The case for improved control of new vehicle supply

My blog two weeks ago on the need to rethink new vehicle supply strategies seems to have struck a chord – frankly to my surprise, as I thought even the supply chain diehards had either accepted defeat or retired.  However, it generated the largest number of views so far since I started doing these blogs nine months ago.  It’s perhaps therefore worth reflecting on why controlling new vehicle supply is a good thing, and a “win-win-win” for manufacturers, dealers and customers.

I had a discussion recently with a manufacturer about the need to restructure their dealer network – not an unusual discussion topic even before the pandemic hit us, but certainly moving up the agenda now.  In the course of the discussion they shared the evolution of their total cost of distribution over decades, and it has not moved significantly.  As far as I am aware for most manufacturers, total cost of distribution remains around a third of the retail pre-tax price.  Although I am obviously not going to suggest that the fixed costs of dealer networks do not need to be addressed in the face of the need to invest in online, and a clear customer demand for an omni-channel experience, the fact is that a major part of distribution cost is variable marketing.  Hundreds of hours of time is spent on trying to save a few Euros from product cost, but then hundreds (or thousands) of Euros is spent on variable marketing in much more subjective and less well-disciplined decision making processes.

It is easy to suggest that this is the consequence of over-capacity, but this is too simplistic.  Lower plant utilisation, but of a richer mix which retails faster without the same level of variable marketing behind it is a better, stronger business.  It is also less exposed to sudden changes of demand such as those that we have just seen, and it seems will continue to see as incentives are focussed largely on BEVs that are often supply-constrained anyway.  When the order pipeline is fed with real demand and a forecast that is driven by real demand, then experience suggests that the build stability improves, helping manufacturer and supplier efficiency.

I am not advocating a renewed search for the holy grail of 100% build to order (BTO).  The reality is that high BTO levels for some markets are usually only possible when that demand can be blended with similar or higher volumes of build to stock for markets like China or the US.  I believe that we are also in an era of instant gratification.  Waiting for a highly customised Rolls-Royce is one thing, but for a Golf or a Renault with a few options?  I don’t think so.  But build for stock can be done intelligently, not just in terms of volume and mix planning, but also inventory deployment.  One of the keys to successful lean inventory models is not shipping cars to dealers, but holding them back as far up the supply chain as there are shared specifications and an ability to deliver within a week or so.  The questions that arise about whose stock it is, who funds it, what happens if a dealer has a customer for “another dealer’s car” have all been examined in the 1990s and 2000’s.  There are a range of solutions to pick from and improve on, and as and when agency becomes more widely adopted, even if just for BEV ranges, there is no real option to centralised stocks and a shared order pipeline.

If all of this made sense 20-30 years ago, it makes even more sense now as we see online channels rise in importance.  The ability of customers to see inventory and the order pipeline would make a huge difference to the willingness of customers to use the channels based on recent research interviews we have conducted.  Given the choice, customers will upsell themselves, rather than being pushed into an aged stock vehicle that a dealer needs to shift.

There are no real losers from improving new vehicle supply and all the related processes and workarounds that we have to deal with current inadequacies, other than the owners of disused airfields.  It may be that we’ll have a few more of those as travel patterns are disrupted, but let’s not fill them with cars…