The Future of New Car Allocation
OEM supply chain management and Gordon Gekko
OEMs have been signaling for some time that when the parts and labor shortages are over, they will move to a more "Just in Time' or Subscription retail model using predictive demand forecasting. If you remember that "Just in Time" is a warehousing term, there is also "Just in Time Manufacturing." This automotive OEM model hopes to use Artificial Intelligence and First-Party data to manufacture and distribute vehicles that match consumer demand with increased profitability, Just in Time.
I've been speaking with industry leaders regarding "Just in Time Manufacturing" as an OEM model for some time. However, what is not considered in those conversations, and explained in the link at the bottom, is this type of inventory manufacturing model embedded throughout our US supply chain is one of the reasons we are in the situation we are in today. For example, this model used in the technology sector keeping a lean supply of goods in the US left us with a quickly depleted supply of chips worldwide when demand soared. So we have to be careful not to try and be too efficient. If we do, we will again see the unintended consequences we see today.
Speaking to industry veteran and friend, Dale Pollak, he shared his thoughts rooted in experience and foresight. His comments to me were, "I do not believe the manufacturers will ever fundamentally change their distribution model until they have a direct-to-clear consumer path to success. They are a manufacturing supply-driven industry that cannot convert to demand. I've heard this talk through the years many times, and it never comes to fruition. It is a structural problem in the industry having many suppliers that must be given long advance manufacturing notices." As usual, Dale is not wrong. As mentioned earlier, the hurdles and pitfalls are mountainous and could do more harm than good.
Let’s say OEMs figure out a way to make this "Just in Time" model happen when supply stabilizes in the next 12 to 24 months. Thinking back to my college days, I remember a supply manipulation lesson learned that applies to this topic today. It was a collusion exercise in economics back in the 80s regarding Oil Cartels. We studied how the Cartels would collude to constrain supply and increase prices. Each time they tried to manage supply for very long, one of the nations would get greedy and start oversupplying to take market share, and then they would all go back to it. Simply put, think of the fictional character Gordon Gekko. If you don't know who that is or why it is relevant, google him. It will make sense. You may be thinking, the automotive industry is not as commoditized as oil, and brand loyalty will keep this from happening. However, based on what we see in this graph below, that is not necessarily the case. Loyalty drops as supply drops.
The takeaway for me as an Economist is this. There is too much temptation to overproduce in a supply-managed manufacturing environment consisting of highly competitive big-game players, like Oil and Automotive. The Oil Cartels proved this repeatedly even when managing supply created increased profitability. I don't see this ever happening in an industry like Automotive, where brand loyalty and market share are the ultimate prizes.
Below is a brilliant depiction showing how this supply crisis happened by the New York Times. Flip through this very slowly, and you’ll get a complete picture.