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Making hard decisions easier

Making Hard Decisions Easier

Slowing production, cutting shifts, or mothballing a plant for a week or more are difficult decisions to make.  Reducing volumes has wide reaching implications, for the employees in assembly plants and tiers of suppliers through to logistics providers and the franchise network. But you cannot ignore the market indefinitely and sometimes cuts just have to be made. So why have so many carmakers only recently further reduced production when it is clear that the markets have been experiencing significant oversupply? Conflicting reports suggest that between 10% and 40% of sales in the UK may be artificial in some way[1], Susan Docherty of Chevrolet Europe has been quoted as saying that Fiat and Peugeot-Citroen are “producing "very scary numbers" with discounts of as much as 30 per cent off gross sale prices”[2], and in the same article Automotive News Europe wrote that “Ford estimates that 30 per cent of eight-month sales in Germany were self-registrations”.

The pre-registration problem will therefore likely resurface in used car residual values for younger cars at some point over the next year. It’s a familiar scenario and every carmaker knows it. As in 2008 the only possible outcome is at some point there will be excess stock of both new and used cars. The prognosis for the near term doesn’t look great either. Across most of Europe, 2013 projections for GDP, interest rates and inflation suggest a lack of disposable income that points unwaveringly towards weakening demand for retail sales.  But of course, carmakers recognise this too.

Moving planned supply allocation from one market to another can help reduce oversupply but reallocation is a limited option when so many markets are weak. And changing the committed production to suppliers is not something that switches off the supply taps immediately. Supply pipelines of components for planned production mean that weeks if not months of parts are already on their way.

The uncertainty inherent in the markets at present only exacerbates the problem.  If a market doesn’t fall as expected then a volume cut means losing market share, even if most carmakers recognise that the industry places far too much emphasis on market share over profitability.

But the real issue for many carmakers is lack of certainty as to which cars are going to defy the market and take share from competitors, and which product can only be deeply discounted. 

It’s clear that some sales are unprofitable. Certain actions such as tactical promotions and increasing sales through certain short cycle channels, such as rental, will yield less revenue. And whilst discounting works, many price actions taken are too reactive to problem allocation and competitor activity.

Many measures only indicate problems too late. For example, manufacturers are now paying far more attention to overage stock than before the beginning of the financial crisis. Some forward measures help, such as the order fill rate and the richness of the customer sold order mix. But whilst carmakers are awash with data, information could be better collated and analysed. In particular, the industry could benefit from better analysis of the quality of sales. It’s clear when some models are struggling, but what is less clear is the actual retained margin on individual retail sales.

Transaction data on agreed customer price, trade in prices, applicable bonuses and campaigns and the detail of stock and funding costs per unit would help to complete the picture as to which cars are selling quickly and yielding a better margin for dealers, lenders and assemblers.  In mainstream retailing, where transaction data per individual customer is readily available and attributable via loyalty cards and online shopping, the supply and stocking costs and actual retained margins are understood by individual product line. For example, knowing the price elasticity of demand, combined with a detailed understanding of the cost of sales, including stock turn by line, allows grocery retailers to respond quickly to the market on a daily basis. Changing “a little but often” avoids big swings in stocks and supply. Changing a little but often will also require flexible labour contracts and supplier relationships, but any incremental cost at this level will almost certainly be less than the costs of disposing of surplus production. A better understanding of real customer demand and the quality of each sale would help carmakers to be more responsive to the market, which would in turn make the hard decisions smaller, more frequent, and therefore slightly easier to make.

Image: Google Earth

[1] AM online, September 2012

[2] “Price discounting in Europe said to have reached 'scary' levels”, 28th September 2012

Written by Ben Waller

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