No chips, no stock – great news!

I’ve talked before about the need for a more disciplined approach by manufacturers to balancing supply and demand – the traditional ‘stock push’ approach is not only the driver of a lot of waste in terms of distribution cost, but it will make any attempt to deliver a true omni-channel seamless customer experience impossible.   Excessive supply over demand leads to aged stock, persuading customers to take cars that don’t really match their requirement, or losing customers as dealers can’t satisfy their needs in an acceptable leadtime.  When we model improvements to the current distribution model – whether that is by modifying the standard franchise approach, moving to agency, or even the extreme of a direct distribution model like Tesla – the first step is always to apply best supply chain management principles.

This is not some theoretical set of principles, but the lessons learned from the manufacturers and dealers who worked together in the late 1990’s and into the ‘noughties’ in a number of markets, but most widespread and longest-lasting in the UK.  By centralising all inventory and creating and managing the order pipeline centrally, leaving only showroom display cars at the dealers, customers picked from a far wider choice of cars, with a broader range of specifications.  ICDP was active in supporting these initiatives, and across three volume manufacturers, we saw reduced total inventory, increased sales volume, and reduced discounting as the result of less aged stock and a better fit of available cars with customer requirements.  There were no downsides, but with the global financial crisis the ‘old think’ pressure for sales volume rather than ‘sales quality’ diluted many of these leading edge approaches.

 In today’s market environment the idea of having surplus stock and unsold stock is clearly fantasy, and discounts are off the table.  Customers are happy to take any car that approximately meets their needs as long as the lead time is ‘only’ three or six months.  That is evident in the data that we have collected as part of our latest supply chain research, with the webinar for ICDP members scheduled for tomorrow.  What would have previously been benchmark performance has now been surpassed by the reality of having a continuous excess of customer demand over available supply.

Just picking out a few numbers, the order banks held by the factories across 16 sample models have extended from 1.6 months to 4.9 months for volume brands and from 2.3 months to 7.2 months for premium brands; across a sample of 122 models, there is no stock available of any specification for almost 80% of them, driving up build-to-order rates from 50% or less to well over 80%.  Although build-to-order means that customers can choose the exact specification that they want, this generally involves small variations in colour and trim and individual options.  Only around 5% of sales, even for a premium brand, are what you might describe as ‘Christmas trees’, laden with options, raising a separate question about the need to engineer and offer a dazzling range of options, bringing with it complexity in the supply chain and a barrier to the ability of customers to ‘self-serve’ through online channels in the way that Tesla does.  Whilst there are some frustrations with the consequent waiting times, the widespread publicity around shortages means that many customers are starting their buying process earlier, and dealers have stepped up to the task of explaining the delivery times.  Some dealers have also changed the basis of payment for their sales staff, rewarding order take rather than delivery, thus maintaining their motivation.

We are not suggesting that as the supply situation eases, hopefully during this year, that supply chains should continue to run without any stock, and that it is necessary or acceptable for all customers to wait months for their new car.  There is clearly a balance to be struck, but the techniques for doing this were proven twenty years ago.  They are based around managing produce range complexity, applying ‘runner/repeater/stranger’ to build to forecast and stock deployment, and allowing flexible access to stock and orders to meet customer demands directly or through order amendment.  At the top level, these allow lower total system stock, reduced dealer costs in part reflected in a cut in dealer margin, and reduced variable marketing expense.  The removal of ‘noise’ created in the supply chain by silo thinking and behaviour typically results in more stable production schedules.

These are all clearly good things.  Some dealers will argue that they are unable to apply their own judgement to ensure they have the right stock for their customers, but for every dealer that gets these decisions right, there are others who get it totally wrong, leading to higher costs and dissatisfied customers.  ‘Having the right stock’ is also sometimes another way of saying ‘picking the hot product’ and only results in other dealers being unable to meet the demands of their customers.

Given the overall benefits, and the way in which the stock centralisation and visibility supports some of the fundamental building blocks of omni-channel retailing (‘seamless’ and ‘transparent’), manufacturers and distributors should be looking urgently to implement these supply chain models ahead of the restoration of free supply.  Starting from low stocks makes the transition to a lean supply system easier, without the pain of de-stocking, and the behavioural change of selling from the pipeline rather than from dealer stock is also avoided.  It then provides the first stepping stone to a true omni-channel environment, regardless of whether that is based on a franchise or agency contractual format.

ICDP members can still register for the webinar tomorrow (February 8th) by contacting the Project Office and download the presentation or watch the ‘on demand’ recording through the website archive.