Worried about hitting your target, and wondering how you got in such a mess? Here’s a likely explanation that will resonate with dealers and brand country managers, written by someone who has worked at international level with several European manufacturers.
So it’s a rainy Monday morning at the height of the great British summer
and, being near the end of the month, you are reviewing (no doubt over a clenched bacon sandwich) how close you are to this quarter’s manufacturer target. And you will be considering options available to achieve the needs of your brand and trigger that al important bonus on units to get you over the line financially.
Sounds familiar? Well, it should. Up and down the country there are hundreds of people sitting in their offices with just this dilemma (and varying standards of bacon sandwich), and there lies part of the problem.
There is no standard benchmark for a dealership. While the functions and activities are similar, the scale and scope vary from financing a few scooters a month through pass-the-parcel credit cards to purchasing hundreds of thousands of pounds-worth of shiny crated metal on inventory financing or with surplus cash for the very few able to do so.
For some franchises it’s absolutely the case that half the profit is in the metal and half is in the bonuses.
For some, the bonus regretfully is not a bonus but is factored into the profit and loss to form part of the liquidity. To miss a month or a quarter could be very costly or near fatal for certain dealers. This is evident from the retail pricing strategy adopted to ensure the Magic Number is hit at any cost, much to the chagrin of competitors less cash strapped and achieving high profit per unit margins and running sustainable businesses.
HOW IS THE NUMBER CALCULATED?
So the Magic Number – sell-in or sell-out, or indeed both, depending on your manufacturer needs – how is it calculated?
Let’s firstly assume that the national sell-out target devised by the factory and given to the UK subsidiary is based on an accurate assessment of a number of factors. These would logically start from the market size and performance as the main driving force, coupled with the market share your factory either wants to achieve or wants to compare with a previous period. This target is then shared among the dealer network, factoring in various performance variables such as their sales and financial capacities and any geographic anomalies (like a small sea between you and the mainland). Finally, the production plan by model for the year, the phase-in and phaseout of the new models and market seasonality are added into the mix.
The wise would also consider other relevant competitor offerings either in or coming to the market and, of course, the effect these would have on your own range, along with visual showroom footprint in the case of multi-franchise scenarios.
The wiser still will look at the stock currently in the network (both unregistered and preregistered) and use the average sell-out rate to calculate how many months’ stock the network needs to chew through. For instance, 400 of a model in dealer stock with an average sell-out of 40 per month = 10 months’ stock, meaning that a new model may not quite hit the targets needed until the old one is incentivised or massaged through the network faster.
Based on these components and the price of wet fish staying roughly the same, the Magic Number is bestowed upon the dealer by the long-suffering area sales manager (ASM) – after much coercing from superiors – and this then becomes the focus of the business as you strive to jump the hurdle and achieve the bonus.
INFLATED FIGURES
Unfortunately, the Magic Number calculations are flawed for many European manufacturers, and here’s why.
Let’s work backwards starting at the other end of the process and head back to the factory to understand how it all works and therefore help you to interpret the events that lead to the Magic Number that is so important to your success.
Somewhere at Acme Motorcycles Factory HQ a few people are sitting round a well-worn table looking at the previous year’s financial and market-share results on a global scale.
These would include representatives from production, purchasing, HR, marketing, commercial and members of the senior management team.
Once the previous year’s results are squared away, the talk will move to the future commercial year (not always a calendar year as we know it).
Budget guidelines will have been sent to all major regions, including areas such as the capacity of the factories, production schedule, colour-range options and features, along with any cost increases on the previous year. They will also flag up any additional costs to factor in for smaller markets due to homologation, deleted models, delivery timing and shipping conditions etc.
Let’s say the global sell-in figure is 100,000 units this year for our example.
The regional management will then cascade these guidelines down to their country managers, along with the percentage of sales needed, calculated by region and individual market. If there is no subsidiary the importer will be given a much inflated figure with which to begin bartering.
Budgeting normally takes three to six months and the first draft will see the country managers disseminating budget guidelines to their sales and marketing managers and ASMs.
During the first draft the in-country team will put together a figure for its area (the UK) which will be made up of a number created by ASMs after discussions with their dealers (usually an increase due to new models etc).
THE BUDGET IS COMPLETE
The first draft will ALWAYS be too low, as everyone tries to reduce the target needed to achieve their own bonuses, and will be sent back for a second review.
As a rule the company will give the country manager a target figure – let’s say 10,000 units for argument’s sake.
The country manager (who also has other Key Performance Indicators, or KPIs, to consider) will then add a 10% buffer (to ensure he or she hits the 10,000 and thus triggers their personal bonus), making an 11,000 unit target the number that gets fed to the ASMs to split among their dealers.
Now ASMs also need to hit their targets, so they will fatten up their figures to the dealers to ensure they have the best possible chance of achieving the numbers – so 11,000 units now becomes 12,000 units, and this is thrown out to the network with a raft of incentives or concessions to sweeten the pill and make it challenging but not impossible.
The budget is complete and it gets fired back to head office to approve – which will trigger the marketing and support budgets inline with the volume agreed and allow the subsidiary to plan its calendar of marketing and incentive campaigns to support the target achievement.
But wait … there’s trouble afoot at ACME Bikes HQ. All the global budgets have been dutifully returned and after much work with the Casio the numbers are a little short overall – around 10% short, as the USA has an excess of stock and the market’s a little slow, coupled with the fact the new flagship model won’t clear homologation until four months after the EU version and therefore will completely miss the season.
In this situation I have seen two routes followed on many occasions:
The first is, the “missing 10K” is distributed among those markets most likely to over-achieve or those that the MD feels are sandbagging. Remember that 10K will become 12K by the time it gets to the dealers as it follows the same process mentioned previously.
Let’s say for our example the UK is allocated 2000 extra units to achieve from the “missing” total.
The budget guidelines are sent back to the markets formally requesting the higher number and this kicks off a second round of talks between the country manager and the mid-level team and ultimately another conversation between ASMs and a few key dealers.
Why? Well, knowing that the budget from bottom-up was largely achievable using quantifiable data and rationale, having an extra 2400 (2000 + 200 for CM + 200 for ASMs) units added to your 10K first draft budget is a kick in the proverbials as the final number will be 14400 and has no real rationale behind it.
Simply spreading this equally across the network is an option, but it’s lazy and risks demotivating the whole network. So you exercise damage limitation and spread the unjustifiable numbers among your favourite accounts, the ones that have financial capacity, and maybe even a couple that you could part company with if they don’t achieve it, thereby killing two birds with one stone and having somewhere to put a number you have very little idea of how to achieve.
Once this uncomfortable exercise has been accomplished (usually by ring-fencing locally a certain volume to be distressed at the end of each month or quarter to achieve the target, and therefore a lower-than-average profitability per unit in your profit and loss), the final budget is sent back to HQ for approval and any minor tweaking.
The second option is for HQ to allocate the “missing” 10K and make it a top-down process of a non negotiable number – cue that international, but mainly Italian, sport of laptop-throwing (seen five times in 15 years, normally accompanied by a deathly palour as the thrower considers if they have backed up that morning).
Depending on your skill and how confident you are of your abilities, as a regional brand manager you can attempt to fight this topdown approach by producing a lengthy PowerPoint presentation explaining why the new Magic Number cannot be achieved and some financials to show you’ll cut your costs to achieve the revenue and profit targets needed.
The reality is that accountants and business owners are not by nature commercial people, and while they have a set of skills commercial people cannot appreciate, supply and demand along with common sense is not one of them.
In this case I have seen 10% added to the industrial cost of machines (that has not changed for four years), so if the volume target cannot be hit, the revenue targets can be (in the head of the MD at least).
In that scenario everyone has to go and explain to their teams, ASMs and dealers why a five-year old product with no technical or visual changes just went up 10% at trade and 15% at retail… not an easy job but it’s now the reality, and your “punishment” for not accepting the Magic Number they plucked out of the sky for you – how dare you question the Magic Number with logic and data!
So these are the two options I have seen and worked through many, many times and this is largely how the dealer target is defined and allocated.
IMPACT ON THE MANUFACTURER
Let’s go a stage further to look at the impact on the manufacturer. Let’s assume the 100K-unit global budget has now been signed off and the new year start is two months’ away. For most manufacturer sales staff, this means saving all orders and sell-out until the new year, to give you and your dealers a head start and ensure Q1 success, thus motivating everyone: “Yeah, we hit the target!”
Based on the 100K units, the factory knows it now needs 65 million 10mm hex head bolts and sends the year’s requirements for components (based on the global budget model split) to purchasing to negotiate the costs and ensure the industrial margin of 35% to 42% is maintained.
Costs for production of a certain model have already been drafted in the budget based on previous years and the wet fish price, and adding just one pence to each of these bolts will make a massive disparity in margin, so purchasing have a tough job to do.
For the sake of simplicity let’s assume purchasing barters and achieves the component costs needed to comply with the budget – and if there is a slight overspend you will simply swap tyre supplier halfway through the year to compensate. That is why most factories have two OE suppliers of tyres and use them to correct the BOM (bill of materials) cost for each vehicle and thus stay within the budget for vehicle cost.
The first quarter goes well as the dealers stock up on the new product and are buoyed by early adopter sales, but then in the second quarter somebody mentions the economy down at the pub and sales start to slow, triggering a bit of push back from the dealers on wholesales as the retails aren’t as high as expected.
Most factories pre-purchase components at least three months in advance, so the tap cannot simply be turned off. It has to be tapered, causing a temporary glut of parts and an ineffective use of cash flow.
Meetings are held and staff are grilled as to why the UK is not on target to hit the 14,400 units this year, and it’s at this point you bring out your original budget (made with logic and caution) and show that had you stuck to the 10K you would be perfectly on target.
Senior management politely dismiss this very minor point, you are reminded of the unwritten rule “everything can change except the number” and asked what can be done to achieve greater sales? Campaigns are launched, discounts agreed and money accrued for paying your staff ’s bonuses is repurposed to provide more commercial support.
Back in HQ there’s another problem – component prices were fixed at a minimum volume and if the 100K production target becomes 95K in reality, then the purchasing department either has to pre-purchase the other 5000 bikes’ worth of components or accept a slightly higher price – meaning the industrial margin will suffer and not adhere to the budget. Therefore the lovely chaps in purchasing will not hit their personal bonus targets either … unless they can find much poorer quality components, that is. Then a serious stab is made at this before the head of global after-sales points out increased warranty costs would negate any saving – but the scary thing is that it was actually thought about at every level.
Hasty re-forecasting is asked of each region, country, county and dealer – and a new real-world budget is submitted with a few “told-you-sos” strategically placed into PowerPoints as a passive aggressive response.
At this point every idea is considered, and the regional managers will be having private conversations with their country managers to see what can be done, and where volume can be found, to avoid being the black sheep at next month’s meeting of the round table.
For sure, a reduction in figures would mean the early 5.45am Ryanair flight instead of the 10am BA offering, along with a public berating in front of your peers. “You are only as good as your last result.”
Instead, deals are done and a few key dealers are used to “disperse” excess inventory on deals offered to everyone but only achievable by larger, financially strong dealers.
Your seat at the big round table is more comfortable and you nod knowingly as the regional MD points out his regions, of which you are part, have made budget. In reality, all you can think about is what will happen next quarter and that awful Ryanair flight at midnight!
And so the game goes on, and already you are starting to think about next year’s Magic Number!
BACK IN DEALER LAND
Meanwhile, back in dealer land the ACME S125cc is suddenly being punted out at near your cost, causing much vexation among your sales team.
It appears a few hundred units have been sold “cheap” and pre-registered in order to hit market share for the period, and these are causing problems with loyal dealer Bert in Birmingford, who hasn’t sold one this month as somebody in the Isle of Orkney can buy one £50 cheaper up there.
Bert needs to sell three ACME S125s this month to hit his target, so he takes the easy option and advertises his stock on eBay as a limited number at cost price, hoping to pick up a bit of finance commission or maybe score a delivery fee.
Bert’s ASM has already told him that his franchise is on rocky ground, and he’d like to keep it until he retires next year in case it adds value to the business, so he bites the bullet and preregisters the unsold bikes and parks them up at below cost, justifying this in his head by offsetting the quarterly bonus against the loss.
So let’s get this straight … To hit the Magic Number you sell some stock at under cost to get the bonus to make up the loss you took on the vehicles to hit the Magic Number.
A cynic would suggest there’s not much magic in that number.
A wise old trader in Hong Kong once told me: “Turnover is flattery and profit is sanity.”