How to Cut Selling Costs--A leasing plan that smooths production blips

There have been plenty of changes in the way cars are sold, but when it comes to reducing the cost of selling, nothing has changed that much.

Sure, there are some different sales techniques such as Saturn's and AutoNation's one-price policy. Then there's the growing trend toward more leasing. But for the most part, car companies still do the same old things: when sales are down they offer rebates, bigger discounts, increase advertising, offer better loans and lease arrangements; when sales are up, they raise prices.

While the industry has trimmed costs in nearly all parts of its operations, very little has been accomplished in sales.

What type of innovations in selling techniques would reduce costs? Let's take the furniture business as an example. You go into a furniture store. You see a showroom full of beautiful furniture. You see some furniture you really like. You can visualize it sitting in your empty living room. You become anxious to make that happen, the sooner the better.

You have a rude awakening when you find out that the only way you can get immediate delivery is to take the floor samples, scratches and all. The salesman then tells you that delivery on new furniture will be four to six months, and if you put 10% down he'll be happy to call you as soon as it comes in.

What is going on? Why does it take so long? It's really not that hard to understand if you think about it. It's how they keep their costs down to a bare minimum. The factory waits until it accumulates enough similar orders to make an efficient production run. This way they also keep inventories throughout their entire system to a bare minimum.

This is all very interesting, but what does it have to do with the car business? When a customer is ready to buy a car, he or she isn't willing to wait six months. They want immediate delivery. If they can't get what they want, they go to another dealer.

This process adds considerable cost to the car because it forces the automakers to build inventories. Ideally, these stockpiles reflect customers' needs, and manufacturing schedules are adjusted to meet efficiency requirements and thus keep costs down.

But in reality the whole system works very inefficiently because it's based on marketing forecasts that are hardly ever right. It's hard to tell when a customer is ready to walk into a dealer and buy a car. It could depend on how much money he's got, his other commitments at the time, the weather, whether the stock market is going up or down, or a half-dozen other factors. The result is usually shortages of cars, lost sales or excessive inventories.

Carmakers are continually struggling with these problems. Some are reducing the number of options. This, of course, simplifies inventories and makes for more efficient manufacturing. But the impact hasn't been that great.

Maybe that's simply the nature of the business. However, the popularity of leasing, I believe, may have opened up an opportunity for some innovative thinking. I wouldn't be surprised if before long the majority of car sales will be leases. Even now 70% to 80% of some of the more expensive models are leased.

To me this presents a chance to realize considerable cost savings. You would know precisely, to the day, when a lessee is going to turn in his or her car. Usually a couple of weeks before the lease is up the customer will scurry around trying to line up a new lease arrangement. If his current dealer has what he wants in inventory and the price is right, he probably will make his new lease arrangement with him. If the dealer doesn't have what he wants or if the price isn't right, he will go somewhere else.

Here's what I propose: Offer the customer a good deal if he would come in six months before his current lease is up and order his replacement car. The advantage is that he gets the car he precisely wants at a bargain price without all the running around he normally has to go through.

There also are numerous advantages for automakers beyond retaining customers. They could more accurately forecast sales. This, in turn, would enable manufacturing not only to batch its production to gain efficiency, but also schedule production more in line with actual sales requirements. The result would be a reduction in final car inventories and all in-process inventories as well.

This arrangement could produce longer production runs and fewer changeovers, yielding improved quality control, more even production schedules, less overtime, and simplified manpower schedules. Add all this together and the savings could be considerable.

All it would take to activate this plan is to have the finance people figure out how much could be saved - I'm sure it would be in the millions - and offer half of it to the customer as an incentive to order his replacement lease car six months early.

This is a plan that the sales people could initiate with no risk, little investment and with large potential gains.

- Stephan Sharf is a retired Chrysler Corp. executive vice president for manufacturing.