The New Normal?

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Looking at specific brands, one defines the gold standard of inventory management: BMW. Admittedly, BMW keeps its inventory tight, sometimes short, but rarely is it in excess. Toyota and Hyundai also have demonstrated lean thinking when it comes to inventory management.

However, practices have been less than stellar at the Detroit Three. Now, here come the excuses for bad inventory management (more than 70 days’ supply or less than 40): “You never want to be short” or “The model lineup is very complex,” or “We are changing our models at a faster rate.”

Balderdash. The Detroit Three have practiced sloppy inventory management for quite some time, with a few exceptions through good times and bad. During the past nine months it has gotten worse, a testament it is not about selling problems just with the winter months.

Is this the new normal? For the Detroit Three the answer is no, it seems to be an operating principle. The only thing helping them through the current environment is low interest rates. If interest rates start to creep up, we could see dealers balking at taking on more metal.

It is highly unlikely the market will expand for six years in a row. Manufacturers that are in excess today need to clear the swamp (in other words, balance production and demand) before the market softens further or interest rates rise.

If not, the tradeoff between profits or production will be much harsher in the middle of a downturn.

Let’s hope improved balance sheets at the Detroit Three enable a shift away from what appears to be, unfortunately, normal.

Conventional wisdom among economists is that about half of the downswing of economic activity in business cycles is due to consumers and producers working off inventories built up at the top of the cycle, a pattern noted by James P. Womack and Daniel T. Jones in their book “Lean Thinking.”

If inventory gets under control, profits will go back to dealers and the factory; otherwise a good proportion simply will end up with the customer in the form of increased incentives.

Warren P. Browne is president of WP Browne Consulting and has extensive experience in the global automobile industry. During the past 20 years, he has held senior executive positions at General Motors, including in Brazil, Poland and Russia. He currently serves as an adjunct professor of economics at Lawrence Technological University.