Inventory Management and Dealer Forecasting in the Automotive Industry
Automotive dealers have a number of objectives to meet with respect to stock levels. These include maintaining the right level of stock inventory, minimising stock holdings, keeping stock costs to a minimum and maximising efficiency in stock use. A consistent ordering process reduces business pressure to meet stock levels and allows dealers and distributors to manage the exceptions to stock levels as opposed to moving from one crisis to the next.
Without an efficient forecasting process in place a dealer will simply aim to minimize stock holdings. However, if dealers are not forecasting correctly, stock levels will be incorrect. There are obvious inventory costs in holding too much stock but at the same time, too little may require emergency orders. Dealers who require such emergency orders bear not only higher costs of stock purchase but also increased freight costs. In addition, dealers have traditionally decided not to order extra stock because, in the event that the dealer is unable to move that stock within a reasonable time frame, there may be a higher cost of managing and warehousing inventory.
An efficient forecasting system assists both the distributor and dealer to reduce costs by providing a consistent, predictable and reliable basis for stock inventory. There will always be unforeseen circumstances, but these can be managed as exceptions as opposed to normal business processes.
Distributor versus dealer forecasting
A new system, pioneered and functioning well in Europe, gives distributors, rather than dealers, ultimate responsibility for forecasting stock requirements. By analysing trends in stock ordering across all dealerships, the distributor is better able to forecast, taking a broad view of requirements, predicting the expected stock requirements of dealers and advising accordingly. For example, following the release of a new vehicle model, patterns may emerge in high volume metropolitan locations. These then provide valid information on trends as the volume increases in other locations, such as in country areas. The distributor can advise or make certain components compulsory when a new dealer starts up or a new model is introduced into a new area.
Under this new system a dealer is obliged to purchase a certain level of stock because the distributor wants to ensure that a dealer has a basic set of components for a particular vehicle model that will cover most situations. Distributors understand, through trend analysis, the frequency with which components will be used and are in a position to advise dealers about the components that are to be maintained.
There has been slight, initial resistance from the dealers in the implementation of this system. The major issue has been that the distributor is basically instructing the dealer as to the stock that has to be purchased. However, as the distributor now accepts a greater risk by allowing the dealers to return unused stock within an agreed period or to increase or in some circumstances reduce quantities, resistance has been greatly reduced.
The advantage to the dealer in agreeing to those recommendations is that many dealers today would not stock all the recommended parts due to the cost of maintaining inventory and the fact that it could not be returned to the distributor if it was not used over a given time. Essentially, the dealer manages the inventory risk and their behaviour reflects that risk.
Free flow of information within the network
The key to successful dealer forecasting is the free flow of information between the dealer and the distributor. Dealers provide information about their current stock levels and the demand for stock items and the distributor can understand the stock patterns that the dealer experiences. In a well functioning dealer forecasting system most of the risk of maintaining inventory is with the distributor, not the dealer.
The distributor has a broad visibility of stock levels across all dealerships and in certain circumstances it is possible to open up the visibility between all dealerships. A dealer enquiry for a part can reflect both the distributor stock and the dealer network stock. Generally, a dealer will be able to see only the distributor stock and if that has been exhausted, a dealer may be allowed to view the rest of the stock. Distributors encourage dealers to buy from the distributor first, and then buy it within the network. When buying within the network the supplying dealer accepts the order and is credited from the distributor. The receiving dealer is charged for the stock from the distributor. The distributor can then monitor the demand between the two, and adjust the system for that demand later on. The distributor can then analyse whether a dealership is using more of a particular stock than expected, and can adjust the dealer's forecast accordingly.
Contingency for emergency orders
The primary goal in any stock control process is to reduce emergency order frequency. An efficient warehouse process, where dealers place more stock orders and less daily or emergency orders reduces pressure on the entire distribution and dealer network. The dealer forecasting system, together with an optional distributor buy-back strategy, goes a long way to achieving this.
Dealers are encouraged to stock a greater range of parts, based on the analysis gained from a consistent forecasting process so that they can fulfil their customer requirements efficiently and cost effectively. The distributor gains the benefit of knowing where parts are located throughout the dealer network and a more efficient warehousing operation.
There are some quite significant benefits to both distributors and dealers of a dealer forecasting system. Distributors and dealers in Europe that have engaged this model are experiencing significant upside to their business and are now more able to meet customer requirements as well as having a more consistent and predictable inventory process.
The free flow of information between the distributor and dealer is enhanced with a dealer forecasting system. Distributors understand the amount and frequency of all stock requirements in the system. There is an ability to move stock using both the distribution and dealer network. The dealer however has reduced risk in stock holdings and so is more likely to retain a greater variety and number of parts to satisfy customer needs.
Summary
Consistent and predictable information flow between a distributor and a dealer can be achieved through an efficient forecasting system. A distributor, having access to a broad view across all dealers, can provide in depth analysis of stock usage, inventory and future stock requirements. A distributor is then able to provide accurate advice to dealers on the type, amount and availability of stock required based on factual data.
Cost reductions throughout the supply chain process are realised for distributors and dealers through a more streamlined forecasting system. Facts can dictate how much stock is required across the entire dealer network and the expected usage rates by each individual dealer. Total stock inventory is reduced, availability immediately known and the ability for the distributor to deal with emergency orders is greatly enhanced. For both the distributor and dealer, inventory and warehousing costs are reduced while a reduction in frequency of emergency orders results in less freight and delivery costs.
Article by Ben Portelli
[source] www.ibs.net
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