In recent Supply Chain Matters commentaries focused on the automotive industry and its supply networks, we have focused on how the ongoing global wide shortage of required automotive semiconductor logic devices provide the opportunity to re-think existing business practices. With the semiconductor demand and supply imbalance forecasted to extend into next year, automakers are forced to make decisions as to which models are to be prioritized to compensate for limited supply. Some decisions are being predicated on models most in demand by consumers while others focus on most profitable vehicles.

The industry itself will likely experience lost sales because production lines continue to be disrupted by a lack of required semiconductor inventory.  Toyota, which managed to bulk up on safety stock several months now indicates that September’s production schedules across Japan will have to be cutback as much as 40 percent.

Ford Motor Company has now come up with an alternative approach that will shift to a make-to-order (MTO) planning and production scheduling to better respond to consumer demand in the United States and at the same time reduce overall finished goods inventory costs.

The Wall Street Journal reported this week (Paid subscription or metered view) that the automaker seeks to leverage the ongoing semiconductor shortage to initiate changes to its U.S. sales organization and vehicle distribution strategies.

Ford CEO Jim Farley indicated on the company’s financial performance briefing in July that the company’s goal is to have MTO factory orders account for upwards of a quarter of vehicle sales and consequently, the automaker can reduce overall finished vehicle inventories among U.S. dealers from an historic average of 75 days to a targeted range of 50-to-60 days.  Reportedly, the strategy can reduce U.S. vehicle inventories on dealer lots by tens of thousands of vehicles and at the same time allow Ford to configure and deliver vehicles that customers actually want the most. Customers would be able to configure the model and various options desired online with targeted delivery time to a U.S. dealer to be in six to eight weeks.

One could surmise that the 6–8-week target appears to be conservative, but it allows the automaker to be able to better fine tune overall manufacturing and supply chain planning processes that can identify the most desired models and option configurations.

The report indicates that U.S. dealerships seem willing to support this new distribution plan. However, they reportedly remain concerned for lost sales if other auto brand competitors continue to stock more vehicles on their lots and provide consumers with the immediate gratification of a vehicle that can be driven off the lot.  From our lens, we believe that such a concern is not surprising from dealers who have fostered traditional thinking and business practices centering on selling on the lot sales practices for years.

The reality is that the automotive industry is being disrupted by a combination of forces. The pandemic forced many auto dealers to improve capabilities to connect with prospective buyers online, answer specific questions, and actually close a deal and deliver a vehicle via online interactions. Technology laden start-ups such as Carvana and Tesla have already challenged traditional vehicle ordering and delivery practices and consumers seem to enjoy this type of buying experience for its convenience and stress-free experience. For auto dealers to remain meaningful, they will have to embrace business models for being more services oriented in nurturing longer-term relationships with a consumer.

The other reality in the U.S. is that the notions of independent auto dealers is quickly being subsumed by larger, nationwide dealer owners who gain a franchise to promote and sell multiple auto brands thru regionally focused dealerships and pooled vehicle inventory. Having to inventory multiple brands and models regionally can be an expensive working capital proposition.

Supply Chain Matters applauds Ford’s new initiative because it demonstrates required new thinking in both customer fulfillment and in fostering broader efficiencies in overall inventory management practices, not just the factory floor. This has been long overdue for the U.S. automotive industry.

The global wide shortage of semiconductor devices is not going way soon and more importantly, provided automakers an important learning experience. Increased requirements for more sophisticated technology components in automobiles and trucks implies capacity and inventory supply needs that are also shared with other industry supply networks. Automakers can no longer assume that they can apply short-window inventory buying practices among high tech component suppliers. Semiconductor suppliers have already demanded longer-term, multi-year supply contracts to insure adequate manufacturing capacity. This in-turn challenges traditional thinking for the industry’s just-in-time inventory and manufacturing practices.

Managed MTO fulfillment strategies can definitely help automakers to better anticipate, and plan critical component inventory needs based on actual demand levels while at the same time reduce inventories of finished goods at the dealer level. We trust that other automakers will rethink these strategies as Ford has done.

 

Bob Ferrari

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