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