It’s been a long time since we’ve posted about the roll of allocation schemes in supply chains, but they remain one of my favorite topics. Allocation schemes involve a pretty simple issue: Suppose a supplier is selling to multiple retailers and at some point gets more orders than it has capacity to fulfill. How should the supplier dole out its limited capacity to its retailers? At one time or another, this has been relevant for high tech goods, luxury items and a number of other industries. But one place this almost always comes up is automobiles — newly released vehicles in particular. A hot new release is going to sell at its full sticker price (and maybe more) so allocating new cars is like passing out thousand dollar bills. So how should an automaker approach this problem?
Here is how Dodge is approaching this for its new Challenger SRT Hellcat — a muscle car with more horsepower than a Lamborghini (Dodge Challenger Hellcat dealer ordering begins — with a catch, Sep 9).
Dodge will base Hellcat dealer allocation on the total number of Dodge vehicles a dealer has sold within the last 180 days, including everything from Dart to Durango to Viper, brand head Tim Kuniskis said.
In December, a second allocation calculation will be made based on the previous 90-days’ sales performance, as well as a traditional 30-day inventory turn.
The dealer allocation for the Challenger Hellcat rewards the dealers “that are selling the Dodge brand,” Kuniskis said. “You sell a lot of Darts for me, Journeys for me, Durangos for me, I’m going to give you the rights to this one, too, because this is a halo of the brand.”
After the initial allocation, Dodge will also begin to measure the Hellcat’s days-on-lot and use it as a factor to determine the number of Challenger SRT Hellcats a dealer will get, Kuniskis said.
The longer a Hellcat sits without being sold — as it might if it were to have a $10,000 or $20,000 market adjustment on it — relative to those on other dealer lots, the fewer future Hellcat vehicles a dealer will receive, the Dodge brand boss explained.
So this is one of the cool things about allocation schemes. They can impact dealer behavior by introducing competition even where logically there should be none. Most customers are not going to cross shop a dealership in Chicago and one in Houston. By rights, a dealer in Chicago should really only have to worry about what other dealers in Cook County are doing with pricing. But under this scheme, competition in Houston can serve to disciple dealers here in Illinois. If, for whatever reason, dealers in Houston refrain from marking up the Hellcat and battle it out to move the metal, the good folks in Detroit are going to be happy to keep sending them more cars. If dealers in Chicago try marking up the price, they may find themselves up the creek without many cars to sell as Hellcats go to go to Texas, not Cook County.
All of this raises the question of why Dodge should care. For the foreseeable future, they are going to be able to sell however many of these beasts they can produce. Why should they care if a dealer tries to make a few extra bucks (or a few extra grand) on one of these cars? Part of this comes back to the fact that Dodge has to manage its overall brand and its overall portfolio of cars. The article reports that Dodge “worked hard” to keep the price of the car a shade below $61,000. To be clear, that ain’t cheap — especially for a mass market brand like Dodge. On the other hand, it also isn’t anywhere close to Lamborghini. Dodge views this as a halo car — something around which to build excitement and attract buyers to the brand, even if they are too practical to buy a gas-sucking muscle car. That is going to be hard to do if the only people who can think of buying one are members of the one percent.