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The U.S. Automotive Industry Needs Updated Finished Goods Benchmarks

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Earlier this week the Detroit Auto Show occurred, an annual event that provides industry players and business media the opportunity to feature multitudes of commentaries regarding the state of the industry and the state of automotive supply chains.

The year 2013 was a good one for the U.S. automotive market as sales rose 7.6 percent to 15.6 million vehicles.  That is quite a comeback from the levels of 2009-2010 when severe recession all but forced the bankruptcy of both Chrysler and General Motors and caused many other automakers severe cutbacks in revenue and profits, not to mention jobs.

As we begin 2014, the U.S. market is now the target for most of the globe’s auto makers as the U.S. economy continues its steady rebound and U.S. consumers are much more inclined to replace or buy a new vehicle. The latest estimates for auto sales in 2014 hover in the 16 million vehicle range, a slight improvement.

Yet, in reading certain news reports, we wonder aloud if the industry has learned some operational lessons regarding inventory management, specifically finished goods inventories management.

On Wednesday, the Wall Street Journal published two articles on the industry.  One of the articles made note that many automotive OEM’s are now considering even more investments in added capacity.  Yet, some seasoned CEO’s such as Sergio Marchionne, CEO of Chrysler and Fiat openly states his constant concern regarding excess inventories. He was quoted as indicating that he watches inventory like a hawk. He should know, since he has been responding to that problem in the European market.  Auto makers are augmenting North America production capacity not only to serve the domestic market but export markets as well.  Today’s more prevalent common platform design strategies coupled with more sophisticated levels of factory automation allow auto makers to exercise far more flexibility in production options from any given plant.

What did catch our attention were reports of current finished goods inventories across various U.S. automotive retailers.  According to Autodata Corporation, auto dealers had 3.45 million cars and trucks in inventory at the end of 2013, which is reported as the equivalent of 63 days of finished goods inventory at roughly $100 billion in value. That number is reported as being considered “optimal” by the industry. Keep in mind that automotive OEM’s book revenue credit at point of shipment to dealers, thus their metrics of revenue are fulfilled, but dealer metrics of unsold vehicles being financed is a different story.

The WSJ published a sidebar article indicating that Mike Jackson, the CEO of AutoNation, one of the largest retail auto dealers in the U.S. was indeed concerned about finished goods inventory levels. Jackson is of the opinion that inventories are much higher, closer to 90 to 120 days of supplies if cars sold to fleets is excluded from the selling rate equation. Thus the value of sales rate is combined for fleet sales and private sales which skews the specific type of product demand.

We applaud Mr. Jackson for his candor.  It strikes us that since 2009, the industry should have learned some very important lessons regarding unsold inventories and conflict of metrics among OEM’s and retail dealers.

Today more than ever, auto markets are driven by a B2C online presence.  Consumers can literally shop and price any make or model vehicle and view current inventory levels from the majority of OEM online sites.  Auto dealers can now view finished goods inventory across wide geographic regions and can electronically swap inventory with other dealers. Some of the luxury OEM’s such as BMW or Mercedes allow consumers to actually order a vehicle to be built at the factory and then arrange to pick up that vehicle when completed.

Now more than ever before, OEM’s and their retail dealers have information available as to what models and options consumers are most interested in and from what specific geographic regions product demand is coming from.  They also have the ability to select and utilize a wide variety of advanced software applications directed at item-level inventory management and optimization that are delivering bottom-line savings in more efficient overall management of inventories.  Technology should not be an issue.

Why then is 60 days of unsold inventory viewed as an acceptable norm?

We obviously suspect it has more to do with conflicting metrics, namely revenue recognition or output performance.  If OEM’s receive some revenue recognition at every shipment, they consequently only care when the pipeline gets bloated. They then turnaround and offer retail dealer’s additional cash selling incentives to motivate them to sell unsold inventory more aggressively. Our household bought a brand new Honda in 2013 and it was very clear that the salesperson was highly motivated to offer the most attractive price if we opted for a vehicle in dealer inventory.

This problem has been the bane of the industry and it is shocking that it continues with so many other options in product demand and inventory management now available.

Supply Chain Matters is therefore seeking input from those within the industry- why does this situation continue?  Is the adage of “push it down the pipeline” still an acceptable norm with so many other alternatives now available? It seems to us that there has got to be a better way of channel distribution.

What are your observations?

Bob Ferrari

 


General Motors Selects Mary Barra as New CEO

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A significant shoutout is in order regarding today’s announcement on the appointment of Mary Barra as the new CEO of General  Motors.  This appointment represents a milestone of the first senior female executive ever to lead a global automobile manufacturer, and the significance is not unnoticed.

The appointment is part of a far-reaching re-organization of GM management and includes the announcement that current CEO Dan Akerson will exit the company next month due to personal reasons. Akerson  advanced his succession plan by several months after his wife was recently diagnosed with an advanced stage of cancer.

Ms. Barra has spent her entire working career at GM. The daughter of a tool and die maker at the Pontiac division, she starting in 1980 as a co-op student and risen through the ranks in roles in manufacturing, engineering and other leadership positions. Her most senior roles include Vice President of Human Resources and most recently Vice President for Global Product Development. As head of global development, additional responsibilities were added as global director of procurement. According to GM’s announcement along with other business media reporting, Ms. Barra is credited with the bulk of the current turnaround in company’s line up of new vehicles.

News reports indicate that Ms. Barra has demonstrated a bias for action and for getting things done.  Under her product development leadership, GM introduced the new Chevrolet Cruze and Chevrolet Impala models, both of which have had market success. In its reporting, the Wall Street Journal characterized Ms. Barra has “having a reputation for speaking her mind, a trait that hasn’t always been appreciated in GM’s executive suite.”

Supply Chain Matters views that as a positive connotation, one that has the potential to move GM into an even bolder direction.  Her grounding in manufacturing operations and procurement would indicate an awareness to global supply chain needs, including how the supply chain contributes to strategic business outcomes.

Much more will be written and spoken regarding this landmark announcement, along with GM’s other new leadership appointments. For the time being, due recognition is warranted to GM’s Board and to Dan Akerson for this bold and landmark appointment.

 


ThyssenKrup Announces Sale of Alabama Steel Finishing Facility

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On Friday, ThyssenKrupp AG announced that it would sell its troubled but state-of-the art Calvert Alabama steel finishing plant to the 50-50 joint venture of ArcelorMittal and Nippon Steel & Sumitomo Metal Corp. for $1.55 billion. The announcement concluded an 18 month effort to sell two packaged facilities, in essence a vertical integrated supply proposal. The price garnered in this sale was considerably lower than the $5 billion that Germany based Thyssen originally invested in the Alabama steel rolling facility.  

Three years ago, the Calvert plant was paired with Thyssen’s other raw steel producing plant in Brazil in an effort to provide auto manufacturers located in the southern region of the United States a more technology laden supply of fabricated rolled steel for product design and supply purposes. It was an effort to benefit from the resurgence of auto manufacturing in the U.S., but ran astray because of the rising production costs involved in the Brazil facility, and lower than expected global steel demand.  Thyssen initial attempts for sale involved both the Brazil and Alabama plants as a package, but that resulted in lack of attractive bids. Thyssen later agreed to sell the Alabama facility itself, and managed to garner five different bids for the facility, including U.S. based Nucor.

For the potential new owners is the ability to utilize raw steel supplies from other U.S. or Mexico based steel fabrication facilities.  However, the deal reportedly includes a pledge to annually procure a minimum of two million tons of raw steel from Tyson’s Brazil facility over a 6 year horizon. The new owners can further leverage the higher capacity and productivity that the Alabama plant provides along with a shorter logistics chain for manufacturers with plants in the southeast U.S. region.

The deal itself is still subject to regulatory approvals.  According to reports published in business media, AccelorMittal currently accounts for roughly 40 percent of the steel supplied to the North American market and that may be a sticking point for regulators. Nippon-Sumitomo currently operates a 2.9 million square foot finishing facility in Indiana that supplies U.S. Midwest auto and appliance manufacturers with rolled steel products.

Because of possible concerns, reports now indicate that the review process is not expected to be completed until at least July of next year. One would hope that regulators would have a strategic sourcing perspective for insuring that the current resurgence of auto, appliance and other steel focused manufacturing in the southeastern United States continues with an Alabama plant that now has other options for vertical integration.


A Milestone for the U.S. Automotive Industry and its Supply Ecosystem

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An important milestone for the U.S. automotive industry will occur this month.  The United States Treasury announced that it plans to sell its remaining 31.1 million shares of General Motors stock sometime before the end of the year. The move hopefully represents the final chapter in the 2008-2009 government bailout of General Motors and indeed, the U.S automotive supply chain.

According to business media reporting, the U.S. government initially invested $50 billion in GM, and thus far has recouped $38.4 billion of that investment.  The planned final sale could bring in an additional $1.2 billion, based on the current value of GM stock, making the final net cost to taxpayers of $10.4 billion. In addition, asset sales have helped the U.S. government to recoup over $12 billion of the $16 billion invested in GM’s automotive finance arm.  More importantly, the U.S. automotive industry and its associated supply chains have rebounded from the certain brink of disaster.

In its reporting, the conservative-leaning Wall Street Journal indicates that because of the rescue bailout, companies and communities were saved from possible collapse. The WSJ writes: “The U.S. auto industry has recovered nearly all of jobs lost since the beginning of the financial crisis, is broadly profitable and is expanding again.” A partnership between government and business provided more novel means to expedite restructuring needs and provided .labor with a stake in the end results.  The WSJ echoed analysts and indeed Supply Chain Matters declared beliefs that many auto suppliers that relied on the Big Three U.S. automotive OEM’s would have collapsed if the rescue did not occur. It quotes Bureau of Labor Statistics data that indicates the same numbers of people now work in automotive and parts manufacturing as existed in October 2008. Tier One automotive suppliers have also garnered the opportunity to seize on the move toward more technology-laden auto models and are now growing their revenues and profits based on investments in more innovative and fuel efficient features for new models of automobiles. The expression “a rising tide lifts all boats” is alive and well among U.S. focused automotive supply chains. Not only have U.S. brands garnered the benefits but non-U.S. nameplates as well.  Today, European, Japanese, Korean and even China based manufacturers are investing in U.S. based automotive manufacturing.

In contrast, the Eurozone countries have endured two long years of economic recession with the European auto industry dealing with similar effects of recession, namely declining sales, gross idle and excess capacity in both manufacturing and dealer networks.  Labor unions and indeed individual governments seek to protect jobs and local economies, but decisions seem to linger.  Much can be learned from what occurred in the U.S.

The Thanksgiving holiday celebrated this week in the U.S. and other regions is time to reflect and give thanks for blessings in our lives.

Those that contribute to or are indirectly associated with the U.S. automotive industry for their economic livelihood should give thanks that a partnership among government and business actually accomplished its goal to save an industry and its supply chain ecosystem. From our lens, it was a proper and meaningful investment. It could have well had a far different and negative outcome.

Bob Ferrari


Strong Earthquake Strikes Taiwan

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Yesterday, an earthquake measuring 6.3 magnitudes struck eastern Taiwan and it adds more food for thought in terms of having active supply chain risk mitigation plans. 

This latest major quake was reported to have struck at a depth of 19.5 kilometers and the epicenter was reported as 52.9 kilometers south of the coastal city of Hualien.

This tremor shook buildings in Taipei and according to a published Bloomberg report, caused the temporary evacuation of one of world’s largest semiconductor fab facilities. Limited damage was reported to the international airport.

Taiwan Semiconductor Manufacturing Company (TSMC) temporarily evacuated three separate fab facilities, but workers returned to their areas shortly thereafter. Another semiconductor producer, United Microelectronics Corp (UMC) temporarily suspended its operations and work was reported to have resumed after a few hours. According to Bloomberg, the administration of Hsinchu Science Park, where many of Taiwan’s high-tech companies reside, reported no reports of damage nor did the island’s 62 industrial parks. However, quite a number of aftershocks have occurred on the island.

This is not the first time that Supply Chain Matters has highlighted severe tremors in this region.  Our last was in March of this year.  Regarding yesterday’s occurrence, we were interested to read the U.S. Geological Service summary of this latest earthquake incident.  The report notes: “This region of Taiwan is familiar with moderate to large earthquake activity, and has hosted over 60 events of M6 or greater within 250 km of the October 31 event in the past 40 years.”

Interesting read when you consider that a considerable amount of the globe’s semiconductor chip fab capacity is located in the region. In August, we highlighted a study from a supply chain risk consulting services provider which identified that within certain automotive and high tech supply chains a vast majority of suppliers are dependent on component supply from just four semiconductor suppliers.  Guess where many of their fab facilities are located?

And, if the Taiwan incident is troubling, consider that yesterday, a magnitude 6.6 tremor occurred in Chile. The two countries was the largest reserves and mining capacity for lithium, which is now rather important for automotive and alternative energy related product supply chains, are Bolivia and Chile. Chile was hit by a 8.8 magnitude quake in 2010.

Plan accordingly.


Update on Current Flooding Conditions in Thailand

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Supply Chain Matters provides an update regarding our previously published supply chain disruption alert involving current flooding conditions in Thailand. 

A published report on Bernama, the Official News Agency of the Government of Malaysia, published late last week indicates that the flooding that has affected Thailand for a month now is estimated to cost economic damage of between 10-15 billion baht. It further reports that the damage could have been worse if it had affected Thailand’s industrial areas. However, the flooding did affect the entrances to some of those factory areas causing workers great difficulties in getting to work.

A syndicated Reuters report featured on the Chicago Tribune web site on Monday reports that 17 factories were temporarily shut on Monday at the Amata Nakorn Industrial Estate, dominated by foreign companies, after flood waters blocked nearby roads. As we pointed out in our earlier posting, this industrial complex houses a number of Japanese based producers within both automotive and high tech supply chains. In the latest Reuters report, a spokesperson for Amata Nakorn is quoted as indicating that the 17 factories were shut after the workers proved to be unable to reach them and the Thailand navy has been asked to help pump out the water. The estate was using more than 100 water pumps to speed drainage and the situation was reported to have improved from the weekend, with levels in many areas dropping 6 inches.  Likewise, flood waters in the remainder of the country have eased.

Thus, while it does not appear that the current flooding is in any way taking on the severity to what occurred in 2011, there are temporary interruptions of supply continuing as government agencies and industrial estate owners continue to work on clearing roads and industrial park entrances.

Procurement and supply chain planning teams can obviously breathe easier but should continue to monitor developments and plan for temporary disruption.


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