How can vehicle inventories at dealers, distributors and OEMs be aligned so that an optimal balance is reached between the need to keep inventory and the need to reduce working capital? What can be done to prevent sales and inventory planning groups from creating plans with what feels equivalent to looking into a crystal ball?
With modern software systems, automotive manufacturers can now synchronize sales, production and inventory planning. This gives a basis for validating the decisions on which products to produce and what quantities are required for each market.
Determining what vehicles to produce is not always based on individual customer orders, as is often assumed. On the contrary, the majority of worldwide sales are based on a build-to-stock strategy in which dealers are supplied vehicles without regard to specific customers. Even manufacturers of exclusive models need to build to stock in certain markets. In addition, depending on the planned product lifecycle, there is a need to support build-to-stock capability.
For example, it’s important for a dealership to have vehicles available so that potential buyers can look at, test drive and experience different models. In today’s market, it’s critical that the desired vehicle is available at a competitive price, especially in large and emerging market regions. It’s becoming less important that vehicles are individually configured by the purchaser or made to order.
The build-to-stock production process offers a significant opportunity for cost savings because demand-driven planning and execution allow manufacturers to achieve greater volumes and to plan longer term. OEMs can only unlock this potential if the turnover rates are sufficient, and if inventory wait times at the factories, distribution centers and dealerships are as short as possible.
The challenge for manufacturers is to serve different markets and varied consumer behavior with a wide variety of products with different characteristics. It should be noted that there are different quotas in the planning process for inventory-oriented production (build-to-stock) and for order-oriented production (build-to-order), which may change over time. This adds even more complexity when trying to control this diversified business with a single planning system.
An example: The California market is one of the largest markets for Porsche worldwide. A dealership south of Los Angeles has 350 different Porsches for sale. According to the dealer, this is a rather small number of cars because demand is currently high. The dealer needs this big number of vehicles because customers expect it. A lower inventory could give the impression that business isn’t going well for the dealer. Additionally, when buying on the spot, customers want to buy the model with the options they like best.
Diversification becomes not a desire, but a necessity. On the other hand, the large inventory requires a high level of working capital. The objective of the dealer is to carry inventory that represents the appropriate product range and the number of vehicles that fits the dealership‘s turnover rate. The challenge for the dealer and the other stakeholders—vehicle manufacturers and distribution centers—is to try to anticipate what is going to be sold, to determine what and where products should be produced, and to organize everything in such a way that the dealer inventory aligns with consumer expectations.
Looking at a Crystal Ball or Intelligent Inventory Planning?
Between production sites and point-of-sales locations are different transportation times with changing dynamics and varying transportation lot sizes. If you want to plan production so that market stock levels are optimized, the lead time between the time of production and the moment when the car is ready for sale in the markets needs to be considered. Time variables must also be considered in both long- and short-term planning, so that those responsible can detect changing conditions and their effects on the market stocks. By using intelligent systems, the responsible parties can initiate adjustments to the production programs that are required.