The Real Deal

The consequences of ignoring the message of Holweg and Pil will be more devastating than ignoring that of Womack, Jones and Roos.

For the past couple of years, certainly, auto buyers have come to rely on something. No, not theInternet. Not Consumer Reports. Not even the “Driven” section of www.autofieldguide.com. No, what these consumers have come to rely on is cash back. On the deal. On the vehicle manufacturer saying to the customer, in effect, “We really want you to buy our car/truck/SUV so much that we are willing to give you money to take it from us.” I don’t know about you, but that sounds more like someone pushing a watch on Times Square than it does a transaction of seriousness and substance, which buying a new vehicle ought to be. Let me hasten to point out that I am not against getting a “deal” when I buy a car. But I also have the feelings that (1) if I was a squeakier wheel or better negotiator I might have gotten a better price from the dealer and (2) if I’d only waited another week I might have even gotten another pile of cash put on the hood by the OEM. That doesn’t make for a particularly happy consumer, despite the gains achieved.

The fundamental reason why cash-back is king is laid out in some excruciating detail—excruciating for those who are involved in perpetuating the practice because of their way of doing business—in a book that will be appearing soon, The Second Century: Reconnecting the Customer and Value Chain through Build-to-Order; Moving beyond Mass and Lean Production in the Auto Industry by Matthias Holweg and Frits K. Pil (The MIT Press). Let me put this as simply as possible:

This book is more important to the industry than The Machine That Changed the World. The authors of The Second Century look at practices in North America, Europe and Asia in terms of building and delivering vehicles and essentially conclude that no one does a particularly good job of it—at least not from the point of view of building the vehicle that you want and the one that I want and the one that my sister wants and the one that. . . . Even lean production is not enough—especially because lean production is essentially all about the factory, and the research that the authors conducted show that the average delay from order processing and scheduling is 30.4 days, as compared with the 1.4 day that the average vehicle is in production. Not surprisingly, when there are delays of that magnitude the approach taken in vehicle manufacturing—with few exceptions (e.g., exceedingly high-end cars)—is based on forecasts. What happens when you build to forecast? Well, it just may be that you produce a whole lot of blue sedans when people really want red coupes. But you didn’t know that because (1) the forecast is made so far ahead of demand and (2) there is an inventory build of a couple of months sitting on various lots. The authors point out that 60 days’ worth of vehicles in an environment where there are 17 million units sold translates into 2.8 million vehicles in inventory: doing the math just on interest rates means that’s in excess of $2.5-billion. OEMs are pushing for just-in-time deliveries to assembly plants while there is about a month before the plant gets the order and another couple of months of vehicles (yes, yes, on average) sitting on lots. Want to know why profits aren’t what they could—or should—be? The consequences of ignoring the message of Holweg and Pil will be more devastating than ignoring that of Womack, Jones and Roos.