Get those cars off the lot and cash in the bank Over the last two decades we've watched the American auto industry roll up its sleeves and plunge into lean manufacturing. Not only did this improve quality and productivity, it freed up all kinds of cash. So I ask, if it worked so well in manufacturing, why not use it on the sales side of the business?
When it comes to retailing, for some strange reason American automakers love inventory. They not only think it's necessary, they think it's good to have a minimum of 60 days' inventory parked in dealers' lots from the Atlantic to the Pacific and from Canada to Mexico. That represents a ton of money. At the current days' supply, General Motors has roughly $20 billion tied up in finished goods, Ford has $15 billion and DaimlerChrysler has $10 billion.
Look at it this way: The average price of a new vehicle today is $22,000, so don't think of all those shiny new cars and trucks as cars and trucks on the dealership lot. Think of them as piles of cash. Now, pretend that you're the president of a car company. Would you want all that cash stashed in parking lots across the country, or would you want to take that money and really put it to work for your company?
Sound impossible? Honda and BMW both run on about 30 days' supply; Toyota has about 40 days' supply. So not only can it be done, if the Big Three did it they would free up billions of dollars that could be invested in new product development, e-commerce ventures or a host of other business opportunities. Heck, they could even do something for their shareholders.
Besides, when a car sits for a couple of months, it develops what the dealers call lot rot. It can get dings and dents. The gasoline can go stale, the battery can die, the tires can leak and the interior can lose that new-car smell. Lot rot reduces the customers' perceptions of quality. That means it usually takes a sweeter deal to move the metal.
The reason the Big Three love 60 days of inventory in the field is that they've trained the American consumer to buy on impulse, and to expect that the dealer will have what they want. That's the theory. However, many if not most consumers drive off the lot with something that only approximates the car of their dreams. They end up taking a model that's not exactly their favorite color, or has a different type of interior than they would have preferred, or has some options they really didn't want.
If a customer wants to order exactly what they want, good luck to them. First off, most sales people won't even take the time to help fill out an order form. They're expected to move what's on the lot. After all, the dealership already bought those vehicles and is financing them. The longer they sit, the less profit there is, so the whole focus is to sell what's already there.
Even if a customer does get a helpful salesperson to fill out an order form, there's probably going to be a wait of a month or two to take delivery. And expect a longer wait if it's a hot-selling model. Not many customers are willing to wait that long.
That's why you've heard about so much interest in the 10-day car, i.e., the ability to take an order from a customer and deliver a new car to the dealership within 10 days. Automakers know that most consumers would be willing to wait a week or two to get exactly what they want.
Better still, they could collect the money to build the car before they started to build it. It's what the finance guys call negative working capital. In other words, the automaker doesn't have to borrow the money, or dip into its bank account, to buy all the parts and pay its workers to assemble the vehicle. It gets the customers to pay up front, and then uses that money to build what they want.
Today most vehicles are built to a forecast and to dealers' orders. Of course, dealers only want to order the hottest selling models, so the factory forces them to take the slow moving ones, too. It's a push system, the exact antithesis of lean production.
The only way to get lean in retailing is to change the way cars are designed and built. Modular cars that can be easily bolted together, with the customer choosing what modules he or she wants, is the only way to quickly turn an order. That, coupled to a logistics system that can get a car from the end of the assembly line to the dealer's lot in a matter of days (not the weeks it takes today), new mindset, new processes and discipline. Now it's time to put the same effort into leaning out the retail end of the business. And this time the payoff will be bigger.