Car Companies Do It Again!

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

For a blog post, I don’t often get off on international issues but this one has been making me crazy for years.

From an op-ed in last Wednesday’s New York Times:

     


In addition, even when it comes to the trucks and S.U.V.’s that Americans actually do want to buy, the bailed-out automakers are building vehicles faster than they can be bought. Inventory levels at both companies have ballooned this year, to the point where G.M. now has nearly three months’ worth of sales sitting on its lots and Chrysler’s excess inventory (in terms of days of supply) is exceeded only by such marginal players as Saab, Mitsubishi, Suzuki and Mazda.


Allowing new cars to pile up on lots may well be the most deadly of Detroit’s new-old bad habits, as the practice not only artificially inflates sales numbers (which, ridiculously, are booked upon production, not when a vehicle is driven off the lot), but also lead to yet more incentives, fleet sales, subsidized leases and subprime lending.

     from A Green Detroit? No, a Guzzling One by Edward Niedermeyer

The auto companies’ manufacturing people love to brag about low in-plant inventory. But can you think of a more expensive way to hold inventory than in the form of finished goods?

Between inflexible supply contracts and labor contracts that required paying laid-off employees, the car companies had really no short-term variable costs, so it paid to continue to run factories when there were no sales. However, the labor contracts should have gone away, and I hope they negotiated more flexible supply contracts. Maybe this is just habit?

Thanks, Dick!

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