In today’s post, John Sloan talks about challenges dealers face in ordering inventory that best matches customer demand.
Emcien: Describe the Chrysler-Emcien initiative that examined dealers’ struggles with complexity in the ordering process.
JS: In a soft “push” market where volume is driven by heavy incentives versus the merits of the brand / model, managing cost is paramount. A key piece to focus on is product inventory. Dealers get roughly 60 days of no-interest floor plan. In a soft market, vehicles can easily sit for longer than two months before being sold, so it’s critical that vehicles be easy to order, stock and sell. Simple is better.
Emcien worked on a model to simplify the Chrysler PT Cruiser product mix. There were thousands of possible build configurations for the PT Cruiser, creating significant complexity for engineering and the assembly plant, as well as the supplier extended enterprise. Emcien’s ability to accurately forecast demand is invaluable for a complicated product line because it can assist with reducing the build configurations to those that best match demand. The PT Cruiser initiative validated the power of the Emcien inventory model.
Additionally, it must be noted that a company with an extended pipeline – imported inventory versus domestic production – should find the Emcien model essential because inventory configurations have to be determined months in advance. Imports from Korea, for example, come to the U.S. by ship. In this pipeline, the model mix commitment can be up to 6 to 8 months in advance. If dealers / manufacturers can better assess what customers want and therefore turn inventory faster, the economics at their level and at the manufacturing level is substantially improved. This is because key cost elements of the manufacturing and assembly process along with the extended enterprise can be predicted with greater accuracy.
Emcien: What do dealers struggle with today in terms of ordering?
JS: What is the right mix of models and content within models that best matches market demand? Unlike Europe where most customers still order their cars, U.S. dealers must accept the burden to carry a large inventory because customers want to “buy off the rack,” i.e., off the lot. Therefore, all dealers need good feedback on which products turn faster and why. They want to know the most popular configurations plus or minus 2 or 3 options for any particular model range they’re selling. If a dealer knows bright colors sell in their market but not black, that’s a huge benefit because there are big costs involved in holding inventory. For example, in today’s market if a dealer is sitting on a heavy mix of SUVs and few fuel-efficient cars, they will be burning excessive cash on floor plan cost.
This struggle is further affected by the 2 basic inventory pipeline differences. When the manufacturing plant is domestic, dealers have more time to understand changes in demand and can react accordingly because the supply line takes weeks versus months. Furthermore, the shorter pipeline means they don’t have to commit to ordering as much product at once.
It’s much harder for companies with the aforementioned lengthy plant-to-dealer product pipelines — Hyundai for example with products made in Korea versus the U.S. — to best match production to market demand. A Hyundai dealer will have better information on domestic production versus Korea, where the information may be as limited as, “I’ve got x vehicles with specific configurations coming into the port.” Thus, the severity of any inventory decision on imported products is much greater than if the assembly plant is domestic.
Emcien: If there were a tool that could tell dealers what to stock by region, etc., what value would there be?
JS: Tremendous value! Truly a powerful competitive weapon. The company that can do a better job of satisfying customers in the purchasing process will win. The ability to help a firm know what to produce is such a powerful asset because it can dramatically improve internal cost management as well as delight the customer. I should think it would be embraced rapidly.
John Sloan has been in the automotive business for over 30 years with experience in the retail, field sales and product development areas. He has worked on milestone products that include the 1994 Ram Pickup, the 2005 Chrysler 300 and the 2009 Dodge Challenger. His team was responsible most recently for global product marketing for the Jeep brand. Presently, he is thoroughly enjoying retirement.
Very interesting article.
There are 2 issues to deal with (both closely related).
(1.) What vehicles to produce and (2) how to guide dealers to order the right stuff for their lots.
Both are mega problems, and if done poorly can tie up tremendous amount of capital. Dealers have so many combinations to choose from that customers had relatively small chance of finding just what they were looking for at a local dealership. This translates to lost sales, affects customer satisfaction, dealer closing rates and the amount of incentives needed to make a sale.
When the number of order-able choices is large, dealers struggle to order the right stuff. This translates into slow-selling configurations that sit on dealer lots for extended periods of time, which adds to dealers’ financing costs and ultimately leads to more rebates to move the languishing models.
In the supply chain, fewer build combinations contributes to improved vehicle quality by reducing manufacturing complexity. The reduction in orderable configurations also allows for significant engineering and manufacturing cost savings.
Great timely article!!
Perhaps the long pipeline for foreign manufacturers (such as Honda) has motivated them to offer fewer configurations in the first place and to sell vehicles “loaded” with options at a better price. Of course, the price has many other determinates.
John, I would like to see you comments on this.