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Another Classic Tale of Non-Alignment Among the Business and the Supply Chain Strategy

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The following posting is this author’s weekly guest commentary on the Supply Chain Expert Community web site.

Today’s Wall Street Journal features an article, Detroit’s Unsold Cars Pile Up (paid subscription or free metered preview) regarding the building inventory of unsold cars among the U.S. big-three OEM manufacturers, namely General Motors, Ford and Chrysler.  The premise of the article is that despite brisk levels of auto sales across the U.S., domestic manufacturers have built up some alarming levels of finished goods inventories, akin to the economic downturn three year ago.

I call special attention to both supply chain management and sales and operations planning (S&OP) teams to perhaps share awareness of the lessons brought forward since, in my view, it is a classic example of how corporate business strategy and desired business outcome can conflict with the realities of the processes and tools provided to operations and supply chain management.  It is perhaps another industry example of how the conflicting goals among finance, sales and marketing as well as supply chain can result in an undesirable situation.  Also, at least in my view, it presents a snapshot of certain S&OP processes not factoring the realities of the market with the required capabilities desired within the overall supply chain.

This industry situation developed when Japan based automotive brands, such as Honda, Nissan and Toyota, who were recovering from huge sales setbacks as a result of the 2011 Japan tsunami supply disruption, began to aggressively market their models in the U.S. market at the beginning of this year.  The goal was clear- regain lost U.S. market share through aggressive marketing and discounting of vehicles. Some industry players would refer to this as “old behaviors”.  Regardless, U.S. consumers responded by scooping-up Japanese branded models, and sales volume growth among Japanese nameplates has soared to near double digit levels almost every month.

U.S. OEM’s, especially GM and Chrysler, renewed by the bankruptcy and legacy infrastructure bailouts of 2008, have established corporate goals of increased profitability. GM’s goal is to boost sales, market share and profitability without the need for promotional discounting. That strategy would be fine, provided the S&OP and supply chain management process had a means to dynamically adjust the supply chain based on actual vs. predicted demand, with the means to both identify and dynamically adjust inventories by model, by region, or by geographic region.  Chrysler and Ford were somewhat more pragmatic and elected to continue aggressive promotions on certain specific models of vehicles.

According to the WSJ article, GM both miscalculated actual demand for certain models of its products while not dynamically adjusting inventory and capacity output. Normal industry finished goods levels average between 60 and 70 days.  GM entered December with over 788,000 unsold vehicles, which included 138 days inventory of various model pick-up trucks, 96 days inventory of the newly introduced Chevrolet Cruze model, and a five month supply of Chevrolet Malibu and Camaro’s.  Other examples cited were Chrysler, having nearly a six month inventory of its new Dodge Dart model and over 3 months of Dodge Ram pickup truck inventory. Ford has more than four months’ worth of Fiesta subcompacts.  Contrasted are Toyota’s current 60 days of actual inventory, and Honda is now operating its North America plants at 90 percent capacity to satisfy consumer demand.

While the U.S. market has been the bright spot, global automotive demand has been on the decline, especially across Europe where the ongoing severe economic crisis has cut deeply into auto sales volume. The overall market in China is contracting, with the exception of GM, where its model line-up is currently highly favored by Chinese consumers. Not only must automotive supply chains deal with the sales incentive dynamics of the U.S. market, they must also deal with the realities of a currently hemorrhaging market across Europe, dynamically changing markets in China, Asia and other developing markets.  The industry realities are radically different market demand pictures, highly competitive market competition, all fueled by singular global product platform and supply strategies. If there were ever a definition of a highly dynamic industry supply chain with conflicting forces, it would be today’s global automotive industry.

Supply chains can indeed impact business outcomes and help deliver bottom-line results provided they have the tools and processes that are necessary.  In the case of the U.S. automotive market, and certain U.S. automotive OEM’s, these supply chains need senior management support, involvement and commitment in the understanding that a highly dynamic supply chain requires highly responsive supply chain resource and decision-making capabilities. That would include the ability to sense individual product, market, and geographic demand, with the ability of the supply chain to dynamically and flexibly change resource plans.

This latest automotive industry development perhaps provides evidence that while come OEM’s get it, other do not quite get-it.

I encourage feedback and comments from Community members currently residing or interacting with this industry.

Bob Ferrari

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