5 Deliveries per Week X 500 per Delivery X 52 Weeks = $832,000,000
This represents a per dealer cost of $130,000 per year
Toyota – 1200 dealers- same deliveries and cost per = $156,000,000 Annually
Again, assuming a nationalized number, it costs GM $676,000,000 more per year. Even cutting the dealer count almost in half, and GM will still have a higher expense than Toyota. Using the 22K per dealer avg for field staff and 130K per dealer avg for shipping, these 2 expenses alone represent a 150K per year per Dealer cost reduction for each dealer they shut down.
GM stated an objective of having 3600 dealers remaning, which means they intend to close roughly 2800 dealers. So 2800 dealers closed X 150K per year cost reduction = 420,000,000 per year in cost reduction X a conservative 5 years = $2,100,000,000. So over 5 years, the dealer count reduction to 2800 reduces GM’s expense (on these 2 expenses) by just over $2b.
I am sure there are other areas where savings can occur, but only a bunch of accountants could figure out all that math. But let’s assume another 2 billion over 5 years saved from that, for a total of 4 billion saved over 5 years.
At that rate, assuming no interest charges, it will take 20 years to pay back the money loaned to GM by the United States & Canadian Taxpayers!
You’ve no doubt underestimated the field rep costs. Salaries and benefits are just one piece. You also need offices and cars for these people, and travel expenses. So double those numbers.
OTOH, you’ve overestimated the delivery truck costs. It’s not that much more trouble for a truck to visit two or three extra dealers in the same city. Also, larger dealers will receive more deliveries.
Bottom line, though, is that both costs are a drop in the bucket.
The larger cost is in advertising. One larger dealer can advertise more effectively than three smaller ones. This affects the dealer more than the manufacturer, but in some way this cost likely affects the manufacturer.
Interesting calculations, even though they are based on guesstimates. One thing that lifted my eyebrows: the assumption that there are two factory reps for every ten dealers. What the heck do those “sales” and “fixed” reps do? If the ratio is that bad, the reps must be either twiddling their thumbs or washing the dealerships’ windows and mopping the floors.
And yet, Michael Karesh, who knows GM infinitely better than I do, says RF has “no doubt underestimated the field rep costs.”
Well, our friend Mikey in Canada has always said GM’s salaried ranks are loaded with lard.
Some problems with the math. Although there is savings to gained by closing dealers, you overestimate it. For example, since the 1200 Toyo dealers sell the same number of cars and parts as GM and the trucks are the same standardized size, there has to be many more deliveries of cars and parts to the lesser number of Toyo dealers.
If GM were able to sell the same number of cars with less dealers (a big if), then they too would have to have many more deliveries per dealer then they do now, so there overall deliveries would not change (although they will save a little in fuel costs, I think).
The trucks/deliveries were the larger number of your cost comparison. So I don’t think the savings will be that great. I believe marketing costs savings is where the money will be saved.
They all could make a big gain in efficiency if they would stop assuming they can’t ever fix major problems in the dealer interface. They all have these elephants.
The big assumption is that the those ratios are more or less the same for each company. Personally, I doubt it.
I’ve worked with GM’s people on the supplier and customer (in aftermarket truck bodies), as well as with Toyota’s, and the layers of bureaucrap are orders of magnitude worse with GM. I can’t imagine retail is any better.
Windswords:
I think your point about deliveries hinges on whether each daily delivery to each dealer, mentioned in the main post, is a full truck load or not. If it costs $1500 to have a single truck visit three small GM dealers in a day, unloading 1/3 of its wares at each dealer, and only $500 or $1000 to have a single truck drop off a full truckload at a single large Toyota dealer, then there are still substantial savings to be had in consolidation.
Basically, I think that the truck running costs and driver time costs associated with driving around extra to make several small deliveries, as opposed to one large delivery of the same amount of stuff, is probably a lot more substantial than you give credit for.
Why not seek efficiency by making only full-load deliveries fewer times per week to each small dealership? I think there is a limit to this strategy that comes from the customer service side. If a customer orders a car or a part that is not in stock on site, then it has to be delivered on the next company distribution truck. If that truck only comes on Mondays, and my car breaks down on a Tuesday, the dealer has to either wait a week for the part, or have it shipped FedEx. Either piss off the customer, or end up spending even more money on courier services. Or spend more money on stocking more idle inventory. So the trucks have to keep coming at fairly short intervals.
I think the real wild card has already been identified — can GM keep up sales volumes with a substantially smaller dealer network? I think they risk serious loss on this front. If I used to buy from my a small-town, nearby GM dealer because getting a Toyota required driving 100 miles to the next big city and dealing with the crowds, well, I might just consider a Toyota once the nearby place closes and buying GM becomes just as big a hassle. The corporate types are going to have to be very careful with their clippers if they want to minimize this problem.
Maybe they’ll try trimming the number of big-city urban/suburban dealers first, especially in coastal areas where their market share has dropped a good deal. Their networks in those places are probably now over-dense, considering the sales volumes, and the cost of doing business in those areas always tends to be higher. As long as there are at least one or two GM shops somewhere in the metro area, those who want a ‘vette can find their ‘vette.
This is a good, thought-provoking post!
It seems to me there’s perhaps also some cost or staffing that’s proportional to not just dealer count but also to unit sales, so maybe Toyota has 2-point-something reps per 10 dealers, as opposed to GM’s 2.0.
Just a maybe… it does get one thinking about where GM’s going with costs.
Another possibility is that GM can’t pay their people as well as Toyota and their reps aren’t as good. Salary and retention matter.
Windswords: “For example, since the 1200 Toyo dealers sell the same number of cars and parts as GM and the trucks are the same standardized size, there has to be many more deliveries of cars and parts to the lesser number of Toyo dealers.”
In parts distribution, wouldn’t all these costs be borne by the parts organizations and passed through to the consumer as delivery fees or buried in the parts cost?
Of course, if some parts and service distribution/management/upkeep is borne by the manufacturer, there would probably be an edge to the manufacturer who delivers the more reliable cars, no?
50merc,
I was mostly saying that the cost per rep was low. I have no idea about the number of reps.
I think we can assume that the total cost of supporting a dealership is much larger than suggested here, or the number of dealers wouldn’t be such an issue. If it’s not possible to save a billion dollars a year, it’s not among the big problems.
There are really three big problems:
1. Transaction prices–lower for Detroit
2. Plant utilization–currently very low
3. Legacy costs–too many retirees per car sold
Everything else is secondary.
First ssumption is dead wrong. A dealer must sell in excess of 600 units to be visited by a rep. Under 600 it is all telephone contact. My rep calles on 23 dealers and this would be a normal type of number. I cannot speak about Toyota but the numbers for GM are very wrong.
In the computer software business they have a saying: “Garbage in, Garbage out”. If you start with wild guesses for the data input, then the calculated output doesn’t tell you much.
I want my employer to assume me a $100k salary average, for sake of easy calculations.
Couldn’t we have this debate on Monday? my brain is already too cooked to think about this. “If GM left Michigan at 8am loosing 2.4 million per hour, and Toyota left California at 9am….”
In most cases the delivery cost of a new car is fixed at average cost by manufacturer fiat. Freight charges on a new Pontiac Vibe/Toyota Matrix are the same if you purchase from the dealer across the street from NUMMI in Fremont or across the US in Portland Maine. AFAIK Alaska and Hawaii have higher charges.
It would be cool if some of the domestics offered a fly to the factory and drive the new car home a la BMW. It could have really worked for Saturn back when they had their mojo.
The real cost disadvantage is the supply chain for parts.
I used to work for a contract carrier that delivered GM parts for a big chunk of the West Coast. GM via its trucking companies operates as its own FedEx. If a part if ordered by 5pm and is in stock it will be delivered to the dealership between 0100and 0800 the next day. A truck with one driver can only legally run 11hrs/ or 500 miles. Some of the routes for rural dealers involve driving 150mi, delivering to 3-4 stores and then returning to the terminal. My educated guess is that GM uses 3Xs the Trucks and Drivers in is parts operation vs. Toyota.
factor in another million units and see what your math brings.
it all comes down to selling cars, something management has no clue how to do.
@cfisch
We have sales and services reps that call on us every month for GM. We are at 300 units per year.
factor in another million units and see what your math brings.
it all comes down to selling cars, something management has no clue how to do.
YUP! Dealers are not the issue… THE issue is too many fixed costs divided by too few units sold… GM continues to focus on the numerator and IGNORE the denominator…
And every year the denominator gets smaller and smaller… And the problems get bigger and bigger.
BlueBrat,
If you make about 65k, then you cost about 100k Strangely, if you make 100k, then you cost about 140k. Of course, the demagogues want to cry about disparity of income and how the second person makes more than double the first, but this is only the perception due to obscure government rules and regulations intended to hide the truth.
GMAC closed my local rural GM dealer in December after 35 years in business and better market share than the Ford dealer. Now we have to go to the big city to buy a GM, so many of us are now going to buy a Toyota. GM IS letting GMAC kill off its rural dealers – even when GM is the dominant player and only game in town! What jackasses! If several GM dealers in the city are closed, a customer can drive ten minutes to another one. GM is so stupid – they are standing back and letting GMAC kill rural dealers and in the process destroying long-time customer loyalty to their products. No wonder why they are facing bankruptcy.
The assumptions made in this comparison are SO OFF-BASE AND WRONG. As a GM dealer, we sell under 300 new and XXX used per year. The factory reps call on us by telephone, e-mail and internet contact. We have not had a GM employee in the dealership for over four years. Our reps/ both sales and service are responsible for forty five dealers and I can assure you that they don’t make 100K per year. Keep dreamin guys. The dealers aren’t the problem. Let the market take care of this and it will. This heavy handed approach will only make matters worse. TYPICAL GOVERNMENT SOLUTION