Posts Tagged "Car Inventory"

Direct Sale of Automobiles

Posted by on Feb 23, 2013 in Uncategorized | 0 comments

A report written by the United States Department of Justice considers the advantages of shortening the distribution system for automobiles as a way for the manufacturers to improve profitability.

The report, “Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers” by Gerald R. Bodisch* EAG 09-1 CA May 2009 can be found here.

The auto manufacturers are currently prohibited by law from selling their products direct to consumers.  If the laws were changed, there would be huge economic benefit to the profitability of the manufacturers.

From the report:

Perhaps the most obvious benefit from direct manufacturer sales would be greater customer satisfaction, as auto producers better match production with consumer preferences ranging from basic attributes on standard models to meeting individual specifications for customized cars. With better information about consumer demand, optimal inventory levels should fall, even short of full build-to-order capability by auto manufacturers. To the extent that there are cost savings from leaner inventories, a portion could be passed on to consumers as lower prices. The total value of new car inventory held by the 20,700 franchised new car dealerships in the United States near the end of 2008 was about $100 billion and the annual carrying cost of that inventory was estimated as $890 million.(9) These figures may provide an order-of-magnitude perspective of the savings potential from a reduction in inventories that might derive from direct manufacturer sales of autos.

The most comprehensive estimate of the savings in the vehicle order-to-delivery cycle from build-to-order, direct manufacturer sales is set out in a 2000 report by a Goldman Sachs analyst.(10) Based on an average vehicle price of $26,000, total cost savings in the order-to-delivery cycle were estimated as $2,225 or about 8.6%.(11) The components of those savings were as follows: $832 from improvement in matching supply with consumer demand; $575 from lower inventory; $387 from fewer dealerships; $381 from lower sales commissions and $50 from lower overall shipping costs, since fewer dealerships would reduce the number of distribution points. The Goldman Sachs report identified other possible build-to-order savings of about $1,000 per vehicle in product development, manufacturing flexibility and procurement and supply but the lion’s share of the benefits were attributed to improvements in the order-to-delivery cycle. In a nutshell, the current auto industry make-to-stock sales model takes a lot of money, much of it tied up in inventories and devoted to discounting to clear lots of less popular vehicles, to try to sell cars that can come up short of what customers would really prefer.

While the Goldman Sachs report provides estimates of potential cost savings, a real-world example of the benefits of a build-to-order, direct manufacturer sales model is GM do Brasil’s experience with production and sale of the Chevrolet Celta economy car at its modern Blue Macaw plant in Gravatai.(12) Since 2000, customers in Brazil can order the Celta over the internet from a site that links them with GM’s assembly plant and 470 dealers nationwide. By 2006, 700,000 Celtas had been produced and the car continues to be one of Brazil’s best sellers.(13) Consumers have 20 “build-combinations” from which to configure a model of their choice, including colors and accessories, and can view each change as it is being made. GM built five distribution centers throughout Brazil to reduce transportation time from its assembly plant and buyers can track location of their car online on its way to delivery at a dealer of their choice. The time from configuration at the factory to delivery is only about a week, in contrast to the several week wait that can be common in ordering a car in the United States.

Automobiles are expensive purchases that require maintenance and warranty work, so there is still a valuable service that would need to be filled by local dealers.  Human, face-to-face interaction would still be a valuable part of the customer experience for problem resolution after the sale.

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