Allocation schemes — particularly in the auto industry — are one of my favorite topics. This is also a very important issue among car dealers at the moment (Dealers’ plea: You send it, we’ll sell it, Feb 21, Automotive News).
“We want cars, and we want them now.” That was the unofficial theme of this year’s National Automobile Dealers Association convention. Dealers are delighted by demand but frustrated by their inability to get the vehicles they want.
Automakers are having trouble ramping up to meet surging desire for vehicles and have been hurt by shortages of key parts. Those problems and a switch to a pull system — whereby dealers keep fewer vehicles on their lots and place orders based on customers’ preferences — have exposed the deficiencies of automakers’ distribution systems.
When dealers held huge inventories, it mattered less if some of the cars were the wrong trim levels. But with far fewer vehicles on the lot, it’s critical that the ordering and distribution systems get the right vehicles to the right markets. …
“It’s been very frustrating for dealers,” said John Krafcik, CEO of Hyundai Motor America. “Dealers used to have massive stocks of port inventory to choose from because we’ve been production-push,” he said. “But now we have demand-pull, and our stocks are low, and dealers can’t pull the cars they want. Now they have to wait. One dealer said he hadn’t seen an Elantra in three weeks.”
Operations folks generally love pull systems. Production should respond to demand as opposed to guessing what is going to happen. Guesses are going to be wrong and that will mean the system will have excess inventory. Pull systems thus allow for leaner inventories. Or that’s the theory. The other part of theory is that inventory and capacity are generally substitutes. If you’ve got lots of capacity, you can quickly respond to demand and don’t need that much inventory.
So how is this playing out in the US auto industry? Dealers are carrying less inventory and the automakers have scaled back production, either by reducing shifts or just closing plants. That has taken the safety net out of the industry along two dimensions. Plants and their associated supply chains are running at higher utilization while there is less stock on hand to buffer delays. Thus an automaker’s allocation mechanism — that is how they decide who gets what cars — matters. Tight supply and limited inventory has always existed but at any given time has only impacted a handful of hot models. Now it is impacting pretty much every vehicle and the short comings of the allocation schemes are becoming evident.
Why are they are doing so poorly? One issue is timing. Car sales happen daily but allocations happen on a longer time scale — usually monthly. Thus as the article points out, a dealer may quickly blow through his allocation of a vehicle moving them all in a week but then have to wait several weeks before he can ask for more. That’s just to ask. Actually getting will take weeks beyond that. The article doesn’t explicitly say this, but one suspects that the automakers have some massive MRP system to chug through their production planning and are loath to do that every week let alone every day.
A second issue is variety. A Hyundai dealer wants an Elantra. That statement actually masks a lot of complexity. What the dealer really wants is a particular trim level paired with a particular drive train in a specific color with the option package that has the navigation system. One easily ends up with a large number of variants of varying popularity that all have to go through the same system.
A final problem is that most car makers use variations of turn and earn allocation. You get allocated more by turning your current allocation but what if your current allocation ain’t much?
Linda Walston, business manager for Napa Ford-Lincoln, in Napa, Calif., said her dealership is having a hard time getting Ford Mustangs, F-150 pickups and the redesigned Explorer crossover. The store trades with other Ford dealerships to get enough of those vehicles to satisfy customer demand.
“The other dealers around us have 10 or 12, and we just have one,” Walston said. “You have to sell them in order to earn more, and you can’t sell them if you don’t have them.”
Thus allocations are biased toward stickiness. If a dealer was disappointed in their allocation last month, there is a really good chance they will be disappointed again.
So what is likely to change? The article mentions that several car makers are planning changes to their allocation systems to at least allow more frequently. They are also increasing decision support tools to help dealers order more effectively. One suspects, however, that time needs to be taken out of the system. If car makers cannot respond to orders faster, these problems may persist for a while.