Detroit's Continuing Stupidity: The Inventory Dilemma

The Wall Street Journal featured a lead article Friday discussing the big three American auto maker's dilemma with unsold cars.

My favorite line in the piece is this quote from GM's head of North American sales and marketing, Mark LaNeve, "It's not like we have some crisis." Then there is this gem from his colleague, Troy Clarke, president of GM North America, "Today, we are much better in balancing production and demand than we were two years ago....If the trend continues, we will be right where we want to be."

Actually, they do. A crisis so bad that the CEO of AutoNation, Mike Jackson, routinely finds the wrong types of cars on the lots of his dealerships. According to the Journal article,

"AutoNation's Toyota and Honda stores typically carry enough cars to last 35 to 42 days. Its GM, Ford and Chrysler locations used to have 65 to 70 days of inventory. These days.....that number has climbed to between 80 and 120 days."

The other interesting item reported in article is that AutoNation hired McKinsey and several other consulting groups to perform some rather basic 20/80 rule analyses. That is, to identify the relatively few (usually around 20%) vehicle variations that account for most ( the 80%) sales. I'm not sure why AutoNation couldn't do this with its own marketing staff, but, for now, never mind that.

When Jackson approached GM about co-developing a predictive modeling system based upon this age-old 'wisdom,' Mr. LaNeve said GM was "seriously considering joining" the effort.

At least Alan Mulally, Ford's new CEO, said, of Jackson's idea, "He's absolutely right on. When you have big inventories, you get further and further away from that customer decision."

This is hilarious. The Journal piece, which is quite long, lavishes examples with lots of details, illustrating some howling mismatches of cars and US locations, thanks to GM's and Ford's insistence on guessing at consumer preferences, and then cranking out models according to those guesses.....ah...."forecasts."

This alone ought to tell you why you shouldn't be betting on either GM, or Ford, to return to a consistently superior total return performance path anytime soon. They may not even have sufficient funding to do so independently, at the rate their senior executives are moving on the inventory issue.

As I wrote in a post early on in this blog, the real question is why the manufacturers continue to use dealerships as they do at all. Why not simply establish kiosks or third-party locations, such as Wal-Mart, etc., to site sales offices with elaborate online 3D software programs to showcase their vehicles. Consumers could then order their cars, custom-made, on the spot, paying a deposit. The third-party location would accept the drop-shipped car, which could be built within weeks. And would this not eliminate much of the auto manufacturers' inventory and work-in-process financing issues?

There is another, related challenge which was mentioned in a glancing fashion in the article.

Right now, Detroit seems to need about 18 months, minimum, and often, up to 3 years, to adjust its product offerings to major changes in consumer behavior. I'm referring to, of course, what happens to demand for various product types every time gasoline prices either skyrocket or plummet. What to do? How do the auto manufacturers handle such volatility in the price of a major complementary good used by consumers of their product?

Actually, the answer already exists, in pieces. Shell pioneered scenario planning over forty years ago, and Detroit needs to implement that skill as well. The variability in consumer demand for vehicles can probably be reduced to a few major sources of discontinuous uncertainty and, thus, modeled as several most-probable scenarios.

Under each scenario, the auto producers could determine what sorts of models would be best-suited for the particular situation forecast. The manufacturers could then simply keep designs current for at least a few models under each scenario, and several factories ready to switch over production upon a few months' notice.

Does it not seem likely that the first producer to arrive in the market with vehicles tailored to something like a radical change in gasoline prices would be rewarded with increased market shares and pricing power, offsetting some of the costs of simply keeping designs current?

The truth is, today's global scope and volatile gasoline and oil prices make the auto industry a far from simple business to manage. Judging by the statements in the Journal's Friday article, and AutoNation's CEO, Mike Jackson's cool reception with some solutions, the current leaders of GM and Chrysler remain questionable as being up to that challenge. It also remains to be seen whether either Ford or GM have the financial staying power to continue to play a game in which the manufacturers remain so far from consumers' decisions points.