The United States Congress is in the final stages of reconciling significant corporate tax reform. The final reconciliation bill is expected to be signed before the Christmas holiday.

Not much has been made public regarding the details of the final compromise of House and Senate versions. However, there are a few industry-specific concerns brewing as to specific changes in the end state. 

This blog is not going to dwell on the political connotations of this measure since social and news outlet media is doing a bang-up job on that front. Rather, we wanted to raise awareness to certain actions that may have implications for supply chain strategies, and in this specific case, demand planning and inventory management for certain industries.

A previous House version eliminated the deduction of interest financing among automobile and other distribution dealerships for the floor-plan financing of finished vehicles stored on dealer lots available for sale. Reports indicate that the final compromise may be a certain capping of the original House deduction elimination.

If this measure survives to final law, auto dealers are going to be constrained  to accept large inventories of vehicles and will likely push-back on automotive manufacturers to store certain excess or slow-moving inventory at factories or come-up with a different inventory ownership plan. Consider that as the U.S. auto industry approaches the end of 2017, dealer inventories are averaging 60 to as much as 90 days sales of certain models. Dealers are going to be more reluctant to take-on that financial burden.

The Wall Street Journal reported on brewing consternation among both construction and farm equipment dealers over similar measures. Like auto dealers, farm equipment dealers fear that restricting floor inventory interest deductions will cause them to buy less inventory. Construction equipment dealers are loudly objecting to current carve-outs because their business models favor use of rental fleets. They instead want to expense the entire cost of capital for construction machinery up-front which allows them the capital to refresh rentals. That was a provision in the original House bill.

Supply Chain Matters submits that a better solution is for automotive, farm and construction manufacturers to address obvious shortcomings in supply chain planning and inventory management policies. The notions that factories have to operate at maximum efficiencies regardless of end-market demand has always been flawed. The existing supply chain absorption and inventory buffer mechanisms is based on the premise finished inventory that could be stored among dealerships across the country. In-turn, saturation media sales promotions, rebates, and local discounting programs are relied on to eventually clear-out dealer inventories, but at an added overall cost.

Considering a demand-response model of supply chain planning and inventory management. It would include addressing the obvious flaws in product demand forecasting (i.e. required factory output or specific sales channel end-item model demand) and linking such planning with dynamic multi-tier inventory optimization practices for each level.  And yes, factory efficiency can be achieved with flexible manufacturing methods. Instead of costly rebates and sales promotions, allow timely model demand sensing and predictive analytics based planning practices manage the supply chain and inventory management response.

Corporate tax reform is similar to any other crisis event in business. Leverage that crisis to formulate changed cross-functional supply chain thinking that can satisfy the business needs of all stakeholders in the product demand network.

Just thinking aloud!

Happy Holidays and do hope that shiny new car or tractor is part of the holiday experience.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.