Archive for the ‘Allocation schemes’ Category

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.


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Here’s an intriguing supply chain question: When should a firm sell directly to customers and when should it go through an independent retailer? Obviously, this isn’t a clean either/or question. Nike, for example, has its own stores as well as selling through a variety of different retailers. Of course, Nike stores are as much about marketing — showing all things that can be bought with a swoosh on it — as dramatically increasing the firm’s sales. Apple Stores, on the other hand, are very much above moving merchandise and, I suspect, have really punished many small dealers that have long specialized in Apple products. It is not fair to describe the Apple Store as being the only place to buy a Mac, but it is likely the first place that most people think of.

What go me thinking about this is a recent story about Tesla Motors, the Elon Musk’s electric car company (Car Dealers Sue Tesla, Citing State Franchise Laws, NPR, Nov 9). Tesla’s cars are unconventional and it turns out their distribution strategy is as well. As opposed to signing up franchisees across the nation to be dealers, Tesla has opted to open its own stores in malls. That is leading to complaints that they are violating state franchise laws.

Robert O’Koniewski, the executive vice president of the Massachusetts State Automobile Dealers Association, is suing Tesla for opening a store in a local mall.

In Massachusetts, franchise law 93B prohibits a manufacturer from owning a dealership, O’Koniewski says. An auto dealer association in New York is also suing Tesla.

Typically, car manufacturers build the cars, then ship them out to local car dealers, which have to meet the various manufacturers’ standards. …

Each brand represents another manufacturer that can require expensive equipment and training. Not having to meet those various needs, O’Koniewski says, gives Tesla an unfair advantage.

“Those dealers are investing millions of dollars in their franchises to make sure they comply with their franchise agreements with the manufacturers,” he says. “Tesla is choosing to ignore the law and then is choosing to play outside that system.”

Tesla insists it isn’t breaking the law, in Massachusetts, New York or anywhere else. But it is clearly trying to play outside the franchise system.

Jeremy Anwyl, vice chairman of Edmunds.com, thinks that’s the real issue.

“Let’s say consumers really liked buying from a factory store. That would put dealers in a tough spot because they’ve been saying for years that the franchise system is actually good for customers,” he says.


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For my first blog, I’d like to share a personal experience and link it to some questions of interest to the Operations Room, which has blossomed under the nourishing care of my colleagues Professors Allon and Lariviere.  (Thank you, Gad and Marty!)

On March 2, 2011, Apple announced the “iPad2: Thinner. Lighter. Faster. FaceTime. Smart Covers. 10-hour Battery. Coming March 11. Starting at $499.”

Marketing works: On March 5, 2011, my brother and sister agreed that an iPad2 would be a great Mother’s Day gift.  My mom lives in Belgium and uses her old laptop mainly for email, browsing, playing bridge, and skyping me, Shannon and our four kids in Chicago.  We agreed that the 16GB wifi model would be more than sufficient. I was to buy one and carry it on my April 28 flight to Belgium (en route for Germany for my annual teaching in our executive MBA program at our partner school WHU).

That was the plan and … I put it on the backburner “for later” but never entered it as a task on my Outlook.  So I forgot about it until suddenly on April 11 I realized there were only 17 days to go.  I hadn’t anticipated the product would still be in short supply one month after introduction.  (more…)

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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? (more…)

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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? (more…)

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My family is a Honda family. We have had at least one Honda in our driveway for the past dozen years.  Over that time, Honda has seen its US market share rise pretty steadily. Even when the overall car market crumbled, Honda managed to be less affected than the average firm and thus saw its overall share climb.

That is, until this year. As the graph shows, Honda has recently fallen off the pace. Yes, its sales are up this year but its gains are much more modest than the gains of GM, Ford, and even Hyundai. So why has Honda stumbled?

Automotive News has a recent article that proposes several answers (The threat to Honda’s mojo, Dec 6) even as it quotes Honda execs claiming that they don’t worry about share.

At Honda, “no one talks about share,” Mendel said in a recent interview. “Chasing share gets you into bad habits. We set a business plan to sell a certain number of cars. We don’t set the plan based on an assumed share. We plan to grow 2 or 3 percent in volume in good times, and bad times. And there are times we’ll give share back.”

Of course, Honda doesn’t care about share. Just like I’ve never heard a business school dean say he or she is concerned about BusinessWeek rankings.

In any event, the reasons given for Honda’s slow down are numerous. The Civic and CR-V are long in the tooth but have redesigns coming. Honda was slow to ramp up production until they were convinced that an increase in demand for trucks (that’s pronounced Pilots and Odysseys at Honda) was real. The company has never been as aggressive as other firms with promotions. They have always been better at products than marketing. And so on.

One explanation, however, caught my attention: Honda has been hampered by its allocations mechanism. (more…)

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Manufacturing can be hard.  It can take lots of little decisions to get everything right.  Throwing in living, unpredictable organism, and it gets even harder.  I am not talking here about assembly line workers.  I’m talking about microorganisms.  That’s the problem that Genzyme has had.  Genzyme specializes in biopharmaceuticals and thus depends on tiny organisms to get things done.  When those things catch a virus, it can shut down an entire factory. We wrote about this back in October, and now the New York Times reports that they have yet to fix the problem (Genzyme Drug Shortage Leaves Users Feeling Betrayed, Apr 15).

Last June the company temporarily shut its main factory in Boston because of contamination from a virus. Such problems can arise in biotechnology factories, which use living cells to make drugs, and few faulted the company at the time. But Genzyme, which initially predicted that the drug shortages would last six to eight weeks, has repeatedly backtracked on when supplies would be fully restored, as it has run into further manufacturing problems. At one point, particles of steel, rubber or fiber were found in some vials of the drugs.

The company has paid a pretty serious price for this.  It’s stock has been hammered, and it has Carl Icahn making noise. Further, other drug firms have begun to produce competing medicines that may cut into Genzyme’s long-term sales. And these are small markets. The affected medications are for rare genetic conditions.  When Wyeth makes  a bottle of  Advil, they have effectively no idea to whom that medicine is going. Genzyme, however, is essentially on a first name basis with its clients.

That is in part because there are only 1,500 Cerezyme users and fewer than 1,000 Fabrazyme users in this country. It is also because the drugs are so expensive — about $200,000 a year. Many patients turn to a Genzyme case worker to help them secure insurance or financial aid.


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