Matching supply and demand in the auto industry

Matching supply and demand is in some sense the fundamental problem in operations management. That is very apparent right now in the auto industry. Dealers for months have been clamoring for more inventory of hot moving models. (See this earlier post.) Now Automotive News is pointing to a systematic problem in the automotive supply chain (Needed: A new way to order cars, Jan 10): The way car companies take orders and allocate stock is simply too slow and unresponsive to demand.

Don Ferrario says he could have doubled new-vehicle sales last year if he only had the inventory. Ferrario, president of Ferrario Auto Team, says the factories’ turn-and-earn allocation system can’t keep pace with demand.

It’s a “self-fulfilling prophecy,” says Ferrario, who runs four domestic-brand stores in Elmira, N.Y., and Towanda, Pa. “If you base stocking on the last three months of sales, you are going to guarantee that you won’t sell more than that over the next three months.”

Dealers are essentially forced to order on a periodic basis so will be looking back as much as forward when it comes time to place an order. The challenge here is that the period is fairly long (typically one month) relative to how fast market conditions (e.g., gas prices, the stock market) can change. Thus, if a dealership has a busy weekend just after placing its order, it will have to sit around for a month before it can make the appropriate adjustment.

So what can be done? Different companies are trying different things. GM, for example, is supposedly moving to checking inventories twice a month. Ford and GM have started to prioritize orders for cars that are already sold to customers over cars that will just sit on a dealer’s lot (stunning that one has taken this long to be done). Chrysler is providing improved IT support.

Entrepreneurs have also taken note. Firms such as Ideal Inventory Solutions have step in to do what the car makers can’t (Dealers’ inventory frustration fuels vehicle swap shops, Jan 10, Automotive News).

[Founder Ellis] Disch, 32, launched Ideal Inventory Solutions, a Web site that makes vehicle swaps among dealers easier. It’s an online venue that allows dealers to purchase and wholesale new vehicle inventory anonymously. More than a year later, his business is growing rapidly.

“We can help reallocate vehicles to other dealers faster than the factory can,” he says. “We’re not miracle workers, but some vehicles have sold within a few hours.”

This is an interesting problem with several intriguing angles. One, as I have noted in earlier posts, is that the industry as a whole is in transition and dealers are learning to live with car companies that are not blindly pumping out more and more vehicles. Greater production discipline may be good for the industry as a whole but it also means that a wider variety of models will be in tight supply. Ordering and allocation mechanisms don’t matter a whole lot when supply is not binding. That all changes in a world of scarcity.

A second point is just how flexible factories are. An OEM might take orders weekly but that isn’t going to matter if it is unable to tweak production schedules on a similar time scale. A related issue is just how idiosyncratic local or regional sales are. Sales numbers at one dealership might jump around in mix, but should a factory’s production? A dealer’s sales inevitably represent a small numbers problem. Suppose a car sells 100,000 units a year. If the automaker has 1,000 dealers, that’s two cars a week per dealer and realized volume and mix will almost inevitably jump around . At a national level, both volume and mix should be more stable. That makes a case for producing a level mix and simply waiting to as late as possible allocate vehicles to particular dealers. That is essentially what Ideal Inventory Solutions is facilitating.